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The Russian Ministry of Finance and the Russian Federal Tax Service continue to focus on issues of international taxation

08.05.2020
8 min read
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Pepeliaev Group advises that:

  • Russia has completed internal procedures necessary for beginning the use of the Multilateral Convention (MLI) with separate countries that are partners with the Russian Federation under double taxation treaties (DTTs);
  • the Procedure of conducting mutual agreement procedures within the framework of DTTs is planned to be specified;
  • the format for notifying participation in an international group of companies (IGC) has been changed;
  • an opportunity has emerged to submit notifications of participation in foreign companies and unincorporated foreign structures through a personal account of the taxpayer and the ‘Nalogi FL’ mobile application.

Application of the MLI

Pursuant to article 25(7)(b) of MLI the Russian Federation on 30 April 2020 sent to the OECD Depository, using diplomatic channels, a notification concerning internal procedures necessary for beginning the application of provisions of the MLI with regard to 27 DTTs with the following countries:

1. Australia

10. Ireland

19. Poland

2. Austria

11. Israel

20. Qatar

3. Belgium

12. Latvia

21. Serbia

4. Canada

13. Lithuania

22. Singapore

5. Denmark

14. Luxembourg

23. Slovakia

6. Finland

15. Malta

24. Slovenia

7. France

16. Netherlands

25. Ukraine

8. Iceland

17. New Zealand

26. UAE

9. India

18. Norway

27. United Kingdom

Therefore, the provisions with regard to collecting taxes at source and so-called optional provisions of the MLI will be applied by Russia within the framework of DTTs with the specified countries from 1 January 2021.

As the Russian Ministry of Finance stated in its message with regard to other partner countries under DTTs, the corresponding notifications concerning the application of the MLI will be sent on a regular basis as MLI provisions come into force with respect to these countries.

comment.jpgStill the business community has an open question concerning amendment of conditions of DTTs with counties in the list, namely: Luxembourg, Malta and the Netherlands. Two countries (Malta and Luxembourg) have already received demands to amend provisions of DTTs with regard to the taxation of interest and dividend income at source. We suppose that the Russian Ministry of Finance required that Luxembourg and Malta confirm their consent to the amendment of conditions of these DTTs before 1 January 2021 taking into account the date of the planned application of the MLI with these countries. Therefore, until the end of 2020 international groups of companies have time to adapt their corporate structure to the planned amendments.


The Draft of the Procedure for conducting mutual agreement procedures

A draft of the Order of the Russian Finance Ministry “On approving the Procedure and deadlines for filing applications to conduct mutual agreement procedures in accordance with the international treaty of the Russian Federation on issues of taxation and the procedure and deadlines for consideration of the specified application” (the “Procedure”)[1].

In the first part of the Procedure, in particular, the following is reflected:

  • provisions concerning entities which may file an application with the Russian Ministry of Finance for the conduct of a mutual agreement procedure;
  • provisions concerning mandatory information and documents which should be attached to an application for the conduct of a mutual agreement procedure;
  • provisions concerning the possible deadline for filing the above application; and
  • provisions concerning the revocation of such application.

The second part of the Procedure is of the most practical interest for taxpayers. According to clause 9 of the Procedure, the Russian Ministry of Finance within 90 days from the date when the application for the conduct of a mutual agreement procedure is received is intending to check the application and the documents attached to it with regard compliance with the deadline for filing and whether the provisions of the DTT apply to the circumstances specified in the application, and to issue a decision to start the mutual agreement procedure or a decision concerning a grounded refusal to conduct such procedure.

At the same time according to clause 10 of the Procedure the Russian Ministry of Finance has the right to refuse to conduct a mutual agreement procedure if there is decision of a Russian court in legal force on the issue specified in the application. We believe that such a condition in the future may in practice make it significantly more complicated to initiate mutual agreement procedures in Russia, taking into account the Russian case law which is unfavourable for taxpayers in disputes concerning the taxation of cross-border transactions.

Clause 12 of the Procedure establishes that when the Russian Ministry of Finance receives a request to conduct a mutual agreement procedure from the competent authority of a foreign country (territory) which is a party to the DTT within 90 days from the date when such request was received if the request is well-grounded the Russian Ministry of Finance has the right to take a decision concerning the conduct of the mutual agreement procedure and notify a taxpayer whose interests may be affected by such decision.

