The Russian tax authorities are moving towards the beneficial ownership concept regarding the application of double tax treaties (DTTs) concluded by the Russian Federation. This new approach is reflected in a number of private clarifications issued by the Russian Ministry of Finance to address specific cases of application of DTTs to foreign partnerships receiving Russian-source income.

Under Russian domestic law a foreign recipient of income may apply DTT provisions upon the presentation of a Certificate of Tax Residency to a Russian company - the source of income. Foreign partnerships established in countries that treat partnerships as fiscally transparent entities have experienced difficulties in obtaining these certificates from their local tax authorities. In the majority of past cases involving foreign partnerships, in the absence of a Certificates of Tax Residency, the Russian tax authorities have denied the application of DTTs.

Recent clarifications issued by the Ministry of Finance follow the beneficial ownership principle and state that individual partners may be deemed as beneficial owners of income paid to a foreign fiscally transparent partnership. Following this approach, each individual partner may claim application of the provisions of the effective DTT concluded between Russia and their country of tax residence with respect to the portion of income payable from Russian sources and allocated to individual partners.

Under this approach, while foreign partnerships may ensure their entitlement to benefits under the DTTs, Russian companies that have to apply the terms of the DTT will be faced with additional compliance.

Although it is unlikely that these specific clarifications would be referred to often in day-to-day practice, it is likely that this development of recognition of beneficial ownership represents a new approach to solving controversial issues in application of DTTs that may be followed by foreign companies in other circumstances.

Natalia Kuznetsova, (natalia.kuznetsova@ru.pwc.com), Moscow