Update to Beneficial Ownership and Eurobond Interest
The Russian Ministry of Finance recently issued a letter which has overturned the authorities’ view on the concept of beneficial owner and Eurobond interest taxation. For more than 15 years the Russian tax authority has viewed the term “beneficial owner”, which is fixed in many Double Tax Treaties, in the legal sense. That meant that an entity was only a beneficial owner of income earned on a legal point (on the base of agreement, for example). Taxand Russia takes a look at what the Ministry of Finance's view on beneficial ownership and Eurobond taxation may have on Russian businesses.
The concept of beneficial ownership has great influence on the application of benefits under DTT agreements, so it is always taken into consideration for international tax planning and also for Eurobond schemes. According to the Russian Tax Code, a Russian legal entity must withhold tax from cross-border payments (incl. to SPV).
In the disputed letter, the Ministry of Finance held that SPV could not be reviewed as a beneficial owner and all payments must be withheld. The Finance Ministry held that the DTT benefits depended on the residence status of the beneficial owner. But in practice it is very difficult (or sometimes just impossible) to determine this information. The term “beneficial owner” is not fixed in Russian legislation, so it is very difficult to understand who is a real beneficial owner and who isn’t. This point of view lays too great a burden on a tax agent to carry out an investigation to try and figure out the real economic owner of income.
The Ministry of Finance letter, is disputed because, it showed high risks for investors and would mean big losses for major Russian companies, so after hot discussions between the business community and Ministry of Finance, they came to a consensus. The Ministry of Finance worked out a Draft Law with amendments to the Russian Tax Code, which offers to free Russian tax agents (in the disputable letter it was a bank) from withholding tax.
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