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Russia: Clarifications on beneficial ownership rules

The Federal Tax Service (FTS) of the Russian Federation has recently issued a  letter (the “Letter”) addressed to the local tax offices purporting to unify approaches in court disputes with taxpayers in relation to the application of withholding tax rates under Double Tax Treaties (DTTs). 

The Letter covers both conceptual points of view on the position of the tax authorities with regards to the application of the beneficial owner (BO) concept as well as a brief analysis of recent relevant cases such as ZAO Kredit Evropa Bank, MDM Bank, AO Bank Inteza, OOO Olemkinsky rudnik, PAO Severstal, OOO Kapital, OOO Krasnobrodniy Yujniy, PAO Vladimirskaya energosbitovaya kompaniya, OOO TD Petelino and OOO Ekvant.

The Letter lists certain criteria, which are important when determining whether a foreign company is the BO of income, as follows:

economic presence in the country of its residence;
full powers to control and dispose of income; and
use income generated from business activities.

The FTS states that tax authorities will carry out the following actions when examining relevant cases:

analyse the level of independence in the decision-making process of the directors of a foreign company;
assess the presence of legal and economic powers to control and dispose of income;
analyse business functions performed by the company;
evaluate the presence of economic substance (office, employees, overheads etc.);
analyse the level of commercial risks regarding used assets;
assess the level of economic benefits derived from income; and
evaluate the economic activity of a group “as a whole” (as one single unit).

The FTS points out that data concerning movement of funds can be obtained from foreign tax authorities. Furthermore, the tax authorities will trace information from financial statements, commercial databases and other sources.

In the legal cases quoted the BO concept was used to argue that withholding rates as per relevant DTTs could be applied to different types of income, including dividends, interest, royalties and capital gains. It should be stressed that the FTS uses the BO concept even when this is not explicitly stated in the relevant DTT article and indeed in a much broader interpretation than the one as per the OECD Model Tax Convention. In addition, this rule has been applied retrospectively to the legal cases, at it only came in to force on 1 January 2015, something which has caused criticisms that it is against the notion of interpreting treaties in good faith.

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