Proof of income ownership
To apply Double Taxation Treaties, Russian companies have been required since 2017 to obtain from foreign recipients of income proof that such recipients have actual right to income. This requirement is relevant to all companies engaging in cross-border transactions. We will find below a more detailed review of this topic.
What type of income are we talking about?
- Revenues from sale of Russian real estate property
- Revenues from sale of shares in organizations whose assets consist of 50% of real estate property in Russia
- Revenues from international transportation
- Revenues from lease of sea vessels and containers used for international transportation
- Revenues from lease of property used in Russia
- Other income not related to the entrepreneurial activities performed by a foreign company in Russia
How is income taxed at a source in Russia?
As a general rule, when a Russian company makes the aforementioned payments to a foreign founder or other foreign counterparty, such company must withhold Russian income tax at a rate of 10%, 15% or 20% depending on the type of income. Double Taxation Treaties concluded between Russia and other countries allow not withholding tax in Russia or applying reduced tax rates.
When can a Double Taxation Treaty be applied?
Russian companies may apply the benefits conferred by such treaties if they receive the following 2 documents before payment of income to a foreign company:
- Proof of actual right to income;
- Confirmation of residency in the country with which Russia has signed a Double Taxation Treaty.
Russian companies must obtain these documents. If they fail to obtain these documents, then the amounts paid to foreign companies will be subject to tax at the rate provided by Russian law.
How to confirm that the recipient of income is the owner of income?
There is no list of documents provided by the Russian Tax Code to confirm actual right to income. Foreign companies may prepare their confirmation of beneficial ownership of income in any form, and they should focus on the substantive part of such document.
Actual right to income means that recipients of income are entitled to dispose of the income they receive at their own discretion, they do not save on the payment of taxes at their source in Russia, and they carry out commercial activities in the country with which Russia has signed a Double Taxation Treaty.
It is recommended to include in the confirmation text a basis for such statements.
What treaty should be applied if the foreign recipient of income is not its beneficial owner?
- If the beneficial owner of income is in Russia, then the provisions of Russian tax law will be applied for taxation purposes, and the rules set out in Double Taxation Treaties will not apply.
- If the beneficial owner of income is a resident of a foreign country with which Russia has signed a Double Taxation Treaty, then the provisions of such treaty will be applied.
When a foreign organization, which is not the beneficial owner of income, receives dividends from a Russian company, such foreign company should send to the Russian payer:
- A document supporting the absence of actual right to income;
- Information about the entity holding such actual right.
What do we offer?
We assist with issues of beneficial ownership of income using modern concepts applied in international tax practice.
If your company is about to pay income abroad, please contact us. We will review the circumstances of your case, provide advice on the tax benefits offered by International Tax Treaties, and help draw up a document confirming actual right to income.
We have prepared a special questionnaire to collect from large multinational corporations all the information necessary to confirm right to income. This questionnaire allows Russian companies paying income to foreign companies to avoid the risks associated with the application of benefits conferred by Double Taxation Treaties.