8 July 2015
Tax Alert
The Beneficial Owner Concept –
Developments in Arbitration Case
Law
EY’s Russian Tax and Law
practice was named a leading tax
firm in Russia in “World Tax
2015”, an annual guide published
by the International Tax Review.
In May and June this year a number of important rulings were issued on
disputes over withholding tax in which the tax authorities appealed to
the concept of a “beneficial owner” (or “person having an actual right
to income”).
Arbitration case law in this area goes back quite a long way1, but we
have of late seen increased focus by the tax authorities on the
beneficial owner concept. The explanation for this may lie in the
“deoffshorization” law, which came into force on 1 January2, as well as
in a number of Ministry of Finance clarifications on this topic which
were published last year3.
The “beneficial owner” rules mean that a foreign company which
receives income from Russia (first and foremost in the form of
dividends, interest and royalties) may not have the right to claim lower
rates of withholding tax under double taxation treaties. Lower rates do
1
For example, the Eastern Value Partners Limited case (Ruling No. 09AP-33421/2012-AK of the
Ninth Arbitration Appeal Court of 5 December 2012), the ZAO Toros case (Ruling No. KAA41/2465-11 of the Federal Arbitration Court of the Moscow District of 7 April 2011).
2
Law No. 376-FZ of 24 November 2014.
3
Letter No. 03-00-RZ/16236 of 9 April 2014 and Letter No. 03-08-05/36499 of 24 July 2014.
not apply to companies which cannot be deemed
“beneficial owners” of income (or, to use
alternative expressions, do not have an “actual
right to income”, are not “the actual recipients
of income”, are deemed to be “conduit
companies”, and so on).
Beneficial ownership rules are set out in the
Commentaries on the OECD Model Convention
and in the new “deoffshorization” law in a fairly
generalized way and with emphasis on the
priority of economic content over legal form,
which is why, in Russia as in most other
countries, the application of the concept
develops through law enforcement practice. It is
the evolution of this practice in Russia that we
are witnessing now.
considered as the beneficial owner of the
dividends since the entire amount of them
was redistributed.
Following an audit the tax inspectorate ordered
the tax agent (ZAO Votek Mobile) to pay
withholding tax on dividends at the rate of 15%.
The first instance court concurred with the tax
authority’s position.5 In the appellate court6,
however, the company succeeded in refuting the
tax authority’s conclusions by presenting the
following arguments:

it follows from a letter received from a
competent Swedish lawyer that shares
received as a capital contribution become
the property of the receiving party (in this
case the Swedish company which received
the dividends), thus indicating that the
inspectorate is mistaken in its view that
the shareholder bears no business risk;

according to clarifications provided by the
Swedish shareholder, not all the dividends
were passed on.
The ZAO Votek Mobile Case
This case involved a dispute over withholding tax
on dividends paid to a Swedish shareholder in
2012. In the opinion of the tax inspectorate, the
Russian company which paid the dividends did
not have the right to apply the 5% rate of
withholding tax under the Russo-Swedish treaty
owing to the fact that not all the required
conditions were met. In particular, the
inspectorate took the view that the Swedish
company which received the dividends, Tele2
Russia Holding AB, was not the beneficial owner
of the dividends. The inspectorate’s reasoning
for this conclusion was that the Swedish
company which received the dividends:

did not determine their subsequent
“economic fate”, since the entire amount
of the dividends was passed on upwards in
the ownership chain;

received shares in the Russian company as
a shareholder contribution, i.e. free of
charge, indicating that it had no business
risk consisting in the potential loss of its
own investment;

in the opinion of the Ministry of Finance,
which the tax inspectorate sought in the
course of the dispute4, it could not be
The court also pointed to the tax inspectorate’s
failure to prove that the final Swedish
shareholder which received the dividends was
the beneficial owner of the dividends.
The tax inspectorate may file a cassation appeal
against the ruling.
The OAO Sankt-Peterburg Telecom
Case
OAO Sankt-Peterburg Telecom is another
subsidiary of the same Swedish shareholder
(Tele2 Russia Holding AB) which was the
recipient of the dividend distribution scrutinized
in the ZAO Votek Mobile case. The dispute
concerned the withholding tax rate for dividends
paid in 2010-2011. The tax authority took the
view that the shareholder was not the beneficial
5
Decision No. A14-13723/2013 of the Arbitration Court of the
Voronezh Province of 6 October 2014.
6
4
2
Letter No. 03-08-13/23614 of 19 May 2014.
Ruling No. A14-13723/2013 of the Nineteenth Arbitration
Appeal Court of 5 June 2015.
owner, presenting a similar line of argument to
that which was used in the above-described ZAO
Votek Mobile case.
envisaged by the Ministry of Finance7 and by the
“deoffshorization” legislation which entered into
force from 1 January 20158.
The taxpayer’s position in this case is based on
the following arguments:
The tax inspectorate may file an appellate
appeal against this decision.

