On June 7 2017, Russia signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profits Shifting (the MLI).
Russia notified the OECD that it wishes 66 of its current double tax treaties (DTTs), signed with other countries, to be covered by the MLI. The only exceptions are those agreements with countries that are not members of the OECD ad hoc group which developed the MLI, and the agreements with Sweden and Japan, both of which are currently being renegotiated and which should incorporate the MLI principles in the new resulting DTTs.
By signing the MLI, Russia has approved amendments to the preamble texts. These amendments give new purpose to the DTTs, stating the intention that double taxation be eliminated while at the same time avoiding the creation of situations in which non-taxation or reduced taxation through tax avoidance or evasion can occur (in particular, via treaty shopping).
The key changes to DTTs which the Russian Federation wishes to introduce are as follows:
- Prevent treaty abuse by adopting the principal purpose test (PPT). This test implies that a DTT benefit cannot be granted for an item of income or capital if it is reasonable to conclude, regarding all relevant facts and circumstances, that the obtaining of the benefit was one of the principal purposes of the arrangement or transaction that resulted directly or indirectly in that benefit. Supplementing the PPT rule is the simplified limitation on benefits provision (LoB). This means that DTT benefits should be granted to qualified persons (i.e. to individuals, to entities which have their principal shares regularly traded on one or more recognised stock exchanges, to government authorities, and to others listed as qualified persons), and to others in the cases defined in the Convention.
- Introduce an additional rule for dividend transfer transactions stating that exemptions from or limitations on taxation rates on dividends paid should be granted only when the ownership conditions described in a DTT's provisions are met throughout the entirety of a 365-day period. This would apply to the DTTs signed with Cyprus, Hong Kong, Luxembourg, the Netherlands, Singapore, and Switzerland.
- Introduce an additional provision affecting capital gains from the alienation of shares and on the interest of entities that derive more than 50% of their value from immovable property to imply that the relevant value threshold should be met at any time during the 365-day period preceding alienation.
- Introduce additional rules for mutual agreement procedures.
The issues covered by the MLI relate to the most controversial areas of taxation which most often cause disputes, and affect the taxation of a wide circle of companies, including the Russian subsidiaries of multinational companies.
The Russian Federation believes that, by signing the MLI, it will limit the withdrawal of profits from Russia, and increase the possibility that efforts can be coordinated to implement the OECD's plan to prevent base erosion and profit shifting.
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