The Russian beneficial ownership concept was introduced into Russian tax law in 2015 as a part of BEPS initiatives. Since 2017, foreign companies receiving Russian-sourced income and claiming treaty benefits are obliged to provide the Russian companies paying the income with documentary and economic evidence supporting their beneficial ownership right.
A complicated area of Russian tax law
The Russian beneficial ownership concept has already become one of the major mechanisms applied by the Russian tax authorities to counteract tax avoidance schemes, limit capital outflow and raise fiscal revenues in Russia. Following the well-established OECD approach, the Russian beneficial ownership concept mainly focuses on limiting access to treaty benefits for conduit companies, which only perform intermediary functions in a cash flow structure and do not conduct any operational activity. However, it should be noted that the Russian beneficial ownership concept is a rather complicated area of Russian tax law that has its own particular features developed in numerous court cases (most of them negative for taxpayers) over the past three years, and which has been clarified in several significant letters issued by the Russian Federal Tax Office and the Ministry of Finance.
If the actual recipient of the passive, Russian-sourced income is not the beneficial owner, the Russian Tax Code prescribes the application of the “look-through approach”. This approach allows another person (company) to be designated as the beneficial owner in a cash flow structure to claim the treaty benefits according to the double taxation treaty (DTT) of the state of its tax residence.
In this case, a company distributing Russian-sourced income and acting as a tax agent has the following options when applying the “look-through approach”:
- If a beneficial owner is a tax resident of a state which is party to a DTT with Russia, the foreign recipient (indirect shareholder) can apply the treaty benefits if it is able to provide documentary confirmation of its beneficial ownership status;
- If a beneficial owner is a Russian tax resident, then a Russian tax agent could apply tax benefits under Russian legislation as if it were an internal distribution of income between Russian entities.
Recent amendments to the Russian beneficial ownership concept
At the end of 2018, Federal Law No 424-FZ introduced several amendments to the Russian beneficial ownership concept. The law is now in force, but some of the provisions are applied retroactively and cover tax periods starting from 2018.
The key amendments of the Law are aimed at simplifying the procedure for confirming beneficial owner status for certain categories of foreign recipients of Russian-sourced income, e.g. individuals, public companies listed on Russian or OECD countries’ stock exchanges, sovereign funds, direct subsidiaries of Russian and foreign states. To apply the simplified procedure, the listed recipients should provide a self-declaration of their beneficial ownership status along with a confirmation latter and documents confirming that they meet the aforementioned criteria.
Some technical amendments were introduced to the Russian Tax Code regarding the application of the “look-through approach”. Currently, applying the “look-through approach” is not only limited to dividends, it could also be applied for any passive income distributed from Russian sources, including, but not limited to, interest, royalty, rent income, etc.
In addition, another relevant amendment concerns the situation where several payments or dividend distributions are executed under a single arrangement. So it should be sufficient for the foreign recipient to provide one single confirmation for such groups of payments.
Some important issues still need clarification
Generally, the aforementioned amendments are mainly focused on clarifying and mitigating technical uncertainties in the Russian Tax Code, and simplifying several administrative and tax compliance procedures for particular cases, rather than introducing new planning tools or opportunities favourable for business.
Unfortunately, the new amendments do not clarify some more important issues relevant for business, e.g. there is still no clarification on the treatment of direct investments made by direct shareholders as investments made by the beneficial owner (indirect shareholder) under the “look-through approach”. Taking into account that a number of tax treaties with Russia contain investment provisions, this makes applying the “look-through approach” impractical as the beneficial owner will not be able to claim a reduced withholding tax rate (WHT) in Russia.
Therefore, due to the ongoing development of the beneficial ownership concept and the general worldwide trend of tax transparency expansion, foreign investments in Russia should be carefully structured taking into account uncertain issues related to applying the beneficial ownership concept and negative court practices, which affect not only companies receiving income from Russia and owing assets located in Russia, but also projects associated with foreign direct investment in Russia.
The corporate tax team of ALTHAUS Group, the exclusive representative of WTS Global in Russia, monitors the current beneficial ownership practice and provides clients with highly qualified and comprehensive tax advisory services on the application of the Russian beneficial ownership concept. The corporate tax team of ALTHAUS Group will gladly assist clients (international groups and holdings with Russian entities) with analyses of the beneficial ownership status of foreign recipients of Russian-sourced income, as well as tax consulting services to identify tax risks and provide relevant recommendations.