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Russia Will Introduce Measures To Counter Tax Treaty Abuse

by Tatiana Smolenskaya, Tax-News.com, Moscow

04 December 2009


At the behest of President Medvedev, the Russian Ministry of Finance has prepared an amendment to Article 7 of the Tax Code to crack down on tax avoidance by means of offshore companies set up to benefit from lower tax rates granted under double taxation treaties.

The primary objective of the legislation would be to deny Russian residents who set up offshore companies for the purposes of tax avoidance the benefit of lower treaty withholding tax rates.

Russian business has tended to favour Cyprus as the preferred location for setting up offshore companies owned nominally by local lawyers or accountants; as a result of the double taxation treaty between Russia and Cyprus the Russian company can remit dividends to such offshore companies subject to a withholding tax of only 5% compared with usual Russian tax of 15%, and remittances of royalties and interest are free of Russian tax, compared to 20% within Russia.

According to Russian official statistics quoted by Vedomosti, Russia received USD56.9bn in foreign investment from companies registered in Cyprus last year, or 22% of total inward investment, and in the first nine months of this year, the figure was USD5.2bn, or 10% of the total.

Similar figures for the Netherlands, Switzerland and Belgium are also statistically significant, implying that the tax treaties with these countries have been used for tax avoidance.

After changes to the double-tax agreement with Cyprus are ratified by the Russian government, the Russian tax authorities will be able to request information from their Cypriot counterparts about beneficial ownership of companies, in line with standard modern tax information exchange conditions.

Speaking at the Fifth All-Russia tax forum of Chambers of Commerce, Stanislav Voskresensky, deputy head of the Ministry of Economic Development and Trade, was quoted in the national media as suggesting that that new legislation will define the term "beneficial ownership" in respect of agreements for the avoidance of double taxation, and ensure that treaty benefits are not extended to individuals or organizations where the actual beneficiary is not a tax resident of the country with which Russia has a double taxation agreement; the individual or organization and the earnings received would be subject to taxation in line with the Russian Tax Code rather than the bilateral agreement.

This would also affect ultimate beneficiaries in countries where no such treaty exists.

In his speech, Voskresensky also spoke about the future of legislation on transfer pricing; this will have its first reading in the Duma this December, and will become law by spring 2010.

A comprehensive report in our Intelligence Report series, examining in depth the situation of offshore transparency and secrecy in a number of the most prominent jurisdictions, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report2.asp

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