Now Switzerland – new season spoiler on amendments to DTT

A short while ago, the Russian Ministry of Finance sent a notice proposing to amend a Double Tax Treaty (“DTT”) to one more state – Switzerland.

Earlier it was reported that after a series of amendments to DTTs with Cyprus, Malta and Luxembourg, as well as termination of the DTT with the Netherlands, next in line to receive “proposals they can’t refuse” would be Hong Kong, Singapore and Switzerland. Now we see that, having returned from summer holidays, the Russian Ministry of Finance has proceeded with implementing its plans.

The exact details of the proposed amendments have not yet been disclosed; however, given a trend set by the already amended DTTs, we can assume that they provide for the withholding tax on dividends and interest to be raised to 15%.

Currently, the DTT with Switzerland stipulates taxation of dividends under the general rule at a rate of 15%; however, it also provides for a preferential rate of 5%, which applies if a minimum share in the source of payment is 20% and investments amount to CHF 200,000. At the same time, interest and royalties are not subject to withholding tax.

The results of the first negotiations are expected to be announced in October this year.

However, taking into account earlier negotiations with other states, there are really only two scenarios: we should expect either a tightening of the taxation regime and increased rates in the DTT with Switzerland, or a repeat of the sad fate of the agreement with the Netherlands, if Switzerland’s position in the negotiations is not flexible.

Under the negative scenario, in order to terminate the DTT, the states will also have to be sent a notice of denunciation at least 6 months prior to the expiration of a calendar year, which means that the DTT could be terminated on or after January 1, 2023.

We hope the states will manage to reach a compromise. We continue to follow the developments; however, we recommend not waiting to analyze cross-border structures and foreign assets in Switzerland for possible tax consequences and to consider possible options for protecting your interests and assets.

This overview is prepared by Capital Legal Services attorneys (Vladislav Zabrodin’s team).