14 March 2019 Tax Messenger Tax Edition Changes to Withholding Tax and Beneficial Ownership Rules at the End of 2018: What Needs to be Done? The end of 2018 brought further amendments to articles of International Tax Review the Tax Code dealing with the application of withholding tax ranked EY Russia Tax & Law and beneficial ownership rules in certain situations. practice as a leading tax firm Federal Law No. 424-FZ of 27 November 2018 (Tier 1) in Russia in its annual World Tax guide for 2018. The key changes made by Federal Law No. 424-FZ of 27 November 2018 are as follows: Proof of beneficial ownership of income must be provided for each individual payment of dividend income and/or for a group of payments under a single contract for other types of income (paragraph 3 of clause 2 of Article 7 of the Tax Code) It is established in clause 1.1 of Article 312 of the Tax Code that the look-though approach may be applied to all kinds of Russian-source income A simplified procedure for confirming As things stand, a number of issues appear to beneficial ownership, involving the arise with regard to the practical application of provision of a confirmation letter, is these provisions, including the following: introduced for individuals, state sovereign Regarding the amendments to paragraph 3 of funds, companies that are at least 25% clause 2 of Article 7 of the Tax Code: publicly traded and companies with a controlling government interest (at least 1. Does the requirement to provide proof of 50%) (clause 1.5 of Article 312 of the Tax beneficial ownership for each individual Code) payment of dividend income allow for confirmation letters and certifications to A list is laid down of documents to be be obtained once a year, and if so, subject provided for withholding tax purposes in to what conditions? relation to income on securities constituting the object of a repo or the 2. Given that interest payments on securities subject of a securities loan (or other may be made under a single depositary similar agreement) that is paid to a foreign agreement, is it acceptable for a foreign company which is the purchaser of company to provide confirmation letters securities in the first leg of the repo or the and certifications once, at the time when a borrower under the securities lending depositary agreement is concluded, even agreement (or other similar agreement) though payments under that agreement between the settlement dates of the first may be made in respect of securities of and second legs of the repo or during the different issuers and in different periods? term of the securities lending agreement 3. Is it possible to declare oneself a beneficial (or other similar agreement) (clause 1.2-1 owner in relation to some payments of of Article 312 of the Tax Code) interest income on securities under a Information in publicly available guides single depositary agreement but not in may now be used to confirm the residence relation to other interest payments under of a foreign bank in a foreign state in order the same agreement? for tax to be calculated and withheld at 4. How would a change in beneficial owner appropriate reduced rates (clause 3 of status during the term of an agreement Article 310 of the Tax Code) affect the applicability of reliefs (for Income from a participating interest in example, if a foreign company did not other entities that is paid in the form of name itself as the beneficial owner of dividends is defined as including income in income at the time of concluding an the form of assets (property rights) agreement but its status changed during received by a company shareholder the term of the agreement)? (participant) upon departure (exit) from Regarding the amendments to clause 1.5 of the company or upon the distribution of Article 312 of the Tax Code: the assets of a company being wound up among its shareholders (participants) to 5. Can the simplified procedure for the extent that it exceeds the amount confirming beneficial ownership for certain actually paid by the shareholder persons/entities be applied in relation to (participant) in question for shares payments of dividend and interest income (participating interests, equity units) in on foreign nominee accounts that are that company (subsection 1 of Article 250 subject to withholding tax in accordance of the Tax Code) with Article 310.1 of the Tax Code? The amendments to Article 312 are effective Regarding the amendments to clause 1.2-1 of from 1 January 2018, and the other Article 312 of the Tax Code: amendments from 1 January 2019. 6. Does this mean that similar documents may be requested by the tax authorities when conducting an audit based on the provisions of Article 310.2 of the Tax Code 2 and may have to be gathered by a foreign depositary that pays the dividends in question, nominee holder before income is paid? before they are paid, of the foreign company’s acknowledgement that it is not the beneficial Regarding the amendments to clause 3 of Article owner of the income, of the quantity of shares in 310 of the Tax Code: the Russian company on which the dividends in 7. Should it be understood, taking into question were paid and of the size of the Russian account the provisions of subsection 4 of company’s direct interest in the foreign clause 2 of Article 310 of the Tax Code, company. that information in publicly accessible In the event that the amount of dividends information sources may be relied on when received from the Russian company, insofar as it income is paid to foreign banks by Russian corresponds to that company’s participating tax agents that are not Russian banks or interest in the foreign company, exceeds the the development bank state corporation amount of dividends paid by the foreign only in cases where reduced tax rates are company within the above-mentioned time applicable, but not where there is an period (increased by the amount of withholding exemption from taxation? taxes charged on those dividends), the Russian The above list is not exhaustive, but provides issuer must calculate and pay tax on that excess just a few examples of difficulties that may arise. at the rate of 15% not later than ten days after Another issue regarding the amendments to the expiry of the time limit set for the payment Article 312 of the Tax Code is how, in practical of dividends by the foreign company to the terms, they are to be implemented post factum, Russian company for the purposes of the given that they apply retrospectively to provisions in question. payments made from 1 January 2018 onwards. Dividend amounts should be translated into Federal Law No. 493-FZ of 25 December 2018 roubles using the Central Bank exchange rate prevailing on the date of the decision to pay the The amendments made by Federal Law No. 493- dividends. FZ of 25 December 2018 alter the withholding tax rules for circular ownership structures These amendments are effective from 1 January whereby shares in a Russian company are owned 2019. by a foreign subsidiary of that company. In A number of issues might arise in applying these particular, the amendments exempt a dividend provisions, such as the following: payment from Russian withholding tax and Can the provisions be applied to individual exempt a depositary that makes such a payment dividend payments at the discretion of the from performing tax agent functions in relation persons involved (rather than all to that payment provided that all the following payments)? conditions are met: Can the provisions be applied where a the person claiming beneficial owner Russian company’s participating interest is status is a Russian company exercised through not one but a number of the Russian company has a direct interest foreign companies and (or) unincorporated in a foreign company that is a direct structures? shareholder in that Russian company Are the provisions applicable only when the foreign company must distribute dividends are paid directly, or also when a dividends to the shareholder that set-off occurs? Would the applicability of beneficially owns them within 120 days of the provisions depend on the manner in receiving the dividends from the Russian which such a set-off is documented? company Does the timing of the receipt of dividends In this situation, beneficial ownership is by a Russian company from a foreign determined relative to the Russian company’s company affect the applicability of the participating interest in the foreign subsidiary. provisions (i.e. if money is credited to the The Russian company is obliged to notify the 3 Russian company’s accounts after the Although the amendments in question were expiry of the 120-day period)? intended to clarify tax rules and address existing ambiguities, there are, as shown above, a whole If withholding tax has been charged on range of issues that may arise when applying dividends at the rate of 15%, can a claim them in practice, including questions of for a refund of that amount be submitted interpretation and of procedure. In our view, to the Russian authorities, and if so, who therefore, Russian issuers, depositaries and would have the right to apply for the other tax agents should consider the need to refund? review positions held and processes used with Where payments are made on depositary regard to withholding tax and devise appropriate receipts, what arrangements must be approaches to new issues. We would be happy to made with the issuer in order for zero provide any assistance that may be needed in taxation to be applied, given that the these areas.