According to Russian tax law, any income distributed by a Russian company to a foreign company is subject to Russian withholding tax (WHT) at 15% for dividends and 20% for royalties, interest and other income, unless reduced by a tax treaty.
To benefit from tax treaty provisions, the income’s non-resident recipient must be:
On 1 January 2015, the concept of a beneficial owner was introduced into Russian tax legislation. A beneficial owner of an income (BO) is defined as:
1. A person who has the right to use and/or dispose of the received income at their discretion by virtue of:
a) direct or indirect participation in an entity (non-incorporated structure) or
b) control of the entity (non-incorporated structure) or
c) other circumstances.
2. A person who has the right to use the income on behalf of another person.
In addition, BO status is separately applied to every dividend payment and/or to a group of payments within one agreement’s framework.
In principle, the BO concept should only be applied to passive income such as dividends, royalties and interest.
However, the Russian tax authorities have indicated that the BO concept applies to all types of income, including:
From 2017 onwards, the BO must provide to a Russian company (tax agent) documents confirming its BO status, as the tax agent pays the Russian-sourced income and is therefore responsible for paying WHT on this income. The tax agent should keep these documents and provide them to the Russian tax authorities at their request.
However, neither Russian tax law nor clarifications from competent authorities indicate which documents can be considered as proof. But based on current practice, the following documents are usually accepted to confirm the BO status of the recipient of Russian-sourced income:
According to Russian tax law, the tax agent is responsible for the WHT payment. If the tax agent cannot prove the Russian-sourced income’s BO status to the Russian tax authorities, the tax agent is obliged to pay:
Based on our analysis of the courts, the Russian tax authorities use the following criteria and arguments to challenge BO status:
Given the above points, a foreign company must respect the below conditions to justify that it is the BO of the Russian-sourced income:
According to Russian law, the responsibility of the WTH computation and payment is shifted to the tax agent. If the tax agent cannot prove the BO status of the Russian-sourced income recipient to the Russian tax authorities, they are obliged to pay the unpaid tax, penalties and late payment interest.
Therefore, it is in the tax agent’s best interest to analyze the BO status of the foreign recipient of Russian-source income with the criteria listed above. And, they should obtain BO status confirmation from the foreign company and prepare the so-called “defense” file to justify the BO status to the Russian tax authorities. KPMG Luxembourg has already helped several clients document the BO status of their Russian-sourced income.
The foreign recipient should structure transactions to meet the BO status as listed above.
For queries please contact:
Manager, International tax, Russian desk
Phone: Tel. +352 22 51 51 5512
Any tax advice in this communication is not intended or written by KPMG to be used, and cannot be used, by a client or any other person or entity for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any matters addressed herein.The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
© 2021 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.