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Changes in Eurobond Taxation to Benefit Businesses

Russia

The Russian Finance Ministry recently issued a letter which turned over the authorities view on Eurobond's interest taxation and beneficial owner's concept. The issue was that Russian tax authority had viewed the term "beneficial owner", which is fixed in many Double Tax Treaties, in the legal sense for more than 15 years. That meant that an entity was a beneficial owner of income if he has gained this income in a legal way (on the base of agreement, for example). The beneficial owner concept has great influence on applying the benefits under the DTT, so it is always taken into consideration for the international tax planning, also for Eurobond schemes. Taxand Russia takes a look at this continuing issue and how the new amendments may affect Russian businesses.

For many years the Russian Ministry of Finance viewed SPV companies, which had an agreement with a Russian Bank, as a beneficial owner. It released SPVs from taxation in Russia and its agents from withholding tax. Then in a letter the Russian Ministry of Finance announced that SPVs could not be reviewed as a beneficial owner and that all payments must be withheld. The Russian Ministry of Finance said that the DTT benefits depended on the residence status of the beneficial owner.

After this letter, the Eurobond taxation question became a battlefield between major Russian companies and the Russian Ministry of Finance. Under the powerful lobby of major Russian companies, the Parliament was expected to force amendments to the Russian Tax code, which would free Russian tax agents from withholding tax. But the Russian Government did not support these amendments. As a result, a Federal law with amendments to the Russian tax code with regards to Eurobond taxation was passed on 7 June 2012.

These amendments free Russian tax agents of Eurobond payments up to 1 January 2014. The Russian Ministry of Finance is planning to work out a draft law with new rules for beneficial owner determination and Eurobond taxation.

Taxand's Take


The new amendments free Russian tax agents of Eurobond payments until 1 January 2014. It means that all the Eurobonds, issued before 1 January 2014, would be 'safe' and would not be withheld in Russia. But it is not clear what will happen to the tax rules after this date.

Your Taxand contacts for further queries are:
Andrey Tereschenko
T. +7 495 967 00 07
E. a.tereschenko@pgplaw.ru

Ivan Zelenin
T. +7 495 967 00 07
E. i.zelenin@pgplaw.ru

 

Taxand's Take Author