Russia is trying to stop offshoring to low-tax jurisdictions such as Luxembourg
New treaty with Russia raises tax on dividends, interest
/NOVOSTIVL/ Luxembourg and Russia on Friday signed a tax deal at the latter's request that is set to significantly increase the withholding rate on dividends and interest, part of Russia's wider push to prevent offshoring.
Starting next year, withholding taxes will rise to 15% from 5% on dividends, and to 15% from 0% for interest payments.
Russia has negotiated similar deals with Malta and Cyprus, which, like Luxembourg, are on the country's 'black list' of tax havens, according to KPMG Luxembourg's website.
Many investors use any of these three low-tax countries to channel their funds into Russia but Russia has been keen to put a halt to this as its economy is hit by the pandemic.
Russian president Vladimir Putin this year told his government to quickly renegotiate taxation treaties to plug the state's budget gap and notified the Luxembourg government of its intention to do so in April, otherwise Russia would unilaterally terminate the agreement.
Russia's standard withholding tax rates on dividends and interest are 15% and 20% respectively.
The new treaty, however, foresees reduced rates in certain cases. For instance, certain companies will only be charged a 5% withholding tax on dividends, and there are also exemptions on withholding taxes for interest payments on certain bank loans and bonds.
Russia is seeking to renegotiate its tax agreement with the Netherlands for similar reasons. The new tax treaty between Luxembourg and Russia will have to go through all necessarily legislative steps in both countries before it can come into force on 1 January 2021.