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The Russian Government Drafts Bill to Introduce an Anti-Avoidance Rule
On 25 May 2009 the President of the Russian Federation proposed in his Budget Message the introduction of anti-abuse measures regarding DTTs. In December 2009 the draft bill prepared by the Russian Ministry of Finance was introduced to the Government of the Russian Federation. Taxand Russia examines the Bill and rules concerning beneficial ownership.
The proposed anti-abuse provision is aimed at incorporating the "actual recipient" concept into Russian tax legislation. This term is intended to correspond with the "beneficial ownership" concept. The draft bill provides for the following: when the beneficial owner (actual recipient) of income from Russian sources does not really reside in the respective tax treaty state, then the relevant DTT between Russia and that state will not be applicable to the respective income.
The wording of the draft Bill leaves several questions open, which creates some uncertainty as to how the final provision will be formulated. It is expected that the bill will be in line with the concept of beneficial ownership under the Commentary to the OECD Model convention.
The majority of Russian tax treaties contain a beneficial ownership clause in respect of reduced withholding tax on dividends. However, this condition is not always present in tax treaty provisions related to interest and royalties.
The Deputy Minister of Finance of the Russian Federation has mentioned, that the issuance of the Bill is not dependent on current negotiations which are taking place in relation to several Russian DTTs.
Irrespective of the details of the anti-avoidance rule it is obvious that the Russian tax authorities intend to become more active in controlling the eligibility of non-residents to tax treaty benefits. Considering that in many Russian tax treaties already have the beneficial ownership clause, non-Russian holding and financing companies deriving income from Russia are advised to check whether they qualify as beneficial owners of respective income and whether they are eligible for tax treaty benefits. Non-eligibility would result in withholding tax on dividends at 15% instead of 5% under tax treaties and 20% tax on interest and royalties instead of 0% under tax treaties. Under Russian administrative procedures the tax authorities may carry out audits for the three years preceding the year of audit.
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