Ratification of OECD Multilateral Convention (MLI)
The President of the Russian Federation signed on May 01, 2019 Federal Law No. 79-FZ Ratifying the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Tax Base Erosion and Profit Shifting.
MLI was signed in Paris on November 24, 2016 and entered into force on July 01, 2018. This document was adopted in support of a set of measures developed in accordance with the OECD Plan for BEPS (Base Erosion and Profit Shifting).
The purpose of this convention is to thwart aggressive international tax planning that would move profit to countries where it would not be taxed or taxed at a reduced rate.
Having ratified this document, Russia intends to apply its provisions to double taxation treaties (further “DTT”) with 70 countries with appropriate exceptions and statements, including, for example: China, Cyprus, Finland, France, Kazakhstan, The Netherlands, Spain.
MLI significant provisions
- The convention introduces the Principle Purpose Test. This means that the benefits offered by DTTs do not apply if the main purpose of entering into transactions is to derive such benefits.
- Preferential dividend rates will be applied if the conditions for their application (for example, ownership, investment amount) are fulfilled for 365 days prior to the payment of dividends.
- Russia will apply this condition to DTTs with Finland, France, the Netherlands and other countries.
- Income from disposal of shares, ownership interest may be taxed in DTT jurisdiction, if more than 50% of their value directly or indirectly consists of immovable property for 365 days in that jurisdiction. Russia will apply this condition to DTTs with Finland, France, Cyprus and other countries.
- Criteria for recognition of agency agreements and similar strategies intended to artificially avoid the status of permanent establishment have been established.
- These criteria will apply to transactions with residents from Finland, France, Kazakhstan and other countries.
- Benefits and exemptions will not apply to organizations with double residence until competent state authorities determine which residency is to be considered for such organizations.
- Russia will apply this rule to DTTs with China, France, the Netherlands and other countries.
- Parties to DTTs will be able to apply a simplified benefit limitation clause.
Entry into force of MLI provisions
The changes will start being applied to DTTs with countries that have also ratified MLI. Currently, 25 countries have ratified MLI, including, among others, Finland, France, Germany and the Netherlands.
MLI rules will start being applied to income taxed at the source of payment as early as January 01, 2020, and for other income from January 01, 2021 onwards.
We recommend reviewing the changes introduced by MLI as well as existing conditions with counterparties and flow of income among group companies to assess the risks that could arise following the application of MLI rules. We also recommend making the necessary changes to group structure and flow of income in view of these rules.
We look forward to assisting you with these matters. Feel free to contact us by filling out the contact form below