November amendments to the Russian Tax Code ("Amendments")1 slightly relaxed Russia's beneficial ownership criteria for applying tax treaty benefits. Foreign companies not being direct recipients can claim that they are beneficial owners of different types of Russian-source income through a chain of distributions of income and applying tax treaty rates and exemptions (the so-called "Look-Through Approach"). The Amendments will apply retroactively covering payments made as of January 1, 2018.
The Amendments expressly require foreign recipients to confirm beneficial ownership for each dividend distribution and for each group of other payments under a contract. This will likely require significant compliance efforts.
The Amendments expressly extend application of the Look-Through Approach to all types of Russian-source income and should allow an indirect recipient of income to claim beneficial ownership of income (1) if it qualifies as the beneficial owner of relevant income (i.e. exercising functions and risks with respect to this income), or (2) if it directly or indirectly holds shares (participation interest) in a Russian company paying the dividends.
There is now a simplified beneficial ownership confirmation if a company is a tax resident in a treaty jurisdiction and more than 25% of its shares are publicly traded on a foreign stock exchange in an OECD member state. Unincorporated structures such as trusts may also be "looked through" to identify beneficial owners of Russian-source income.
Russian obstinate approach to determine the final recipient of income by looking through layers of companies remains problematic and is inconsistently applied. While looking through layers of recipients up to a public company may seem deceptively easy, this can distort reporting positions within multinational groups and multiply the number of supporting documents required, and needs to be applied with caution. However, this may not be the final version of the rules, as discussions are being held about bringing them closer to the OECD standard.
Actions to consider
- review compliance with beneficial ownership confirmation requirements on each distribution and prepare defense strategies ("defense file");
- consider new Look-Through Approach opportunity taking into account previously manifested positions and submitted confirmations;
- monitor practical implementation of the Russian beneficial ownership rules over time.
1. Federal Law No. 424-FZ "On Amendments to Parts One and Two of the Russian Tax Code and to Certain Legislative Acts of the Russian Federation on Taxation", dated November 27, 2018.