Tax flash reports

Tax legislation amendments

Applying the concept of the beneficial ownership: Russian FTS explanations

In Letter No. СА-4-7/9270 of 17 May 2017, the Russian Federal Tax Service (FTS) explained its approach to interpreting the concept of the beneficial ownership of income in applying Double Tax Treaty (DTT) provisions. The position taken by the FTS is in line with how court practice is currently shaping up. The FTS’s explanations will be binding for lower-level tax administrations. Therefore, taxpayers should get acquainted with the explanations in order to avoid the possibility of unexpected claims. Here, we will analyse the explanations and answer certain questions that may concern taxpayers.

New controversial court practice on the beneficial ownership of income concept

In recent months, the courts have issued a number of decisions on the abuse of double tax treaties (DTT), some in favour of the tax authorities and others in favour of taxpayers. In this report, we will examine two court cases on the question of applying the reduced tax rate under the Russia-Cyprus DTT and, in particular, on the question of identifying the beneficial owner of income. The first case concerns a dividend payment of RUB 300m on which the taxpayer was assessed an additional tax of RUB 30m as well as penalties and fines in the amount of about RUB 5,5m and RUB 750,000 respectively, because a Cypriot company involved in the deal was not deemed a beneficial owner of the income. In the second case, the court examined the assessment of the 5% reduced rate on dividend income under the Russia-Cyprus DTT, but the dispute was different. The court applied a literal interpretation of the tax treaty’s provisions and ruled that compliance with the formal DTT requirements was sufficient grounds for applying the reduced tax rate.

Russian tax authorities challenge re-sale of Russian assets

In this report, we discuss a recent Moscow Arbitrazh Court decision pertaining to taxes assessed on a number of transactions involving the shares of a Russian company. The shares were sold abroad and then bought back two years later at more than five times the original sale price. The tax authorities concluded that the profit received by the foreign re-sellers should be subject to withholding tax in Russia. It is worth noting that the tax authorities analysed the entire set of transactions over the two years, challenged the paid-for basis of the transactions and re-categorised the transaction from the sale of shares abroad to the distribution of property to a foreign company. This allowed the tax authorities to apply clauses 1.2 and 1.10 of Article 309 of the Russian Tax Code, and to deem clause 1.5 of Article 309 of the Russian Tax Code inapplicable (the immovable property owned by the Russian company whose shares were re-sold did not exceed 50% of its assets). The amount of additional charges (taxes and penalties) was approximately RUB 300 million. This case may well become a precedent.

Reasonable payment upon termination of an employment contract may be deducted for tax purposes

In 2017, the courts have examined several disputes on deduction of severance payments made in case of mutual agreement of the parties. The disputes concerned periods before 2015, i.e. prior to the adoption of new legislation on this issue. Please note that the court practice has changed significantly. The Supreme Court has confirmed that these payments are deductible provided the amount of payment is comparable to standard severance payment upon staffing reduction or company liquidation.

Income on Russian bonds may become exempt from Personal Income Tax

On 15 February 2017, the State Duma passed in the first reading a draft of the Federal Law “On Amending Chapter 23 of the Russian Tax Code”, in particular the section on determining the tax base on interest income earned on the marketable bonds of Russian organisations. Draft Law No. 46023-7 was introduced by the Russian Government. According to the proposed amendments, income in the form of interest (coupons) received on marketable bonds of Russian organisations that were issued in 2017-2020 and denominated in roubles would become exempt from personal income tax (the “PIT”) starting from 2018, provided that the amount of the interest (coupon) payment does not exceed the amount of interest assessed under the current refinancing rate of +5%. If the bond yields exceed the threshold, the excess will be taxable for Russian tax residents at 35%. Additionally, the draft proposes to exempt income received in the form of discounts upon redeeming such bonds.

The bill on three-tier transfer pricing documentation and automatic exchange of information is amended

On 6 March 2017, the Russian Ministry of Finance (the “MinFin”) published an amended bill adding new provisions to Part I of the Russian Tax Code (the “RTC”) for implementing the international automatic exchange of financial account information and new standards of the transfer pricing documentation for multinational corporations (“MNCs”). The publication is available at the federal portal for bills and regulations.

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