On 15 November 2018, Russia’s State Duma passed in the third reading Draft Federal Law No. 442400-7, which sets out significant amendments to both parts of the Tax Code, including:

The withholding tax in the context of the beneficial ownership rules:

• Separate beneficial ownership checks would be made for each dividend payment and/or group of payments under one agreement (clause 2 of Article 7)
• The uncertainty over whether the look-through approach may be used where the immediate recipient of a payment is a resident of a country that does not have a tax treaty with Russia is eliminated by excluding the reference to the existence of a treaty in clause 4 of Article 7
• The look-through approach would apply for all income from sources in Russia, not just dividends (clause 1.1 of Article 312)
• The look-through approach would now be applicable without reference to ownership share, thus reducing the risk associated with non-proportional payments of income, dividends on preference shares, etc. (clause 1.1 of Article 312)
• A new direct tax exemption is provided for so-called “looped” ownership structures, covering situations where a Russian company pays dividends to a foreign company (whatever the latter’s participating interest), while itself being the beneficial owner of those dividends. A condition is set for the application of this exemption, namely that the Russian company must have had a participating interest of at least 50% in the foreign entity receiving the dividends for no less than 365 calendar days. The provision may be based on the premise that the source of the dividends and the beneficial owner are one and the same person in this scenario, meaning that no economic gain should arise
• The look-through approach would become available for use by “special entities” (clause 1.5 of Article 312), including:
  • Individuals (irrespective of residence)
  • State sovereign funds
  • Companies whose shares and/or depositary receipts have been admitted for trading on Russian or certain foreign exchanges. The securities in question must account for more than 25% of capital
  • Companies with at least 50% Russian and/or foreign state participation (provided that the foreign state (territory) in question has not been blacklisted by the Federal Tax Service)

Some amendments (such as those to Article 312 regarding the look-through approach and “special entities”) are effective from 1 January 2018, meaning that they may be used in managing risks and consequences from this year onwards.

Amendments regarding the restructuring, liquidation or withdrawal from the capital of a Russian company:

• It would now be directly stated in the Tax Code that income in excess of what a shareholder actually paid for shares should be treated as dividends – potentially allowing for the application of a 0% rate for Russian recipients and a basic rate of 15% (rather than 20%) for foreign recipients (clause 1 of Article 250, subsection 1 of clause 3 of Article 284, subsection 2 of clause 1 of Article 309). The Finance Ministry has previously stated a position to this effect
• Losses equated with non-sale expenses would now also include a loss arising for a participant upon the liquidation of or departure/withdrawal from a company. A loss is defined as a negative difference between income in the form of the market price of assets received by a participant and the amount that the participant actually paid for its participating interest (subsection 8 of clause 2 of Article 265)
• For asset contributions, it would for the first time be expressly provided that shareholders are not liable to tax, including withholding tax, in the event of the return of their asset contributions (clause 11.1 of Article 251, clause 2.3 of Article 309)
• Income in the form of assets and property rights received up to the amount contributed would now be excluded from the tax base in the event of a capital reduction irrespective of the personal law of the company concerned. Previously, this provision applied only in the case of a capital reduction effected under Russian law (subsection 4 of clause 1 of Article 251). This would make it easier for relief to be claimed in the case of voluntary capital reductions by foreign companies

Amendments regarding controlled foreign companies (CFCs):

• CFC exception provision (clause 4 of Article 25.13): a company would not be treated as controlled if owned by a controlling person through a foreign (not only Russian, as now) public company that:
  • Is traded on an exchange of an OECD¹ state (other than countries on the Federal Tax Service’s blacklist)
  • The proportion of shares in the company concerned admitted for trading on the exchange is 25% or more
  • The direct and/or indirect participating interest of the controlling person in respect of each such public company amounts to less than 50%
• A CFC notification must be submitted even where a CFC made a loss for the reporting year (clause 2 of Article 25.14)

A number of additional reliefs, improvements and refinements related to personal income tax that would also be beneficial in a restructuring scenario (amendments to Articles 211, 214.1, 217 and 220):

• The tax exemption for income from the sale of immovable property and equity interests therein, which is conditional on a minimum period of ownership, would be extended to nonresidents (clause 17.1 of Article 217)
• The exemption for income received by individuals from the sale of immovable property and equity interests in such property (conditional on a minimum period of ownership) would apply to all individuals rather than only Russian tax residents as is currently the case (clause 17.1 of Article 217)

A number of refinements regarding tax residence and permanent establishments (for example, in relation to aircraft leasing services and the right to apply the 0% rate to dividends):

• Companies that engage in the leasing or subleasing of aircraft would likewise be treated as tax residents on a voluntary basis only (previously this only applied to companies that lease or sublease marine or multi-purpose (river- and sea-going) vessels) or companies engaged in the international carriage of cargoes, passengers and baggage), i.e., the activities in question would not automatically cause a company to be treated as a Russian tax resident (subsection 4 of clause 6 of Article 246.2)
• Foreign companies that have voluntarily declared themselves tax residents, even though Russia is not their place of management, would be able to apply the 0% rate for dividends (paragraph 3 of clause 3 of Article 284)

A number of refinements with respect to value added tax (VAT) and excise duties:

• The VAT relief for warranty repairs is removed (subsection 13 of clause 2 of Article 149) and replaced with new wording (subsection 37 of clause 3 of Article 149)
• Individuals who directly rent federal, regional or municipal property and are not entrepreneurs would no longer be considered as tax agents for VAT (Article 161)
• VAT paid for goods (work or services), including fixed assets, intangible assets and property rights, that were partly acquired using subsidies would now be recoverable as far as non-budgetary funds spent on acquiring them are concerned (clause 2.1 of Article 170)
• A Russian company that has concluded an agreement on the modernization of oil refining facilities based on the condition that the aggregate historical cost of fixed assets included in the modernization is not less than 60 billion rubles would now be able to receive a certificate of registration of an entity that carries out processing of petroleum feedstocks where it uses a dependent contractor to carry out that processing (clause 3 of Article 179.7)

A number of changes related to the calculation of the Mineral Extraction Tax (MET):

• The coefficient Cgp is set at 1 with effect from 1 January 2022 (rather than 1 January 2021 as before). This would result in increased MET for Gazprom companies (clause 17 of Article 342.4)

Endnote

1. Organisation for Economic Co-operation and Development.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., International Tax Services, Moscow

• Oleg Lvov | oleg.lvov@ru.ey.com

Ernst & Young LLP, Russian Tax Desk, New York

• Kirill Lukyanets | kirill.v.lukyanets1@ey.com

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