Balakina Z.V., Ural State Law University (LL.M. Tax & International Tax Law) The Concept of “Beneficial Owner” in Russian Tax Legislation and Case Law

Implementation of the beneficial owner concept in Russia is complicated by: -a lack of universal criteria for determining the beneficial owner; -a lack of consensus regarding the use of this institution in the world science and practice. To date, the concept of the beneficial owner in the Russian Federation is reflected only in: - International Conventions on the elimination of double taxation with respect to passive income (dividends, interest and royalty); -written explanations of the Finance Ministry; -insufficient judicial practice. Attempts to introduce this concept to the tax legislation in the Russian Federation is to be treated as not sufficiently successful.

OECD’s approach to the concept of the beneficial owner The term «beneficial owner» isn’t to be used in a narrow technical sense, rather, it should be understood in light of the object and purposes of the Convention, including the prevention of fiscal evasion and avoidance. (§ 12 par. 2 Comments to Art. 10 OECD Model Convention). OECD is still reviewing the wording of the criteria for determining the beneficial owner, that specifies the importance of this issue.

Until April 29, 2011, the list of persons, who are not beneficial owners, was limited by OECD to: -agent; -nominee; -conduit company acting as a fiduciary or administrator. In their discussion drafts of 2011 and 2012 on the revision of the of beneficial owner concept, OECD has introduced its new interpretation: The recipient of a income is not the beneficial owner of that income, when his «right to use and enjoy the income is constrained by a contractual or legal obligation to pass the payment received to another person». In addition, this obligation “may also be found to exist on the basis of facts and circumstances.” (Clarification of the meaning of «Beneficial owner» in the OECD Model Tax Convention: Discussion Draft, 29 April 2011 to 15 July 2011; OECD Model Tax Convention: Revised Proposals Concerning the meaning of “Beneficial Owner” in articles 10, 11 and 12, 19 October 2012 to 15 December 2012)

Innovations provided for in the OECD Discussion draft, 2012, dedicated to the concept of the beneficial owner The obligation of the income recipient “to pass the payment received to another person”, constraining the right to use and enjoy it, should be distinguished from other unrelated obligations, the satisfaction of which ensured by it and under the conditions of which the recipient may act as: -a debtor; -a party to financial transactions; -a party of collective investment vehicles. The following persons are generally proposed to be treated as beneficial owners of income, unless they are proved to act as a conduit company: -multi-tiered fund structures; -holding companies; -financial institutions.

The concept of the beneficial owner in foreign practice

The concept of the beneficial owner in the Russian Federation

The Finance Ministry Approach to defining the beneficial owner The term “factual recipient of the income" should be understood: - not in a narrow technical sense; - In light of the basic principles of contracts: prevention of fiscal evasion and avoidance, substance-over-form approach. Foreign company is to be treated as the beneficial owner of income provided the following conditions are met: 1) there is legal basis to receive an income, verified by the civil contracts; 2) a foreign recipient does not act as an agent or nominee on behalf of another person who actually benefits from the income; 3) a foreign recipient is a direct recipient of the income, i.e. «economically or factually has the power to control the attribution of the income». (The Letters of the Finance Ministry dated September 26, 2012, № (interest); dated December 30,.2011, № / 1 (Eurobonds); dated October 15,.2007, № (income from trust management); dated April 21, 2006, № (income American Depositary Receipt)).

The above rules for taxation of income from securities, being applied starting January 1, 2014, will not become an effective mechanism for promoting the concept of the beneficial owner in the tax law of the Russian Federation, for the following reasons. -In practice, there are actually no mostly beneficial owners disclosed only foreign nominal owners of the securities; -As noted in par of the above OECD Project, 2012, ”the beneficial owner of a dividend as opposed to the owner of the shares, which may be different in some cases." - Such rules do not touch the commonly occurring situations with payments of dividends and interest on borrowings by nonpublic companies; - New rules of fiscal evasion and avoidance won’t result in large-scale disclosure of beneficial owners.

An innovative approach of the Finance Ministry to the concept of the beneficial owner (The Letter of the Russian Finance Ministry dated April 9, 2014, № P3/16236) In determining the beneficial owner the functions performed by a foreign company and received her risks should also be considered. No only a foreign agent and a nominee, but also a foreign conduit company, are not to be recognized as the beneficial owner. The foreign conduit company is characterized by the following features: - it acts as an intermediary; - it acts on behalf of another person who actually benefits from income as a trustee or a manager; - it has very narrow powers in respect of that income; - it passes all or almost all the income directly or indirectly (at any time and in any form) to another person - a resident of a country with which the Russian Federation has no International Convention on the elimination of double taxation, or the agreement contains less favorable terms. In general, the Ministry of Finance reiterates its previously expressed approach.

Such description of conduit transactions examples by the Finance Ministry can be fraught with negative consequences. The above examples can represent a number of legitimate situations. The payment of dividends in the case of construction of multi-tiered holding structures, can be regarded as one of these (OECD, in its draft dated 2012, recognizes the holding company as a beneficial owner).

The concept of ”the beneficial owner" is important to distinguish from the term “beneficial holder" of the company. The “beneficial owner" means the individual who directly or indirectly owns or has the power to control it. (the term is introduced by the law dated June 28, 2013, № 134 –FL, in the Federal Law dated August 07, 2001, No 115- FL "On countering legalization of proceeds from crime...") To date it is not clear how the current laws on the requirement of disclosing the beneficial owner will relate to the mechanism of applying the beneficial owner concept, which is proposed to be introduced into the Russian tax legislation.

The concept of the beneficial owner is one of the main treaty anti-abuse rules in the world. The above said makes it clear that the question of providing a mechanism of this concept application in the Russian tax legislation is important and difficult to implement.

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