the Swedish shareholder did not transfer
all or almost all of the dividends to its
shareholder: of the 7 billion krona in
dividends received in 2011-2012, the
shareholder distributed only 2.3 billion;

the dividends received were used by the
shareholder, inter alia, in financial and
investment activities (loans, purchase of
other companies, financing of
subsidiaries);

the conclusion drawn by the Ministry of
Finance that Tele2 Russia Holding AB
could not be regarded as the beneficial
owner of the dividends was based on
insufficient information (in particular,
financial statements and later
clarifications from the company were not
considered);

the company carried on activities and had
sufficient capital, and its management
bodies made independent decisions on the
payment of dividends to shareholders;

the company incurred various expenses
(interest, audit and consulting fees) and
received income (interest, dividends,
liquidation payments) in connection with
its activities;

the Swedish company which received a
portion of the dividends passed on along
the chain of ownership is a resident of a
state which has a tax treaty with Russia
and could have claimed the lower rate of
withholding tax if it had received the
dividends directly.
The OAO Moscommertsbank Case
The situation in this case was that the tax
inspectorate had charged additional withholding
tax on interest payments made by a Russian
bank to the Dutch company Moscow Stars B.V.
That company was involved in the securitization
of mortgage loans to individuals, and in 20092010 it received interest from the bank in
respect of purchased loans. In the tax
inspectorate’s view, the company could not claim
exemption from withholding tax under the
Russia-Netherlands treaty since it was not the
beneficial owner of the interest. The
inspectorate’s arguments came down to the
following:

the Dutch company was a conduit entity
which transferred the interest received to
holders of that company’s bonds;

in accordance with the tax ruling profits
tax paid by the Dutch company did not
depend on its actual income and expenses;

the company’s risk hedging expenses are
negligible;

the company did not have permanent staff;

the bank’s own statements classified
obligations in respect of bonds issued by
Moscow Stars B.V. as the bank’s own
obligations.
The first instance and appellate instance courts9
disagreed with the inspectorate’s arguments and
took the side of the bank, which demonstrated
that:
Based on these arguments, and taking into
consideration the favourable decision on the
ZAO Votek Mobile case, the first instance court
ruled in the company’s favour.
The court additionally emphasised that the
official representations, documents, information
and financial statements provided by the
company constituted the very documentary
evidence of the status of the Swedish company
as the beneficial owner of the dividends which is
3
7
Letter No. 03-08-05/36499 of 24 July 2014.
8
In particular, clause 1 of Article 312 of the Tax Code.
9
Decision of the Moscow Arbitration Court of 10 October 2014,
Ruling No. 09AP-53771/2014 of the Ninth Arbitration Appeal
Court of 26 January 2015.

interest received by Moscow Stars B.V. on
mortgage loans in the period concerned
significantly exceeded amounts of interest
paid to bondholders;

expenses incurred by the company for the
hedging of interest rate risks were greater
than the interest payments themselves;

the company created reserves for overdue
loans;

failure by borrowers to make loan
payments on time did not cause Moscow
Stars B.V. to violate its obligations to
bondholders;

interest income of Moscow Stars B.V.
differed from its bond expenses both
quantitatively and qualitatively: mortgage
loans to individuals had fixed rates ranging
from 9.8% to 13.5%, while bonds had
floating and fixed rates (Libor + 1.75%,
Libor + 5.25% and 7% depending on the
class of bonds);

the company’s activities involved various
risks (credit risk, interest rate risk, risk of
changes in market prices of pledged
assets);

the company incurred significant
management expenses (administrative
costs);

the company calculated profits tax on the
basis of its actual financial result and paid
dividends, i.e. the tax inspectorate
incorrectly interpreted the tax ruling
received by the company;

the securitization transaction had a
business objective and was not aimed at
obtaining an unjustified tax benefit.
The court agreed, therefore, that there was no
foundation for the tax inspectorate’s allegation
of interest payments being channelled through
Moscow Stars B.V. on a transit basis, and that
the company had lawfully received exemption
from Russian withholding tax.
The tax authority did not challenge the court’s
decision at the cassation stage insofar as the
beneficial ownership part was concerned.10
The OOO TD Petelino Case
This case involved a dispute over withholding tax
on royalties paid by a Russian company under a
sublicence agreement to a Cypriot company for
the use of a trademark. In the opinion of the
inspectorate, the Russian company did not have
the right to claim a withholding tax exemption
under the Russia-Cyprus double taxation treaty
since the Cypriot company receiving the
royalties was not the beneficial owner of the
royalties. The tax authority gave the following
reasoning for its conclusion:

