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 in Russia.
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 Russia.