The Russian Federal Tax Service recently issued its new guidance summarizing Russian court practice on applying the Russian beneficial ownership rules (the "Letter")1. This guidance significantly increases requirements for foreign recipients of Russian source income in order to qualify as beneficial owners eligible for tax treaty benefits. Although intended as an anti-avoidance measure, this new approach may negatively affect many proper holding and treasury companies, dramatically increasing substance requirements and forcing extensive disclosure.

What the Letter says

The Russian Federal Tax Service expressly states that the Russian beneficial ownership test represent general anti-avoidance rules and can be used to deny tax treaty benefits to companies receiving passive Russian source income, as well as against complex anti-avoidance schemes for the transfer of income abroad.

It may no longer be sufficient for companies to confirm the existence of assets and employees, the absence of pass-through cash-flows, and decision-making limitations on the management of the recipient. The Russian tax authorities may seek to deny tax treaty benefits to foreign recipients that do not have an actual, operating business. The Letter further indicates that pure holding and treasury activities for the benefit of affiliated companies may not be sufficient to show independent business activity, and may be insufficient to support a company being recognized as a beneficial owner.

According to the Letter, taxpayers must now justify the particular form of their transactions and the involvement of foreign recipients of income, and must present reasonable grounds for bearing commercial risks. This significantly departs from the earlier practice and position of the Russian Constitutional Court that limited the rights of the Russian tax authorities to use hindsight to challenge the rationality of commercial decisions, and places the burden of proof on taxpayers.

Guidance on whether recipients of payments are beneficial owners is becoming less clear for multinational groups of companies. The Russian tax authorities do not see an obligation for them to determine the proper beneficial owner of the income. At least, they show some declared willingness to look at pass-through income for pass-through companies. However, for these purposes they may require the tax withholding agent to clearly confirm the person who is the real beneficial owner of the payment.

Implications for taxpayers

Given this more aggressive position of the Russian Federal Tax Service on granting tax benefits, local tax inspectorates may end up more closely scrutinizing cross-border payments of passive income made by Russian subsidiaries to foreign affiliates, especially by companies acting as pure holding, treasury and licensing companies and companies administering interests of one group. Since this is a change in interpretation and not a formal amendment to the Russian Tax Code, this approach may apply to payments for the past three years that are still open for tax audits. The Russian tax authorities may demand additional information and sensitive documents to support active business operations, specific amounts of taxes paid abroad, etc. to firmly evidence beneficial owner status. This unbalanced approach may result in challenges of existing historic holding and financing structures, and may lead to further tax disputes.

Also remaining uncertain is whether this aggressive approach is warranted under post-BEPS tax treaty interpretation and whether the Russian court will uphold this position, especially in view of certain inconsistences with Constitutional Court decisions and existing court practice following Resolution No. 53 of the Plenum of the Supreme Arbitrazh Court on "unjustified tax benefits".

Actions to consider

The aggressive approach of the Russian Federal Tax Service may affect a wide range of multinational groups operating in Russia. Taxpayers may want to consider the following:

  • review the group structure and identify companies that perform solely or mostly holding, treasury or intragroup licensing functions and may fail the Russian beneficial ownership rules as applied in light of the new, stricter approach. Confirm whether such companies may be considered as beneficial owners of Russian source income for tax treaty purposes;
  • consider identifying and collecting additional documents and making changes to the holding, financing and cash-flow structure in the group of companies in order to justify the economic rights of foreign companies to Russian source income (preparation of a so-called "defense file");
  • consider applying a "look-through" approach and potentially disclosing a higher tier company or final shareholders where appropriate with more substance as the beneficial owner in the group, and considering all relevant complications and tax implications in other jurisdictions;
  • evaluate the possibility of including the appropriate gross-up provisions on payments to be made by Russian companies;
  • in case of increased tax risks for past and future periods, consider a tax dispute scenario, including challenging the validity of the Letter based on procedural and material grounds;
  • monitor significant trends in court practice in view of the new, strict approach of the Russian tax authorities, and consider further restructuring opportunities to mitigate withholding tax risks in Russia.



1Letter of the Federal Tax Service No. CA-4-9/8285@ dated April 28, 2018.  

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