Russia: Doctrine of the actual recipient (beneficial owner)

In the letter of April 09, 2014 No. 03-00-RZ/16236 the Ministry of Finance of the Russian Federation has touched upon a subject of the actual recipient of the income (the beneficial owner). 

The Ministry of Finance, in particular, has specified in this letter that at application of the international agreements regarding granting a right to use privileges (the lowered rates and releases) at the taxation of separate types of income from sources in the Russian Federation it is necessary to make an assessment regarding whether the person applying for use of privileges (the lowered rates and releases) provided by the agreement, the actual recipient (the beneficial owner) of the corresponding income is. 

Recognition of the person as the actual recipient of the income (the beneficial owner) requires not only existence of legal grounds for direct obtaining the income, but this person also has to be the direct beneficiary, that is the person who actually receives benefit from the gained income and defines his further economic destiny. When determining the actual recipient (the beneficial owner) of the income it is necessary to consider also carried-out functions and the accepted risks of the foreign organization applying for receiving a privilege in compliance with the international agreements on avoidance of the double taxation. 

Now fiscal bodies actively put the specified doctrine into practice for the purpose of identification of violations of the current legislation of the Russian Federation and additional accrual of taxes, penalties and penalty fee. 

The decision of Arbitration court of Moscow of March 03, 2016 in the matter of No. A40-241361/15 

- The owner of the right for interest income (the person disposing of economic destiny of the interest income, that is the beneficiary) listed by the Russian Bank on loans in favor of Intesa Sanpaolo Holdin S.A. (structure of back to back), the controlling shareholder and ISPY, and the Russian Bank – Intesa Sanpaolo Milan Spa was (the Republic of Italy” 

- During tax audit it is established that Intesa Sanpaolo Holdin S.A. isn’t a beneficiary drawn interest but only the intermediary used by the shareholder - Intesa Sanpaolo Milan Spa and Bank in the form of abuse of the tax right and obtaining unreasonable tax benefit in the form of decrease in an interest rate to 0% according to Art. 11 of the Agreement on avoidance of the double taxation (the Russian Federation – Luxembourg) 

- Restrictive nature of intermediary activity of Intesa Sanpaolo Holdin S.A. and delivery of loans by this holding company at the expense of means of the shareholder, general with the Russian bank, doesn’t allow to recognize Intesa Sanpaolo Holdin S.A for application of a preferential rate of 0%. as the beneficiary (the actual owner of percent) who actually acted as the intermediary (fiduciary) for Intesa Sanpaolo Milan Spa. 

The resolution of the Ninth Arbitration Appellate court of February 09, 2016 in the matter of No. 09AP-59378/2015 

- The privilege (release from the taxation in the Russian Federation) provided by item 1 of Art. 11 of the Agreement on avoidance of the double taxation between the Russian Federation and the Republic of Cyprus taking into account official comments of OECD to the Model convention, is applied only in case the person (the resident of the Republic of Cyprus) to whom percent are transferred is the actual recipient (the beneficial owner) of this income. 

- Because final recipients of percent were other persons, but not the Cyprian companies brokers, at payment of disputable percent there were no legal grounds for application a privilege (releases from the taxation in the Russian Federation). 

- The bank at payment of the controversial income has been obliged to establish whether the person to whom this income, is paid by the actual recipient of the income that hasn’t been made by the taxpayer is.

- In spite of the fact that the Agreement on avoidance of the double taxation between the Russian Federation and the Republic of Cyprus doesn’t contain any specially reservation on the person, “having the actual right for percent”, and also the terms “actual recipient”, “actual right”, this agreement should be interpreted taking into account an explanation of Comments of OECD. 

The resolution of Arbitration court of the North Western district of March 15, 2016 in the matter of No. A13-5850/2014 

- The Russian Federation didn’t sign the international treaties containing the provisions concerning the taxation with the British Virgin Islands. Therefore, the taxation of the resident organization of the British Virgin Islands is carried out according to provisions of the Tax code of the Russian Federation.

- The stocks of JSC Sevrestal transferred in authorized capital of the Cyprian companies actually are the income of the foreign companies – the residents of BVO who are shareholders of the companies specified Cyprian. This type of income belongs to a type of income at which payment to the foreign organization the Russian enterprise has duties of the tax agent (subitem 2 and subitem 10 of item 1 of  Art. 309 of the Tax Code of the Russian Federation). 

- Interdependence of the Russian organization which has introduced stocks of JSC Severstal in the authorized capital of the Cyprian companies, and the companies registered in Cyprus and on BVO has exerted impact on economic content of the operations on a transfer of stock made by the organization and their tax consequences. 

- Transfer of stocks by the Russian organization as a contribution to authorized capital of the Cyprian companies had no character of investment activity as didn’t aim receiving profit or achievement of other useful effect. 

Letter of the Ministry of Finance of the Russian Federation of January 13, 2016 No. 03-08-05/275 

- The privileges provided by the subparagraph “an” of paragraph 2 of article 10 of the Agreement on avoidance of the double taxation between the Russian Federation and the Kingdom Netherlands at payment of the income in a type of dividends from sources in the Russian Federation are applied only in case the recipient of dividends - the resident of the Kingdom of the Netherlands is the actual recipient of such income. 

- At application of provisions of the Agreement the Russian company - the tax agent has the right to request from the recipient of dividends - the tax resident of the Netherlands confirmation that he has the actual right for the dividends (item 1 of Art. 312 of the Tax Code of the Russian Federation) paid to him by this Russian company. 

- The duty of the tax agent to take measures to definition of foreign contractors as actual recipients of the income can be considered executed if at the time of payment of dividends to the shareholder (to the company, being the tax resident of the Netherlands) at the disposal of the tax agent there are documents confirming presence at the recipient of the income of the right of a discretion concerning the order and use with the received dividends.

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