Russia’s accession to the Multilateral Convention to implement measures under the BEPS Plan

On 7 June 2017 the Russian Federation signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the “Multilateral Convention[1]). The Multilateral Convention was developed by the countries that are members of an Ad Hoc Group of the Organisation for Economic Cooperation and Development as part of implementing “Action 15” under the Plan to Prevent Base Erosion and Profit Shifting (BEPS). The Multilateral Convention makes it possible to implement the provisions of the BEPS Plan without amending existing agreements on avoidance of double taxation (“Tax Agreement”). Each jurisdiction may choose the provisions it considers acceptable for itself (other than mandatory provisions) and notify their treaty parties of this.
Russia plans to have the Multilateral Convention cover 63 applicable Tax Agreements. The exception will be Tax Agreements with countries that are not members of the OECD Ad Hoc Group to develop the Multilateral Convention, as well as Tax Agreements with Sweden and Japan. [2]
The Multilateral Convention will become effective for Russia upon ratification.
Key amendments under Multilateral Convention accepted by Russia:
Covered Tax Agreements are being modified to include new preamble text. In the new version they contain the intention to eliminate double taxation without creating opportunities for non-taxation or reduced taxation, including through treaty-shopping. A new purpose of covered Tax Agreements is thereby defined.
Where a person other than an individual is deemed to be a tax resident of two contracting jurisdictions, for the purposes of the Tax Agreement the residency of such entities will be determined by mutual agreement. The competent authorities have to determine the place of effective management, the place where it is incorporated, and any other relevant factors. In the absence of agreement between the competent authorities, the person shall not be entitled to any benefit granted by the Tax Agreement. However, the competent authorities may agree upon the extent to which such benefits may be granted.
This is perhaps one of the most significant blocks of changes introduced by the Multilateral Convention that is of particular interest for Russia.
Rules limiting the application of tax benefits are being introduced to Tax Agreements. In particular, the general rule on the “Principal Purpose Test” supplemented by the “Simplified Limitation on Benefits Provision” is being approved.
The Principal Purpose Test consists in not granting benefits under Tax Agreements if obtaining that benefit was the principal purpose or one of the principal purposes of any arrangement or transaction.
The Simplified Limitation on Benefits Provision allows benefits under a Tax Agreement only if the persons claiming benefits are “qualified persons.” The following persons, inter alia, may be qualified persons:

  • individuals;
  • political subdivisions, local authorities, agencies or instrumentalities of a political subdivision or local authority;
  • companies (or other entities), if the principal class of their shares is regularly traded on recognized stock exchanges;
  • non-profit organizations agreed to by the contracting jurisdictions of the Tax Agreement;
  • regulated entities / structures that are established and operated to administer or provide retirement benefits, and investing funds necessary to conduct their operations;
  • persons other than individuals, if, on at least half of the days of a twelve-month period the abovementioned individuals (in particular, persons who are residents) own, directly or indirectly, at least 50 percent of the shares of the recipient of the income.

Tax benefits under a Tax Agreement may be granted to residents that are not “qualified persons” in the following cases:

  1. A resident that is engaged in the active conduct of a business in the jurisdiction of its residence, and the income derived from the source jurisdiction emanates from or is incidental to, that business. However, “active conduct of a business” shall not include:
  • operating as a holding company;
  • providing overall supervision or administration of a group of companies;
  • providing group financing (including cash pooling);
  • making or managing investments, unless these activities are carried on by a bank, insurance company or registered securities dealer in the ordinary course of their business.
  1. A resident derives income from a business activity conducted in the source jurisdiction, or derives income arising in the source jurisdiction from a connected person, provided the business activity is substantial. Whether a business activity is substantial will be determined based on all the facts and circumstances.
  2. On half of the days of any twelve-month period, persons that are beneficiaries own, directly or indirectly, at least 75 percent of the beneficial interests of the resident claiming benefits under the Tax Agreement.
  3. If a resident is neither a “qualified person,” nor entitled to benefits on other grounds, the competent authority may grant the benefits of the Tax Agreement, only if such resident demonstrates that neither its establishment, acquisition or maintenance, nor the conduct of its operations, had as one of its principal purposes the obtaining of benefits under the Tax Agreement. Before either granting or denying a request made by a resident, the competent authority of the other jurisdiction to which the request has been made shall consult with the competent authority of the resident’s jurisdiction.

