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terms with low-tax jurisdictions as per President Putin’s initiative announced at the end of March. MinFin has already re-signed Russia’s DTTs with Cyprus, Malta and Luxembourg on new terms.
From 2021, residents of these jurisdictions will pay a 15% tax on dividends and a 20% tax on interest from foreign loans. However, the Netherlands has refused so far to renegotiate the terms of its DTT with Russia.
The Netherlands has been one of the top destinations for Russian companies to locate their headquarters along with Cyprus over the past three decades. The attractive tax rates meant Russian subsidiaries in the Netherlands paid out RUB457bn in dividend/interest payments in 2017, RUB412bn in 2018 and RUB33bn in 2019.
In terms of accumulated FDI, Russia’s position with the Netherlands was nearly balanced. Outward direct investments into the Dutch economy were $34bn, while Dutch companies invested $38bn into Russia, according to CBR's 2Q20 survey. The FDI position with Cyprus is drastically different, with $147bn in inward FDIs to Russia vs. $186bn in outward investments from Russia.
According to Vedomosti, if the draft law is adopted in 1Q21, it would only take effect within a six-month period, meaning that any new regulation would come into force from 2022. In our view, this might lead to some additional capital outflows next year, as was the case with Cyprus, Luxembourg and Malta this year. However, this could be positive for Russia’s external balances in the mid-term.
The re-domiciliation of Russian entities to special administrative regions (SARs) could have a positive impact on BoP terms. According to an IMF study, the percentage of phantom investments in corporate shells with no substance and no real links to the Russian economy is c. 57% for inward FDIs and 50% for outward FDIs, while round-tripping investments account for a quarter. On our estimates, the re-domiciliation of Cypriot assets could bring in a nominal amount of $40bn in capital inflows.
Based on IMF estimates, resolving the tax issue would lead to capital inflows of $20bn, which could offset the capital outflows to the Netherlands.
Russia is seeking to renegotiate its double taxation agreements. Russia has an agreement with about 80 countries to avoid double taxation. The agreements define the mutual right of the countries to tax the income flows between the countries. For example, taxes paid to Russia on income generated in Russia can be credited for taxation in the country to which the income is transferred. Last spring, President Putin ordered a change in the terms of Russia's agreements with some countries, as capital gains transferred abroad under the agreements are clearly taxed more lightly than in Russia.
88 RUSSIA Country Report January 2021 www.intellinews.com
