Belgium and the Russian Federation announced in March 2007 that they would negotiate a new double tax treaty (the “Treaty”). Nearly seven years after discussions began on 20 November 2008, the Treaty was finally signed on 19 May 2015 in Brussels. This newsflash is based on an unofficial version of the Treaty made available to the author which may differ slightly from the text approved on 19 May. We will be sure to keep you informed of any significant developments.
The main features of the Treaty are:
Reduced taxation of dividends
The old treaty provided for a maximum withholding tax of 10 percent in the source country. The new Treaty provides for two rates: the standard maximum withholding tax rate is raised to 15 percent and a lower 5 percent rate applies if the following cumulative conditions are met: (i) the receiving company has held the shares for an uninterrupted period of at least 12 months; (ii) the shares held represent directly at least 10 percent of the distributing company’s share capital; and (iii) the value of the shareholding is at least EUR 80,000 or the equivalent in rubles. Unlike before, dividends paid by a resident company are not taxed if the beneficial owner of the dividends is a pension fund.
Reduced taxation of interest
While the source country may apply a withholding tax of 10 percent, the Treaty extends the withholding tax exemptions to: (i) interest paid on a loan granted or credit extended by an undertaking in one country to an undertaking in the other country; (ii) interest paid to a pension fund; and (iii) interest paid to a public entity. The Treaty also contains a new article regarding the source of interest borne by a permanent establishment in a contracting state: even if the payer is not a resident, interest is deemed to arise in the contracting state where the permanent establishment is located.
Reduced taxation of royalties
Royalties are only taxable in the recipient’s country if the recipient is also the beneficial owner. The same source rule applies as in the case of interest. For royalty payments which are not at arm’s length, the excess shall be taxable according to the laws of both the source country and the recipient’s country. Under the old version of the treaty, the source country had exclusive power to tax.
Taxation of capital gains
Gains from the alienation of immovable property may be taxed in the country where the property is located. Unlike the OECD Model Treaty, the Treaty does not contain an anti-abuse provision for companies investing in real estate. According to the OECD Model Treaty, gains from the alienation of shares deriving more than 50 percent of their value, directly or indirectly, from immovable property situated in the other state may be taxed in that other state.
The Treaty determines how to treat income received through fiscally transparent entities: if income is derived through an entity that is fiscally transparent under the laws of either Belgium or the Russian Federation, it shall be deemed to derive from the resident himself, to the extent the receiving resident’s tax law recognises the tax transparency.
Place of effective management
The treaty defines the place of effective management for companies and corporate groups. This the place where the business of the company as a whole is conducted, from where its activities are driven, and where the highest level of supervision occurs. The following criteria are taken into account: the place where the board of directors holds its meetings, the place where senior day-to-day management is conducted, the place where senior executives perform their activities, and the place where the accounting records and archives are kept.
A pension fund is any entity run principally in order to either administer or provide retirement benefits or earn income on behalf of retired persons. In order to encourage the use of pension vehicles, the Treaty exempts from taxation dividends paid to a pension fund in Belgium or the Russian Federation. This exemption only applies if the pension fund is the beneficial owner of the dividends and the dividends are not derived from the conduct of a business by the pension fund or through an associated enterprise.