The supervisory authorities are paying more attention to the practical application of the concept of the actual income recipient. Everyone has heard the recent cases against such companies as "Northern Kuzbass" (A27-7455/2010), "Naryanmarneftegas" (A40-1164/2011), "Oriflame Cosmetics" (A40-138879/2014), etc.
In 2016, one of the most notorious cases was the case of "Severstal", JSC (A13-5850/2014), on which the basic decision was made by the Arbitration Court of the Moscow District on March 15, 2016 (the final point was put by the Supreme Court of the Russian Federation on 05.08.2016, denying to transfer the case for consideration to the Judicial Board on Economic Disputes).
In this article, we propose to consider the essence of the case and have a look at the main arguments of the courts and the supervisory authority.
Briefly about the concept of actual income recipient: in accordance with the tax legislation of the Russian Federation, if an international agreement, containing provisions relating to taxation and fees, establishes other rules and regulations than those stipulated by the Tax Code, the rules and regulations of international agreements shall apply.
However, if the international agreement of the Russian Federation on taxation provides for reduced tax rates or exemption from taxation in respect of income from sources in the Russian Federation for foreign persons having beneficial right to the income, in order to implement this international agreement, the foreign person shall not be recognized as the beneficial owner of such income. If the foreign person has limited powers in relation to disposal of this income, exercises in respect of the said income intermediary functions in the interests of another person, without performing any other functions and without incurring any risks, either directly or indirectly paying such income (fully or partially) to the other person who at the direct receipt of such income from sources in the Russian Federation would not be entitled to the use of the provisions of the international agreement of the Russian Federation on taxation specified in this paragraph.
Thus, the company applying preferential taxation provided by an international agreement shall be ready to confirm and prove that it is the actual income recipient.
That is, first of all, it has a real presence (Real Substance) and, secondly, it carries out real economic activity (transactions made by it have a real economic/business purpose).
The core of a subject: singularity of this case is in the fact that the tax authority has unraveled non-classical conduit scheme for the payment of passive income abroad (dividends, interest, royalties).
This time, multi-corporate procedures aimed at restructuring the ownership of a large Russian mining holding company ("Severstal") were under the close attention of supervising bodies.
In particular, the Russian company, being one of the shareholders of "Severstal", used shares of "Severstal" as a contribution to the share capital of its subsidiary companies in Cyprus. That is, in turn, did the same by transferring the shares of "Severstal" to their Cypriot "daughters", in which the second shareholder (having the right to corporate management) is a foreign company with a registration office in the BVI, affiliated with the Russian company.
The basis of the decision of the tax authority (and subsequently the Court) is the argument that the Russian company by performing a series of consecutive actions on introduction of the shares of "Severstal" to the authorized capital of subsidiary Cypriot companies actually made a free transfer of these shares to the address of companies registered in the BVI.
Thus, the transactions on property contribution (shares of "Severstal") were deemed null and void by the court (due to their sham nature) and rules for the transfer of property without any compensation of the Russian company to the address of a foreign company that does not have a permanent establishment in Russia were applied to legal relations between the parties.
The main arguments of the tax authority in the case were:
Despite the fact that the institution of "the actual income recipient" in the Tax Code of the Russian Federation was introduced only in 2015, international agreements on the avoidance of double taxation previously provided for the possibility of using the advantages of agreements on the avoidance of double taxation (including preferential rates) only in respect of persons: