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18 August 2017
On June 7 2017 Russia, alongside 68 other states and jurisdictions, signed the Multilateral Convention to Implement Tax Treaty-Related Measures to Prevent Base Erosion and Profit Shifting (BEPS), which was developed to implement Action 15 of the BEPS Plan.
The convention contains provisions that are binding for each signatory. It also contains numerous optional provisions, the application of which with respect to a particular double tax treaty (DTT) is at the discretion of each party to the DTT.
The provisions that are binding on all signatory countries (including Russia) include the following:
The optional provisions may be applied in full, partially or not at all. Russia has agreed to the majority of such provisions, potentially tightening existing DTTs. The most important of these provisions include the following.
To benefit from a DTT's preferential provisions, the party applying for such benefits must be listed as a qualified party in the convention. Thus, the convention excludes the following parties from being entitled to benefit from the preferential provisions of a DTT:
Parties not included in this list may, in practice, be restricted in their ability to benefit from such provisions. In order to benefit from the preferential provisions of a DTT, such parties must provide evidence that the main purpose of their establishment or the undertaking of their operations was not to receive DTT benefits (ie, they must perform the principal purpose test).
Reduced rate of taxation of dividends
To apply a reduced rate of taxation of dividends, the ownership criteria, including the possession of a certain amount of capital, must be complied with within the 365 days preceding the date of the dividend payment.
Income from alienation of shares
Income from the alienation of shares of organisations whose asset value is represented mainly by immovable property should be taxed in the country where the immovable property is located if the value of shares was directly or indirectly represented primarily by immovable property at any time during the 365 days preceding the sale of such shares.
The concept of 'permanent representation' has been expanded and refined:
According to the Russian authorities' decision, the convention will apply to 66 DTTs, including those with Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Luxembourg, the Netherlands, Norway, Saudi Arabia, Spain, Switzerland, Turkey, Ukraine, the United Arab Emirates, the United Kingdom and the United States.
The mandatory provisions of the convention, which Russia has acceded to, will apply to all selected DTTs once the convention has been ratified. The application of the convention's optional provisions will depend on the decision of the partner countries. Thus, the articles of the convention to which Russia has acceded may be applied in relation to a DTT with another state if it has not expressed a position on the non-application of this article. Otherwise, the changes will not be applied. In this regard, Russia's tightening of the DTT provisions may be limited by the approach of the partner countries.
The convention will come into force in Russia after its ratification. Ratification will be a serious step towards implementing the measures envisaged in the BEPS Plan, which will change the existing DTT system and have a significant impact on the functioning of international groups of companies in Russia.
For further information on this topic please contact Valery Narezhniy or Nikolay Harivulo at Gorodissky & Partners by telephone (+7 495 937 6116) or email (firstname.lastname@example.org or email@example.com). The Gorodissky & Partners website can be accessed at www.gorodissky.com.
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