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.
Shipping and air transport
Profits derived from the operation of ships or aircraft or railway or road vehicles in international traffic are treated as a separate type of income. If the place of effective management of a shipping company is aboard a ship, it shall be deemed to be situated in the Contracting State in which the home harbour of the ship is situated or, if there is no home harbour, in the Contracting State where the operator of the ship resides. Under the Treaty, capital gains resulting from the alienation of ships and other qualifying transport vehicles are only taxable in the state where the effective management of the enterprise is situated. Moreover, remuneration derived from employment on board a qualifying transport vehicle may also be taxed in the country of effective management.
Adjustment of profits
If an adjustment is made to the profits of a company by the tax authorities of one state, the Treaty contains an obligation to adjust the profits in the other state. However, in order to avoid treaty abuse, this obligation does not apply in the event of fraud or wilful misconduct by one of the enterprises concerned.
While payments received by a resident of one country in his or her capacity as a member of the board of directors of a company in the other state may be taxed in that other state, remuneration for day-to-day management is taxable as employment income.
Income of artists and sportsmen
As a rule such income derived by a resident of one state may be taxed in the country where the activities are exercised (even if they do not accrue to the artist herself but e.g. to a management company in a third country). This rule does not apply if the activities are substantially supported by public funds in the state of residency.
The Treaty (in line with the old version) also grants taxation power to the other state if the pension arises in that state. Exceptions are available for the following situations: (i) payments made under the social security legislation of a state or under a public scheme organised by that state in order to supplement the benefits of its social security legislation or (ii) pensions paid out of public funds for previous government service, which are only taxable in the source state. This rule does not apply if the individual is a national and resident of the other contracting state.
While income not covered by specific articles was previously subject to tax in the source country, the Treaty now states that such income may be taxed in the source state.
The Protocol to the Treaty extends the non-discrimination rule on behalf of the Russian Federation to the treatment of payments to pension schemes: if Russia signs a treaty with a third country providing for tax deductability of premiums, the deduction should be applied to payments to Belgian pension vehicles.
Mutual agreement procedure
The Protocol extends the scope of the mutual agreement procedure on behalf of the Russian Federation if a treaty is signed with a third country.
Exchange of information
If information is requested by a Contracting State, the other Contracting State shall use its information gathering measures to obtain the requested information, even though that other state may not need the information for its own tax purposes. In no case may a Contracting State decline to provide information requested by the other Contracting State on the ground that the information is held by a bank, other financial institution, nominee or person acting in an agency or a fiduciary capacity or because it relates to ownership interests in a person.
While the various language versions (Dutch, English, French and Russian) were previously deemed to be equal in the event of discrepancies between them, it is now stipulated that the English version shall prevail.