the rights holder of the trademark was an
affiliated company registered in an
offshore jurisdiction (Bermuda);

the Russian company could have
concluded an agreement directly with the
licensor (the owner of the trademark);

the licence agreement between the
offshore rights holder and the Cypriot
company and the sublicence agreement
between the Cypriot company the Russian
company were concluded a short time
apart;

the price of the sublicence agreement
exceeded the price of the licence
agreement;

there is a tax treaty between Russia and
Cyprus but not between Russia and
Bermuda;

practically all royalties received by the
Cypriot company were transferred to the
Bermudan rights holder;

the Russian company received an
unjustified tax benefit in the form of a
withholding tax exemption under the
Cyprus treaty without having a business
10
See the Ruling of the Arbitration Court of the Moscow District of
19 May 2015 on Case No. A40-100177/13.
4
objective of concluding a sublicence
agreement.
The Russian company contested the
inspectorate’s conclusion using the following
arguments:

the Russian company could not have used
the trademark without concluding a
sublicence agreement;

its business operations were genuine;

it is normal business practice for the price
of a sublicence agreement to exceed the
price of a licence agreement, as the
sublicensor aims to cover its costs and
make a profit;

the Cypriot company was a genuinely
functioning organization which disclosed
royalties received in its statements and
paid taxes;

whether or not an agreement could have
been concluded directly with the rights
holder is not a matter for the tax authority
to judge, as it does not have the right to
evaluate the economic expediency of
expenses.
It is noteworthy that the term “beneficial owner”
(“actual right” to income) is not used in
paragraph 1 of Article 12 (“Royalties”) of the
Russia-Cyprus tax treaty, which could have
provided a formal basis for not applying that
concept in the case concerned. Nevertheless,
this did not affect the decision of the court,
which took the tax inspectorate’s side11.
The Russian company has filed an appellate
appeal against the court’s decision.
What should you do?
It is clear that the tax authorities are
increasingly focusing their attention on the
validity of the application of lower rates under
Russian tax treaties, basing their approach on
the “beneficial owner” concept. Although the
11
Decision No. A40-12815/15 of the Moscow Arbitration Court of
8 May 2015.
5
relevant rules were introduced into Russian tax
law from the beginning of this year, this concept
has been present in the great majority of
Russian double taxation treaties since they were
signed. The examples above show that this has
led to tax authorities applying the rules to
periods before 2015.
We advise taxpayers to make a careful
assessment of the risk of challenges against the
use of lower rates in current and previously used
structures and transactions. Particular
attention should be paid to “transit” money
flows (dividends, interest, royalties), foreign
companies without an adequate level of
presence in their jurisdiction and structures and
companies without sufficient evidence of
business purpose and without an adequate level
of functions, assets and risks attributable to
foreign counterparties of Russian companies.
We will monitor the development of these and
other cases involving the application of the
beneficial ownership rules.
How can we help?
We should be happy to provide you with advice
and assistance:

in assessing the level of historical and
possible future tax risks;

in developing and implementing
restructuring measures in order to reduce
possible tax risks;

