The Russian Ministry of Finance has informed Luxembourg and Malta that the double taxation treaties should be amended with regard to dividend and interest income.
Pepeliaev Group advises that the Russian Ministry of Finance has sent, via diplomatic channels, notification letters to the competent authorities of Malta and Luxembourg requesting that the respective Double Taxation Treaties (“DTTs”) be amended.
In pursuance of the instruction of the Russian President to increase the tax rate for dividend and interest income, where such income is paid to bank accounts outside the Russian Federation, the Russian Ministry of Finance, using diplomatic channels, sent on 13 April 2020 to the competent authorities of Malta and Luxembourg notification letters requesting that the DTTs be amended with a view to the above income being taxed at a rate of 15%.
A similar notification letter had been previously sent to the competent authorities of the Republic of Cyprus.
The Russian public authority points out that the contemplated changes regarding interest income will not affect interest income as follows:
- paid out under eurobond loans;
- on bond loans granted by Russian companies; and
- on loans granted by foreign banks.
The relevant payments made out of Russia will be regulated by national legislation.
It should be noted that the current DTTs with Cyprus, Malta and Luxembourg provide that interest income paid in Russia is fully exempt from being taxed at source.
This means that the amendments of the above DTTs as demanded by the Russian Ministry of Finance will increase the tax burden of foreign investors where income is repatriated from Russia. This is due to it being impossible to apply the current beneficial rates in relation to dividends, and to interest income paid from Russia being fully exempt from tax at source. If the amendments are accepted, the above types of income will be subject to mandatory taxation at source in Russia at a rate of 15%.
Should no reply be received from the competent authorities of Malta and Luxembourg within the time limits set by the Russian Ministry of Finance, Russia may unilaterally terminate the DTTs with these countries by virtue of article 54 of the 1969 Vienna Convention on the Law of Treaties, article 31 of the DTT with Luxembourg and article 29 of the DTT with Malta.
Therefore, for directors, shareholders and controlling parties of companies registered in Malta and/or Luxembourg this will imply the following:
- a tax rate of 15% will be set with respect to dividend income both under the DTT and Russian legislation if the terms and conditions of the DTTs are amended;
- the current regime of a full exemption from the taxation at source of interest income in Russia under the DTTs will be cancelled if the terms and conditions of such DTTs are amended;
- a tax rate of 15% will be set with respect to interest income, provided that the status of a beneficial owner of income is confirmed, while in the other cases the tax rate will be 20% under Russian legislation (including in cases when Russia terminates the DTT with Malta and the DTT with Luxembourg);
- the Russian tax authorities will be given carte blanche with regard to refusing the unjustified application of benefits under the DTTs with Malta and Luxembourg, the reclassification of intra-group payments, and the complication of the practice of applying the so-called ‘pass-through approach’ in accordance with articles 7 and 312 of the Tax Code.
What to think about and what to do
Directors, shareholders and controlling parties of companies registered in Malta and/or Luxembourg will need to perform stress-tests of existing business structures that are used for cross border payments for the purposes of the possible amendment of their business financing model.
Help from your adviser
Pepeliaev Group's team is ready to help with performing stress-tests of business structures and their redomiciliation, as well as with the preparation of tactics and a strategy for protecting current structures when disputes with tax authorities arise.