On 8 August 2019, the Federal Tax Service of Russia issued a letter* clarifying its position in relation to the beneficial ownership of holding companies.

Foreign companies receiving income from Russian sources need to prove their beneficial ownership in order to receive reduced withholding tax rates in Russia under any applicable double tax treaty with the foreign company’s home country. In our view, the clarification by the Federal Tax Service should therefore make it easier to prove beneficial ownership for purposes of income distributed from Russia within multi-layer corporate groups, which is a positive and long-awaited development for the business community.

The clarification letter states that a company engaged mainly in holding or investment activities should not be considered by the Russian tax authorities, as part of their verification procedures, as having no real commercial activity.

References to the “holding” and “investment” activities of foreign income recipients in their corporate documents and other sources should not therefore be the sole ground for assessing ultimate beneficial ownership in respect of income deriving from Russia.

The clarification letter also proposes that holding companies should be qualified as companies specialising in the holding and managing of share portfolios, whether these portfolios relate to intragroup investments or investments aimed at third parties.

In addition, the letter states that the formal approach that was previously applied by tax authorities during tax audits is no longer acceptable. Instead, tax authorities should focus on whether there are artificial grounds behind the relevant investment or holding activities, including whether income recipients have the relevant authority and are sufficiently independent to manage assets and income deriving from Russian sources.

Previously, the Tax Service expressed* quite a formal and aggressive position, stating that investment or holding activities do not in themselves qualify as independent commercial activities, irrespective of the fact that such activities may be entirely in good faith and non-tax driven. This led to numerous disputes on the tax treatment of income distributions within international groups of companies.