in substantiating, documenting and
defending the status of foreign recipients
of income as the beneficial owners of that
income.
List of Arbitration Cases Involving the “Beneficial Owner” Issue
Taxpayer
Case number
Type of
income
Audit
period
Outcome for the
taxpayer
Is the decision
final?
Real Estate Value
Partners Limited
Ruling of the Ninth Arbitration
Appeal Court of 5 December
2012 on Case No. А4060755/12-20-388.
Interest
2008-2010
Yes
ZAO Toros
Ruling of the Federal Arbitration
Court of 7 April 2011 on Case
No. A41-598/10.
Interest
2007
Yes
ZAO Votek Mobile
Ruling of the Nineteenth
Arbitration Appeal Court of 5
June 2015 on Case No. A1413723/ 2013.
Dividends
2012
No
ОАО
Moscommertsbank
Ruling of the Ninth Arbitration
Appeal Court of 26 January
2015 on Case No. A40100177/13.
Interest
2009-2010
Yes (as far as the
“beneficial owner”
part is concerned)
OOO TD Petelino
Decision of the Moscow
Arbitration Court of 8 May 2015
on Case No. A40-12815/15.
Royalties
2010-2011
No
OAO SanktPeterburg Telecom
Decision of the Moscow
Arbitration Court of 16 June
2015 on Case No. A40187121/14.
Dividends
2011-2012
No
6
Inquiries may be directed to one of the following executives:
Moscow
Director of Tax
Peter Reinhardt
Customs
Yuriy Volkov
+7 (495) 641 2927
Indirect Tax
Victor Borodin
Vitaly Yanovskiy
+7 (495) 755 9760
+7 (495) 664 7860
+7 (495) 705 9738
Energy Chemical & Utilities
Richard Lewis
Victor Borodin
Alexander Smirnov
+7 (495) 705 9704
+7 (495) 755 9760
+7 (495) 755 9848
Financial Services
Alexei Kuznetsov
Irina Bykhovskaya
Ivan Sychev
Maria Frolova
+7 (495) 755 9687
+7 (495) 755 9886
+7 (495) 755 9795
+7 (495) 641 2997
Industrial Products
Andrey Ignatov
+7 (495) 755 9694
Retail and Consumer Products
Alexandra Lobova
+7 (495) 705 9730
Dmitry Khalilov
+7 (495) 755 9757
Yuko Fite
+7 (495) 755 9759
Real Estate, Hospitality and Construction
Yulia Timonina
+7 (495) 755 9838
Svetlana Zobnina
+7 (495) 641 2930
Anna Strelnichenko
+7 (495) 705 9744
Technology, Media and Telecommunications
Vladimir Abramov
+7 (495) 755 9680
Ivan Rodionov
+7 (495) 755 9719
Vadim Ilyin
+7 (495) 648 9670
Tax Performance Advisory Services
Ivan Rodionov
+7 (495) 755 9719
Sergey Saraev
+7 (495) 664 7862
International Tax Services
Vladimir Zheltonogov
Alexei Ryabov
Marina Belyakova
Andrey Vostokov
Evgeny Nepomnyashchikh
Victor Kalgin
Oksana Yaroshchuk
Igor Tkach
Irina Shiyanova
Maria Gubina
Olga Shambalyeva
+7 (495) 705 9737
+7 (495) 641 2913
+7 (495) 755 9948
+7 (495) 755 9708
+7 (495) 648 9626
+7 (495) 755 9967
+7 (495) 783 2542
+7 (495) 664 7832
+7 (495) 755 9950
+7 (495) 783 2517
+7 (495) 664 7868
Human Capital
Zhanna Dobritskaya
Anton Ionov
Ekaterina Ukhova
Sergei Makeev
+7 (495) 755 9675
+7 (495) 755 9747
+7 (495) 641 2932
+7 (495) 755 9707
Transfer Pricing and Tax Efficient Supply Chain
Management
Evgenia Veter
+7 (495) 660 4880
Steve Cawdron
+7 (495) 287 6536
Maxim Maximov
+7 (495) 662 9317
Tax Policy and Controversy
Alexandra Lobova
Alexei Nesterenko
+7 (495) 705 9730
+7 (495) 662 9319
Tax Compliance
Yulia Timonina
Sergei Pushkin
Larissa Gorbunova
Karina Arakelyan
+7 (495) 755 9838
+7 (495) 755 9819
+7 (495) 755 9901
+7 (495) 660 4876
Tax Accounting and Risk Advisory Services
Alexei Malenkin
+7 (495) 755 9898
Transaction Tax
Yuri Nechuyatov
Richard Lewis
+7 (495) 664 7884
+7 (495) 705 9704
Legal Services
Dmitry Tetiouchev
Alexey Markov
Georgy Kovalenko
Mikhail Makhotin
Tobias Luepke
+7 (495) 755 9691
+7 (495) 641 2965
+7 (495) 287 6511
+7 (495) 648 9627
+7 (495) 641 2935
Saint Petersburg
Dmitry Babiner
Anna Kostyra
Fyodor Blinov
+7 (812) 703 7839
+7 (812) 703 7873
+7 (812) 703 7892
Ekaterinburg
Dmitry Babiner
Irina Borodina
+7 (812) 703 7839
+7 (343) 378 4900
Krasnodar
Elena Tikhomirova
+7 (812) 703 7800
This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a
substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global EY
organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in
this publication. On any specific matter, reference should be made to the appropriate advisor.
© 2015 «Эрнст энд Янг (СНГ) Б.В.» Все права защищены.
http://www.ey.com
No part of this publication may be reproduced or used in any form without the permission of the rights holder - Ernst & Young (CIS) B.V.
7