The requirement is being introduced that in order to apply reduced taxed rates when paying dividends to beneficial owners, the receiving party must have an ownership interest in the company paying the dividends for at least 365 days.
An additional requirement is being set: the minimum period for holding shares or interests deriving their value from immovable property must be 365 days preceding the alienation of the shares or interests in order to meet the criterion of the set threshold value of such shares or interests.
A rule is being introduced protecting the right of the jurisdiction that is the source of the income to tax income attributable to a permanent establishment situated in a third jurisdiction. The rule applies when such income is subject to reduced taxation in such third jurisdiction and is exempt from tax in the jurisdiction of the company whose permanent establishment is situated in such third jurisdiction.
The provisions of the Tax Agreement are being modified to eliminate cases of abuse in determining permanent establishment status for persons acting as dependent or independent agents of an enterprise.
It is being suggested to abolish the rule according to which a permanent establishment might not be constituted for specific activities. Specific activities will not constitute a permanent establishment if such activities are of a preparatory or auxiliary nature.
Russia also plans to apply the “anti-fragmentation rule” according to which dividing a single business process into separate transactions (each of which has a preparatory or auxiliary nature) will not be considered as a basis for not having a permanent establishment.
Provisions are being introduced that are aimed at preventing splitting-up of contracts for the purpose of avoiding permanent establishment status (for activity conducted at a building site, construction project, installation project or other specific project) solely on the basis that the activity under each separate contract does not exceed the threshold period of activity set by the Tax Agreement.
Russia has made a reservation that these provisions do not apply to activities relating to the exploration for or exploitation of natural resources.
New requirements are being introduced to the mutual agreement procedure, the purpose of which is to resolve the issue of taxation of an entity not in accordance with the provisions of the Tax Agreement, and also for the purpose of resolving any difficulties arising as to the application of the provisions of such agreements. The following requirements, inter alia, are being established:

  • a taxpayer may present the case to the competent authority of any contracting jurisdiction of the Tax Agreement to initiate the mutual agreement procedure;
  • an objection may be presented within three years from the first notification of the action resulting in taxation not in accordance with the provisions of the Tax Agreement;
  • if the competent authority considers the taxpayer’s objection to be justified and is not itself able to arrive at a satisfactory solution, the competent authority shall resolve the taxpayer’s case by mutual agreement;
  • the obligation is being introduced to implement any agreement reached notwithstanding any time limits in the domestic law.

Ratification of the Multilateral Convention will become a serious step toward implementing the measures under the BEPS Plan, which will change the existing system of international tax agreements applied by Russia, and will also have a colossal impact on the operations of international groups of companies.
Dentons’ lawyers are ready to provide comprehensive legal support in analyzing asset ownership structures and financial flows of international groups of companies as to whether those structures are subject to risks related to the possible ratification of the Multilateral Convention, and the functioning of other tools for combating tax evasion, and to evaluate the consequences of changing those structures to reduce risks identified.
[1] Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) under BEPS Action 15
[2]Russia will not extend Multilateral Convention coverage, inter alia, to Tax Agreements with Albania, Algeria, Belarus, Botswana, Venezuela, Iran, Kirgizia, the Democratic People’s Republic of Korea, Cuba, Macedonia, Mali, Namibia, Syria, Tajikistan, Turkmenistan and Uzbekistan.

Dzhangar Dzhalchinov

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Nikolai Roudomanov

Nikolai Roudomanov