Under Russian tax law, any income distributed by a Russian company to a foreign company is subject to Russian withholding tax at a rate of 15% for dividends and a 20% rate for royalties, interest, and other income (unless reduced by applicable provisions of an income tax treaty).
To benefit from tax treaty provisions, the income’s non-resident recipient must be:
Definition of beneficial ownership in Russian tax law
The term “beneficial owner” (as introduced into Russian tax legislation in 2015) is defined as:
In addition, beneficial owner status is applied separately to each and every dividend payment and/or to a group of payments within one agreement’s framework.
Types of income at risk
In principle, the beneficial ownership concept is to be applied only with respect to passive income (for instance, dividends, royalties, and interest). However, the Russian tax authorities have indicated that their position is that the beneficial ownership concept applies to all types of income, including:
How to prove beneficial owner status
Beginning from 2017 onwards, the beneficial owner must provide to a Russian company (the “tax agent”) certain documents confirming the beneficial ownership status, given that the tax agent pays the Russian-sourced income and is therefore responsible for remitting withholding tax on this income. The tax agent must keep these documents and provide them to the Russian tax authorities when requested. However, neither Russian tax law nor clarifications from competent authorities indicate which documents constitute proof of beneficial ownership status. Based on current practice, the following documents are typically accepted as supporting evidence of beneficial ownership status of the recipient of Russian-sourced income:
According to Russian tax law, the tax agent is responsible for the withholding tax payment. If the tax agent cannot prove the Russian-sourced income’s beneficial ownership status to the Russian tax authorities, the tax agent must pay:
Beneficial ownership criteria for tax purposes
Based on a review of court decisions, the Russian tax authorities use the following criteria and arguments to challenge beneficial ownership status:
Accordingly, a foreign company needs to consider satisfying certain conditions to establish that it is the beneficial owner of the Russian-sourced income:
According to Russian law, responsibility for withholding tax computations and payments is shifted to the tax agent. If the tax agent cannot prove to the Russian tax authorities the beneficial ownership status of the recipient of the Russian-sourced income recipient, the tax agent must pay the unpaid tax, penalties, and late-payment interest. Therefore, the tax agent will need to analyze the beneficial ownership status of the foreign recipient of Russian-source income (following the criteria noted above); confirm the beneficial ownership status of the foreign company; and prepare a “defense” file to justify the beneficial ownership status if requested by the Russian tax authorities. The foreign recipient would want to consider these requirements in satisfying the beneficial ownership rules.
For more information, contact a tax professional with the KPMG member firm in Luxembourg:
Alona Gavrylova | +352 22 51 51 5512 | firstname.lastname@example.org
Read a September 2019 report prepared by the KPMG member firm in Luxembourg
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