Federal Tax Service Letter alters the rules of the game for international groups


Legal update No 640

Bryan Cave Leighton Paisner (Russia) LLP advises that the Federal Tax Service of Russia (FTS) has issued a Letter1 on applying the beneficial owner concept.

The Letter toughens up on many issues of the utmost practical importance for business, compared with both the current legislation and last year’s FTS letter on similar issues (see FTS letter of 17 May 2017 No. СА-4-7/9270@).

The Letter’s key points are:

  • Taxpayers must justify the need for a specific form of transaction and involvement of foreign companies in the business and transaction structure. They must also provide proof that their choice is reasonable and the business risk justified.
  • The key factor indicating a conduit foreign company is lack of independent business operations on its part.
  • Such lack of independent business might be confirmed by:
  1. The company deriving no benefit from disposing of (using) the income.
  2. Its operations lacking signs of a separate part of business (business purpose).
  3. There being no operations relating to business activities.
  4. The company employees exercising no actual management or control over the company.
  5. The foreign company’s profits mostly coming from income transferred from Russia.
  6. The company’s core activity consisting mostly in passing on the income.
  7. All its activities being related to receiving dividends (in fact - holding companies).
  8. The company having no significant financial or commercial risks.
  9. The company making no payments typical in the normal course of business (or its operating costs being insignificant). Costs of registering and maintaining offices in a foreign jurisdiction, low payroll costs and accounting invoices do not attest to doing business.
  • Operations consisting only of investment and financing of group companies do not attest to doing business (in fact - Intragroup treasury companies).
  • A factor in assessing proof of business being conducted by a foreign company is whether it has any income other than dividends and loan interest and whether such income is significant.
  • The Letter is vague about the rules for applying the “look-through” approach: on the one hand, the tax authorities do not have to apply it; on the other hand, they may do so upon disclosure by the company of all relevant information. Since neither the Letter nor the laws set any clear-cut rules as to when the tax bodies are to take this opportunity, the final decision in each case will largely be at the FTS’ discretion.

Importantly, the approaches described in the Letter may apply not just to passive income but also to other operations, such as intra-group services.

We expect to see the tax authorities stepping up their attacks on international groups in the wake of the Letter. In this context, we recommend taking the FTS position into account in planning of your operations and in defence for audits, running a health check and adapting existing business structures, and also preparing a defence file in advance.

At Bryan Cave Leighton Paisner (Russia) LLP, our Tax Practice draws on extensive experience of providing legal advice and support in tax checks and audits, including international taxation matters, and we will be happy to provide you integrated legal assistance on any such matters.
1Letter of the Federal Tax Service of Russia dated 28 April 2018 No. СА-4-9/8285@

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