Russia: Beneficial ownership concept in Russia: claiming treaty benefits becomes more complicated

In April 2018 the Federal Tax Service of Russia issued a letter (Letter No. CA-4-9/8285@) containing guidelines for lower tax authorities on how to use the beneficial ownership concept when applying treaty benefits in Russia. This is the second comprehensive set of guidelines prepared by the tax authorities on this subject (the last set was published in May last year).

The key difference between these two letters is that the prevailing version of the guidelines sets out far more stringent criteria for confirming the beneficial ownership status of foreign companies.

In particular, the Russian tax authorities are requiring that foreign companies that seek to claim treaty benefits in Russia receive active income abroad, and that this income should be used to create an economic profit centre in its country of residence. Activities such as holding assets, intra-group financing, or the provision of services to related parties are specifically marked as not qualifying under the new guidelines.

In addition to confirming the beneficial owner status of a foreign company, withholding tax (WHT) agents (Russian income-paying companies) are required to provide the business justification for why they involved any such foreign company in their structure (or in the transaction), providing evidence of the commercial drivers and risks in the transaction as a whole.

The guidelines re-affirm the trend of the tax authorities to actively combat the use of double taxation agreement (DTA) benefits by foreign companies and structures that do not have sufficient actual and economic presence abroad. This affects primarily those companies with assets and income connected with Russia (foreign holdings, intragroup financial (treasury) centres, etc.), but may also have some negative impact on foreign investors coming to Russia (e.g. through joint venture (JV) structures).

As such, given the recent position of the Russian tax authorities, Russian companies are advised to 'stress test' their income payment structures when foreign companies are involved. If necessary, it might be recommended that the group consider restructuring and strengthening the beneficial owner status of the foreign recipient of income, as well as investigating the possibility of applying the 'look-through approach' when paying income from Russia (i.e. claiming another person in the cash flow as a beneficial owner of the income).