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Russia: Concept of “beneficial ownership” and implications for withholding tax

Russia: Concept of “beneficial ownership”

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).


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To benefit from tax treaty provisions, the income’s non-resident recipient must be:

  • The beneficial owner of the Russian-sourced income
  • A tax resident in the corresponding tax treaty country

Definition of beneficial ownership in Russian tax law

The term “beneficial owner” (as introduced into Russian tax legislation in 2015) is defined as:

  • A person who has the right to use and/or dispose of income received at that person’s discretion by virtue of: 
    • Direct or indirect participation in an entity (non-incorporated structure)
    • Control of the entity (non-incorporated structure) or
    • Other applicable circumstances
  • A person who has the right to use the income on behalf of another person

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:

  • Rental payments
  • Penalties for violating a contract
  • Capital gains from the sale of immovable property or shares in a property-rich company—i.e., when a company’s assets consist of more than 50% immovable property located in Russia

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:

  • A beneficial-ownership confirmation letter issued on behalf of the recipient of the Russian-sourced income
  • Additional documents (such as the so-called “defense” file) that support statements made in the confirmation letter

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:

  • Any amount of unpaid tax—typically when the Russian tax authorities deny that the beneficial tax treaty rate applies and instead taxes the income at the Russian withholding tax rate
  • A penalty—20% of the unpaid amount of the tax
  • Late-payment interest

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:

  • Subsequent, or “transit,” income distribution—for example, income received from Russian companies is transferred upstream either in full (or almost in full) or used to repay debt obligations to affiliated companies either on the same day or within a short period
  • The absence of economic reasons for the interposition of a foreign company in the group structure
  • The foreign company’s “weak” substance—for example:
    • A foreign company’s assets consisting exclusively of participating in Russian companies and/or of loans granted to them
    • A foreign company that has no employees, pays no or only minimal taxes, has nominee directors, and outsources the company’s maintenance to a foreign jurisdiction (e.g., accounting, compliance, domiciliation)
  • The absence of an authority (independence) regarding the use of received Russian-sourced income (that is, the functions the foreign company performs and the risks it bears regarding this income must be taken into account)

Accordingly, a foreign company needs to consider satisfying certain conditions to establish that it is the beneficial owner of the Russian-sourced income:

  • The existence of non-discretionary (not limited) authority in the hands of a foreign legal entity on disposal of Russian-sourced income
  • The performance of a “real” independent business activity that establishes a real economic profit center
  • The absence of transit character of cash flow that could be evidence of a company’s role as a mere conduit or a pass-through entity


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 |


Read a September 2019 report prepared by the KPMG member firm in Luxembourg

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