Let’s consider this issue on a specific example of court decision in the case of PJSC "Severstal".

The Arbitration Court of the city of Moscow made decision to apply a reduced rate of 5 percent on dividends paid in favour of the shareholders of Cyprus. This rate reduction is unreasonable, due to the withdrawal of dividends by transit to offshore companies through Cypriot companies.

According to the court, the reduction in the rate of withholding tax on payment of dividends (5%) is not subject to application because of Cypriot companies to which these dividends were actually paid and which do not have the status of beneficial owner of income.

Further, it is necessary to list the main reasons why the Cyprus company was not recognized as the actual recipient of income:

  • the dividends that were received from foreign companies in Cyprus, in fact, , were transferred to the registered companies oh the BVI in full;
  • the second reason is almost absolute similarity of the charters of Cypriot companies;
  • considerable limitations of Cyprus companies in the disposal of shares in PJSC “Severstal” led to the inability to sell them to third parties that were not part of the group of companies;
  •  there was no other entrepreneurial activity other than payment of dividends.

Most international treaties contain a reservation regarding reduced rates. The reservation lies in the fact that their application is possible only when the person is the beneficiary owner of the income. For this reason, the concept of a beneficial owner of income can easily be extended to legal relationships that arose before making changes in Article 7 of the Tax Code of the Russian Federation.

We can mention a few more cases, also resolved not in favor of the taxpayer:

  • the case of PJSC "MDM Bank";
  • the case of LLC "TD "Petelino";
  • the case of LLC "Ekvan";
  • the case of JSC "Bank Inteza";
  • the case of CJSC "Credit Europa Bank".

Next, we need to emphasize "back-to-back loans" related to intergroup financing schemes, since they are at the most serious risk with respect to the application of the concept of a beneficial owner of the income.

How it works:

  1. The initial issue of a loan to an offshore company, for example, a Maltese company.
  2. Further, this Maltese company transfers the received money to the Russian Federation.

Subsequently, withholding taxes will be 0% (if we are talking about the interest paid under the international agreement).

Having discovered these circumstances, it becomes obvious that the tax authorities question the right of Cyprus companies to apply the provisions of international tax agreements.

In connection with all of the above, the lawyers of Law&Trust International recommend to preliminarily analyze companies for the availability of the right to income for applying reduced rates.

The identified tax risks must be quickly eliminated by restructuring the financing mechanism.