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The Procedure provided for by the Ministry of Finance within the framework of article 142.8(3) of the Tax Code to a large extent is intended to supplement the previously published Guidance for conducting mutual agreement procedures and to make it more specific. It should be noted that the Procedure proposed by the Russian Ministry of Finance has both positive and negative characteristics for taxpayers interested in initiating mutual agreement procedures.

Among the positive proposals we may point out the obvious attempt of the Russian Ministry of Finance to reflect in the proposed Procedure to the maximum extent international agreements concerning the conduct of mutual agreement procedures contained in the MLI. In addition, the Procedure developed by the Russian Ministry of Finance follows on from the standard three-year deadline proposed by the OECD for filing applications for the conduct of mutual agreement procedures.

However contrary to the MLI's provisions, the wording of clause 5 of the Procedure establishing the three-year deadline for filing an application de-facto will establish in Russia an additional restriction on the rights of the taxpayer for filing an application for the initiation of a mutual agreement procedure, since the application can be filed:

  • if a tax audit report has been drawn up with respect to such entity;
  • a grounded opinion was provided within the framework of tax monitoring;
  • or with regard to such person a report has been drawn up of a foreign tax authority which, in the opinion of such taxpayer, leads to the procedure of the taxation of its income, profit or property not being in line with the DTT’s provisions.

The wording of this clause of the Procedure proposed by the Russian Ministry of Finance is based on a clear broad interpretation of article 16 of the MLI, which establishes the commencement of the three-year deadline from the date of “the first notification of actions resulting in taxation other than in accordance with the provisions of the DTT”.

At the same time, it is obvious for practising lawyers that in Russian law enforcement practice such ‘first notification’ does not always have the form of a tax audit report, which in future may significantly restrict the taxpayer’s right to initiate mutual agreement proceedings at early stages of control measures and the application of the so-called ‘risk-oriented approach’ by the tax authorities.

The Procedure proposed by the Russian Ministry of Finance also inherited from the Guidance previously issued by the Ministry of Finance the absence of an unambiguous exhaustive list of circumstances based on which the Russian Ministry of Finance can refuse to conduct mutual agreement procedures. This, in fact, introduces an unlimited discretion of the Russian Ministry of Finance for selecting only a part of an application of taxpayers interested in the initiation of mutual agreement procedures.


The amendment of the format of notification of participation in an international group of companies (IGC)

In accordance with the amendments introduced by Federal Law No. 125-FZ dated 6 June 2019 to articles 105.16-2 and 105.6-3 of the Tax Code, the Russian Federal Tax Service has added the format and the procedure for filling out an electronic notification concerning participation in an IGC[2].

In particular, the format has been supplemented with information concerning issue of preliminary consent for transfer to the competent authorities of foreign countries (territories) the information contained in country report which can be provided not only by authorised state authorities, but also by state corporations.

It is planned that the updated form will be in force from the 2020 reporting period.

comment.jpgPlease be reminded that, since the deadline for filing notifications concerning participation in an IGC is 8 (eight) months from the date when the reporting period ended, then you should report for 2020 not later than on 31 August 2021.

Filing notifications of participation in foreign companies and unincorporated structures through a personal account of the taxpayer

As stated by the Russian Federal Tax Service, a notification of participation in foreign companies (of establishing unincorporated foreign structures) from 29 April 2020 can be formed and sent in the web-version of ‘Personal account for individuals’ and in the application ‘Nalogi FL’ on iOS and Android platforms.

In addition to filing the initial notification of participation, the services of the Russian Federal Tax Service allow an adjusted notification to be promptly formed and filed when it is identified that the initial notification lacks information or contains errors.

In order to use the new function it is necessary to choose its type (foreign companies and structures) in the section ‘applications’ and independently fill out the notification.

Help from your adviser

Pepeliaev Group’s team is ready to help in advising and providing support to clients concerning the taxation of cross-border activity, including

  • the adaptation of cross-border activity of international groups in line with the provisions of the MLI;
  • initiating a mutual agreement procedure; and
  • preparation of notifications of participation[P.1] , concerning controlled foreign companies, and of participation in an IGC.


[P.1]Is there an error in the Russian here? This reads to me as though it shouldn't be there

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