Tuesday, 6 June 2017

Russia: New rules in effect for claiming tax treaty relief

Amendments to Russia’s tax law that apply as from 1 January 2017 introduce new requirements with respect to the documents that foreign companies receiving income from Russia are required to submit to claim reduced withholding tax rates under the country’s tax treaties. The rules are consistent with guidance previously issued by the Ministry of Finance. To receive treaty benefits, the foreign
company must produce documentary evidence that it meets Russia’s beneficial ownership requirements, in addition to providing a tax residence certificate, an apostil and a notarized Russian translation of all documents in foreign languages.
Prior to 1 January 2017, Russian tax law allowed a foreign company receiving Russian-source passive income (e.g. dividends, interest, royalties) to enjoy reduced withholding tax rates under an applicable income tax treaty if the foreign company provided a tax residence certificate to the Russian withholding tax agent (i.e. the company paying the income). The withholding tax agent was entitled (but not required) to request any documentary evidence that the foreign company was the beneficial owner of the income.
Starting from 1 January 2017, to apply for a withholding tax rate reduction under a tax treaty, the status of the beneficial owner must be proven by documentation. The list of required documents is not specified in the Russian Tax Code; however, the Ministry of Finance has issued clarifications on the issue, noting that the Tax Code prioritizes the substance and the content of documents over their form.
A “self-declaration letter” prepared by a foreign company is likely to be one of the acceptable options (or a minimum option) to confirm the company’s beneficial ownership of the relevant income. Such a letter should be carefully drafted because a mere statement of the company’s beneficial owner status without specific details may be considered insufficient. The documentation should demonstrate that:

  • The recipient of Russia-source income is engaged in genuine entrepreneurial activities in the treaty partner country;
  • The income recipient does not transfer the income received (fully or partially) to a person/party not entitled to the same or similar tax benefits as the direct income recipient;
  • The income recipient has the right and the authority to use and dispose of the income received independently, and has no contractual or other legal or practical obligation to transfer the income to another person; and
  • The functions performed and the risks assumed by the income recipient correspond to the income received.

Where a “look through” approach applies, a direct recipient of income that is not the beneficial owner should send a letter to the Russian payer relinquishing its right to claim treaty benefits and informing the tax agent that it acts on behalf of, and in the interest of, a third party (the beneficial owner) with respect to certain income and thus is not a beneficial owner. An indirect owner of income that is a beneficial owner, in turn, must provide documentary evidence to the Russian payer confirming its right to receive the income and claim the treaty benefits.
Failure to comply with the above documentation requirements may result in the Russian payer being held liable for the difference between the tax actually withheld and the tax that would have been withheld at the rate applicable under Russian domestic law (e.g. 15% on dividends and 20% on interest and royalty payments) and being subject to fines (20% or 40% of the understated tax) and late payment penalties.

Source: Deloitte