In June 2018 the Russian Federal Tax Service issued internal guidelines to its tax inspectors on how to determine who is the Beneficial owner of the income and how to treat these cases with practical and hands on examples.
These strict requirements and tests set up by the Russian tax authorities will harm structures with No Substance; that were created to be acting as Holding Companies and whose income is determined to be pass through and in essence passive.
Many recent Russian court cases against such structures overseas were won by the Russian Tax Authorities. By being able to proof that the Beneficial owner of the income were Russian individuals, the Russian Tax Authorities were able to tax the income – dividends in Russia.
PHS & Partners had addressed the issue of Beneficial ownership of income back in June but due to its importance especially in regards with companies that have connections with Russia and rely on the Cyprus – Russia DDT we will like to emphasize the issue and provide further information below.
Beneficial owner is the person who has the actual benefit from the income received and takes the final decisions on how this income will be utilized.
Beneficial ownership issues affects income such as:
Russia applies the Beneficial ownership of income to Dividends, Interest and Royalties and seeks to tax the person who has the right to income in Russia. The Double Tax Treaty benefits for any company will be available provided that the company receiving the income submits to the person paying the income a confirmation stating that this company has the right to receive that income.
Companies that want to comply with these new guidelines must:
Have economic presence in country of residency and have trading activities.
Use the income received in their business activities, have economic benefit from it and have the authority to dispose it.
Take their own decisions.
Have Real substance.
Have no legal or actual obligations to transfer the income to 3rd parties.
It is very important to take these factors into consideration when registering and establishing a company in Cyprus in order to avoid issues that will challenge the residency status of the company.