Comments from Russian Federal Tax Service.
In its letter No. ЕД-4-13/15696@ dated 8 August 2019 (the Letter), the Federal Tax Service of Russia sent out guidelines on how to determine the beneficial owner of income in situations with foreign holding companies (HoldCo).
It should be noted that the Federal Tax Service (FTS) of Russia has already expressed its position with regard to the possibility / impossibility of recognising a HoldCo as the beneficial owner of income1, however in this Letter, the FTS has specified its position on whether a HoldCo has / does not have ‘beneficial owner of income’ status.
Position of the Federal Tax Service of Russia
According to the FTS, at present, the regional tax offices often follow a formalised approach to applying the beneficial owner of income concept with regard to a HoldCo based on analysis of a HoldCo’s corporate documents and identifying within them references to the holding nature of the company’s activity. On this basis, the regional tax offices draw a conclusion on the absence of independent entrepreneurial activity at the HoldCo and, as a consequence, of its status as a beneficial owner of income.
It is noteworthy that previously the Federal Tax Service of Russia expressed the opinion that investment activities, as well as funding group (holding) companies or funding interdependent, affiliated companies, did not attest that independent entrepreneurial activity was being performed.2 Thus it would be reasonable to conclude that a HoldCo, due to the specifics of its activities and functions, in principle can not be recognised as a beneficial owner of income for tax purposes in the RF.
However, in the Letter, the Federal Tax Service of Russia has slightly adjusted its position. Please note:
— activities that consist mostly of investing and funding group (holding) companies or interdependent, affiliated companies, in themselves, do not attest that there is no independent entrepreneurial activity;
— reference to “holding activity” and “investment” in the list of declared types of activity of a foreign owner of income cannot be counted as an independent and sufficient criterion proving the presence or absence of the status of beneficial owner of income.
In addition, it should be noted that the HoldCos listed in the Letter also include interim subholding companies. These interim subholding companies previously were often recognised as not being beneficial owners of income.
As a result, the FTS has instructed regional tax offices, when conducting control procedures to determine the existence / absence of a HoldCo’s status as a beneficial owner of income, to analyse in each case whether there are signs of artificiality in the HoldCo’s activity. This analysis should include whether there are signs that the HoldCo is not independent when making decisions with regard to assets belonging to it and with regard to income from the source in the RF under consideration.
At present, court practice regarding application of the beneficial owner of income concept concerning HoldCos is mostly negative. However, the Letter suggests that HoldCos, including interim subholding companies, could now potentially be recognised as beneficial owners of income for RF tax purposes.
As such, when deciding on the existence / absence of beneficial owner of income status, one should first analyse the business purpose of the HoldCo’s in a group’s ownership structure, and then assess how independent that HoldCo is in taking decisions with regard to managing its own assets and income received from Russian sources.
Thus the Letter could be treated as a reference to the Multilateral Instrument (MLI) on implementing tax treaty measures to combat Base Erosion and Profit Shifting, which contains the principal purpose test. Under this test, double tax treaty benefits should not be applied to income if receipt of the benefits was one of the principle purposes of a transaction / chain of transactions. Please note that the MLI will come into force in Russia on 1 October 2019 and its provisions with regard to withholding income tax will be applicable from 1 January 2020.
Hence we recommend that tax diagnostics of existing / future corporate structures / transactions be conducted, including of foreign elements to assess consequences as a result of applying the MLI provisions.
To ensure success, KPMG’s International Tax specialists can provide comprehensive support to perform all MLI diagnostics on your corporate structure / international transactions in your group, and assist in developing measures to mitigate any identified tax risks and inefficiencies. For more information on the KPMG approach to performing MLI diagnostics, please see the attached file.
Should you have any questions, please do not hesitate to contact us.
1. Letter of the Federal Tax Service of Russia No. СА-4-9/8285 dated 28 April 2018
2. Letter of the Federal Tax Service of Russia No. СА-4-9/8285 dated 28 April 2018