Beneficial Ownership Rules for Holding Companies: The Russian Approach
By Mikhail Khaletsky, Nektorov, Saveliev & Partners
The use of tax benefits by foreign holding companies in earning passive income, such as dividends or interest, from Russia, requires such companies to provide proof of an actual right to the income.
Holding companies generally perform only a limited set of financial operations (receive dividends from subsidiaries, participate in intra-group financing transactions, etc.) and often have a relatively small staff and assets in the place of their incorporation, which can cause diffculties in confirming the existence of an actual right to income in compliance with Russian standards.
Tax authorities do not recognise an “artificial” company as a beneficial owner of income – that usually requires an assessment of two circumstances:
- whether the existence of a holding company has a business purpose, and
- whether the holding company exercises independent business activity.
Business purpose is understood as a rational economic reason, other than the reduction of tax, that prompted a group of companies to create an intermediate holding company.
Such a reason may be a necessity to unite two or more independent groups of shareholders on the basis of a holding company.
Independent business activity is investigated by studying:
- the structure of income and operations of the holding company, and
- decision-making procedures in the holding company.
The Federal Tax Service has formulated an approach, namely that “the activities only carried out in the form of investments and financing of the companies of a group (holding), by acquiring financial investments of affliated companies or providing loans to affliated persons does not indicate exercising independent business activity”.
When studying the decisionmaking procedures of the holding, the following questions shall be examined:
- Whether the holding company has its own qualified personnel;
- Whether such personnel is independent in making managerial decisions or completely bound by the will of the ultimate beneficiaries;
- What actual decisions are made by the management personnel?
If the main function of the holding company’s management is to receive dividends from its subsidiary and, within a short time, to transit such funds to the ultimate beneficiary in a third country, then this company has only a small chance to obtain tax privileges when deriving passive income from Russian sources.
Mikhail KhaletskyGGI member firm
Nektorov, Saveliev & Partners
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Nektorov, Saveliev & Partners is a law firm established in 2006 in Moscow, Russia, and focuses on providing comprehensive legal solutions to corporate and private clients under Russian and English law. Their main practice areas are tax, corporate, M&A, arbitration and litigation, banking and finance, investments, and real estate. They provide legal support to clients in Russia, CIS countries (Belarus, Kazakhstan, Ukraine), and worldwide.
Mikhail Khaletsky is an expert in taxation, as well as a member of the Russian branch of the International Fiscal Association and a certified tax advisor.
Published: International Taxation Newsletter, No. 11, Autumn 2019 l Photo: DyMax - stock.adobe.com