Clarification of the concept concerning application of the actual right to income from the Federal Tax Service

International structuring of business and tax planning include several fundamental components, one of which is the concept of a person having actual right to income or, in other words, a beneficial owner of income. It is necessary to take the foregoing concept into account as one of the main tax risks due to which there is a high probability of losing the tax concessions that are provided for by the Agreement on avoidance of double taxation.

Applicability of Comments to the Model Convention on Avoidance of Double Taxation with respect to taxes on capital and taxes on income

Application of the Model Convention (this entails the possibility of application directly) is based on the general rules for interpretation of international treaties, which are enshrined in the Vienna Convention on the Law of Treaties of 1969. Articles 31-33 of the foregoing Convention clarify that other supplementary/principal sources on the model of supplementary means, etc., which include comments to the Model Convention of the OECD, are taken into consideration (can be taken into consideration) during  interpretation of the Agreement on avoidance of double taxation.

Information regarding possibility of applying the above concept in regards to passive income (this means interests, royalties and dividends), as well as other revenues for which there are no accurately prescribed rules in the articles of the Agreement on avoidance of double taxation

The tax authorities, which rely on the Comments to the Model Convention of the Organization for Economic Cooperation and Development, came to the conclusion that the type of income does not matter. The concept of residence with respect to all types of income is actually being applied, and the concept of actual right to income should also be applied concerning the rules of taxation.

The approach to implementation of the Agreement on avoidance of double taxation, enshrined in Russia at the national level, has no limitations with regard to types of income (Article 7 of the Tax Code of the Russian Federation), to which the concept of actual right to income will be applied.

When considering disputable situations regarding application of the concept of actual right to income, it is necessary to pay attention to the following circumstances:

  • Systematicity of passthru payments (i.e. transit payments or U-turn transactions)
  • Obtaining economic benefits from income
  • Individual bearing of commercial risks with respect to assets
  • Evidence of conducting entrepreneurial activities
  • Nature of money flows
  • Carrying out entrepreneurial functions
  • Availability of authority to dispose of income
  • Independent decision-making by directors of foreign companies

Companies with economic presence in the country of residence having broad powers to dispose of income and receiving economic benefits from income will receive concessions.