At the very end of 2018, Federal Law No. 424-FZ was passed,
seeing several significant changes to Russian tax legislation
regarding the beneficial ownership concept. The law is now in
force, although some of its favourable provisions are now being
applied retroactively from January 1 2018.
The law's key provision aims to simplify the procedure by
which the status of a beneficial owner is confirmed for certain
foreign recipients of Russian-sourced income. These include:
individuals, sovereign funds, listed companies (provided
certain conditions are met), and direct subsidiaries of Russian
or foreign states. In order to confirm the status of the
beneficial owner, the recipients listed above should provide a
self-declaration of their status as beneficial owners, along
with documents confirming the aforementioned criteria.
In addition, the law introduces some technical (but rather
favourable) amendments regarding the application of the
'look-through' approach. For instance, it is now directly
stated that the 'look-through' approach can be applied to all
types of Russian-sourced income, not just dividends.
Another positive change is confirmation of beneficial
ownership in situations where several payments are made under a
single contract. In this scenario, it is no longer necessary to
obtain confirmation prior to each payment. Instead, one
relevant confirmation can cover them all.
Unfortunately, some important issues with the application of
the 'look-through' approach has not been resolved. In
particular, the new law contains no provisions allowing
investments made in Russian companies by the direct shareholder
to be treated as investments made by the beneficial owner (an
indirect shareholder), which was probably the most hoped for
amendment in the business community.
Thus, if a double taxation agreement (DTA) between Russia
and the jurisdiction in which the beneficial owner resides
contains an investment requirement in order to access DTA
benefits, the beneficial owner – without making the
necessary direct investment in the Russian company –
should not be able to enjoy the withholding tax (WHT) reduction
The beneficial ownership concept in Russia has been rather
dynamic in recent years, with numerous court cases and a
multitude of clarifications and guidance being issued by
authorities. The new law introduces some positive provisions
that simplify beneficial ownership requirements in Russia,
although it remains silent on certain important 'deal-breaking'
issues concerning the 'look-through' approach.
As such, investments in Russia need to be carefully
structured with regard to beneficial ownership requirements in
order to obtain WHT reductions, especially given the negative
court practice on this issue over the past several years in
Alexander Tokarev (firstname.lastname@example.org) and Ivan Nasonov (email@example.com)
KPMG Russia and CIS