Protocol amending the double-tax treaty between the Russian Federation and Luxembourg

Protocol amending the double-tax treaty between t...

On 11 August 2011, the Russian Federation approved a protocol that would amend the double-tax treaty between the Russian Federation and Luxembourg. In accordance with Russian Federal law, the protocol now needs to be ratified. Therefore, the earliest expected date that it would enter into force would be 1 January 2013.


The protocol was based on provisions of the Russian Federation’s model double-tax treaty. This model treaty was developed based on the OECD Model Convention.


Taxation of dividends


The protocol’s most important change applies to dividends. The protocol reduces the current 10% withholding tax rate for qualifying dividends to 5%. The company receiving the dividends qualify if it:

  • is the beneficial owner of the dividends
  • owns more than 10 percent of the company paying the dividends
  • invested at least EUR80,000 or the equivalent in rubles in the company paying the dividends.

Thus, after the protocol enters into force, Luxembourg could become, like Cyprus, the Netherlands, and Switzerland, a country noted for having favorable conditions for structuring investments in Russian companies.


Taxation of income from disposing of property in Russia


The protocol adds important provisions with regard to taxation of income from real estate, specifically, income received from selling shares of a real estate investment fund or a similar collective investment vehicle organized primarily for the purposes of investing in immovable property.

In accordance with the protocol, Russia may tax the income from alienation of shares deriving more than 50 percent of their value directly or indirectly from immovable property situated in Russia. This provision does not apply in case of alienation as part of a company’s restructuring.

The protocol also redefines the term ‘dividends’, which now includes any payments on shares in mutual investment funds or similar collective investment vehicles.

These changes in aggregate should negatively impact Luxembourg’s attractiveness as a jurisdiction for structuring real-estate investment in Russia including investment through investment funds.


Provisions on information exchange


In accordance with OECD recommendations, in the protocol, a procedure and mechanism are stipulated for providing to the Russian tax authorities information related to any taxes, including VAT.

Like provisions in the protocol signed with Cyprus, the protocol with Luxembourg stipulates that the fact that banks, agents, or trustees possess the requested information will not prevent the tax authorities from receiving the information . Unlike the protocol with Switzerland, the protocol with Luxembourg does not directly prohibit providing to the tax authorities information in answer to requests of a general nature.

Nevertheless, the protocol lists what a valid request for information should include: the identity of the person under investigation; the type and form of the requested information; the tax purpose of the request; the name and address of the entity that supposedly has the information and reasons for assuming that the entity has the information; document where the tax authorities state that all other means of obtaining the information in their country have been exhausted.


Limitation of benefits


The protocol includes an article on the treaty’s limitations. In accordance with the article, provisions of the treaty with Luxembourg do not apply to companies that were created solely to take advantage of the treaty’s benefits. The tax authorities in Russia and Luxembourg should determine if a company fulfills this criterion under the mutual agreement procedure. The article does not provide for any mechanisms for making this decision, e.g. there are no criteria that determine that a company’s reason for existence is only to receive the treaty’s benefits. This ambiguity could give rise to disputes with tax authorities.


Other provisions in the protocol


The protocol also adds to the treaty cases during which a foreign company’s activity in the Russian Federation does not give rise to a permanent establishment.

The protocol gives Russia the right to tax income not specifically mentioned in the treaty. Currently, such income is not taxed in Russia.

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