Russia: Russia to ratify the multilateral instrument on BEPS

Russia signed the Multilateral Convention to Implement Tax Related Measures to Prevent BEPS (multilateral instrument, or MLI) on June 7 2017.

Russia is now planning to ratify the multilateral instrument, having drafted a ratification law.

Russia has included 71 of the 84 agreements on the avoidance of double taxation (DTAs) listed by the MLI. However, the draft law on ratification does not cover new DTAs such as the Russia-Japan DTA, or DTAs to be concluded such as the Russia-Sweden DTA.

Remarkably, Russia does not intend to include Germany (which is a major EU trading partner), or Switzerland (where many Russian groups have headquarters and trading companies) on its list.

One of the key provisions Russia has chosen to implement is the simplified limitation on benefits (S-LoB) test. This is rarely chosen by countries signing the MLI, most of which prefer the principal purpose test (PPT test). The list of countries using S-LoB is rather short, but includes Greece, Iceland, India, and Kazakhstan, among others.

Even if a treaty partner has not chosen to implement the S-LoB test, there is already a fairly strict domestic beneficial ownership (BO) test in place to check the eligibility of foreign companies to use a treaty to receive Russian-sourced income. The tests overlap, and in certain cases, the BO requirements are far more stringent than those in S-LoB.

Additionally, over the past decade, Russia has consistently changed its DTAs in order to re-allocate taxation rights to capital gains derived from the sale of Russian property-rich companies back to Russia. In line with this, Russia has included this right in its MLI position.

However, only a small number of treaties will be amended (e.g. Italy and Turkey), whereas many others will remain untouched, such as the Russia-Netherlands DTA, despite lots of Russian real estate being held through Dutch holding companies.

These are some of the noteworthy examples regarding Russia's MLI position. There are many more provisions which should be thoroughly reviewed and analysed in light of MLI ratification in Russia.

It is expected that if ratification occurs in 2019, the MLI may take effect from January 1 2020. Therefore, the available time to adapt to structures in the MLI is shrinking, and immediate action may be needed in order to have sufficient time to undertake restructuring where necessary.