Latest developments on beneficial ownership in Russia

An important part of this BO’s development are the letters of the Russian Federal Tax Service providing for instructions and clarifications for the local tax authorities. In Letter No. ED-4-13/15696@ from 08.08.2019 (Letter) the Federal Tax Service signals a new approach to holding companies obtaining income from Russian sources.

Previously, holding activities (investing and financing) have been considered by the Tax Service as activities not qualifying for independent entrepreneurial activities with the suffcient economic substance, so that this has led to the denial of DTT incentives in the majority of cases, merely because of the nature of the holdings.

According to the new, revised position, the tax authorities have to avoid using a formal approach when determining the “actual right to income” and, thus, the eligibility of a relevant holding company for DTT incentives. Furthermore, based on the Letter, conducting the activities mainly in the form of investments and financing of group of companies (holding companies) or interrelated, affliated companies, in itself does not indicate the absence of independent entrepreneurial activity and, therefore, the absence of the “actual right to income”. The mere indication of holding and/or investing activities among the business activities of a foreign recipient of income may not suffce for estimate on meeting the BO criteria. The Federal Tax Service recommends looking for an artificial nature in activities of the relevant foreign companies on a caseby- case basis, e.g., lack of independence of directors in decision making with respect to disposal of assets and of income received from Russian sources, etc., with respect to each concrete holding company. In other words, the current approach might be aimed at compliance with the MLI provisions which shall apply in Russia starting from 2021 and which foresee the application of principle purpose test as a precondition for the DTT incentives.

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