Russian Ministry of Finance continues its attack on offshores.

28.04.2014

With each day Russian Ministry of Finance toughens measure in order to fight tax evasion in Russian Federation. The recent serious step was taking with the issuance of the Letter N 03-00-P3/16236 “On the application of exemptions provided by international agreements on avoidance of double taxation” (hereto – “Letter”) on the 9^th of April, 2014.

In the Letter Ministry of Finance explains the application of exemptions that are provided by agreement between Russia and other countries. Ministry suggest to stop “treaty shopping” deals. Here goes the list of examples of such deals (it is an open list):

1. resident of the state-party to the agreement that receives dividends form Russian sources has an obligation to transfer whole or almost whole sum of the dividends to the resident of the state that does not have an agreement with Russian Federation (or resident of the state with which the agreement about less favorable taxation regime for dividends is in force) directly or through intermediates;

2. resident of the state-party to the agreement that receives interest on the credit (loan) provided to the Russian person transfers whole or almost whole amount of interest to the resident of the state that does not have an agreement with Russian Federation (resident of the state with which the agreement about less favorable taxation regime for interest is in force) since money provided to the Russian person by the first-mentioned resident in the form of the credit (loan) were obtained by him from the second-mentioned resident of the third state;

3. resident of the state-party to the agreement that derives income from copyright or from the sublicense agreement in Russian Federation transfers whole or almost whole amount of such income to the resident of the state that does not have an agreement with Russian Federation (resident of the state with which the agreement about less favorable taxation regime is in force) according to the license contract between first-mentioned resident and the resident of the third country, who is a holder of the exclusive rights to the intellectual property.

Therefore, according to the Letter, benefits (reduce rates and exemptions) provided by the international agreements on avoidance of double taxation are applicable only in case of resident of the state-party to the agreement with Russian Federation being the real beneficiate.

Moreover, it is specially mentioned, that the burden of proof of the that the foreign partner is a real company is on the residents of Russian Federation.

Source: http://www.consultant.ru/document/cons_doc_LAW_161747/

Expert’s opinion

Measures to fight tax evasion form Russian Ministry of Finance is more serious and tougher with each step. Although, there is no mechanisms of following and all the more so of the collection of “unpaid” for the time being. Ministry of Finance is just “thinking” about the enforcement of aforementioned. And such letters do not keep even the fairest of the businessmen calm. Nobody knows if he will discover himself in the heat of the moment.

The question about the prevailing law arises – domestic or international. Although, Constitution, as the main law of the state, gives clear understanding that international obligations are beyond her status, do not expect that after the enforcement of this law, there will be no cases in courts.

Businessmen are supposed to prove the legality of their scheme, and it is possible, that they will prove it. But the amount of time wasted and the formulation of the question is terrifying and worrying.

It is clear that not all business schemes will die, the part of them will transform. It is just a question of time and right strategy

Irina Lomakina ( Director of the Moscow Office, Honest&Bright)