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Beneficial Ownership Concept - The approach of the Russian Federal Tax Service

January 2019 - Tax & Private Client. Legal Developments by Kinanis LLC.

More articles by this firm.

The beneficial ownership of the income concept (“the Concept”) is nowadays a material aspect affecting the eligibility of the taxpayers to claim treaty benefits.

The Concept is defined by the OECD, however, it is not very specific leaving room for Tax Administrations of each jurisdiction to adopt a more relax or strict approach. In either case the Concept is a weapon to the tax authorities which enables them to attack aggressive tax planning by refusing granting treaty benefits to the entities that are not beneficial owners of the income. The most recent example is the new interpretation of the Russian Federal Tax Service (“FTS”) issued on 12th of April 2018 which followed a strict approach as of the concept.

Given the above, clients should examine the position of their companies and take the necessary measures to comply with the new requirements of Russian Federal Tax Service. This should not be limited to those clients that obtain treaty benefits from Russia but to all clients that obtain treaty benefits as the “concept” can be found in all double tax treaties.


In the OECD commentary on Article 10 of the Model Convention, it is stated that the term “beneficial owner” should not be used in the narrow technical sense but should be understood in light of the object and purposes of the Convention, including avoiding double taxation and the prevention of fiscal evasion and avoidance.

The Commentary also states that in the cases of an agent, nominee, Conduit Company acting as a fiduciary or administrator, the direct recipient of the dividend is not the “beneficial owner” because that recipient’s right to use and enjoy the dividend is constrained by a contractual or legal obligation to pass on the payment received to another person. Such an obligation will normally derive from relevant legal documents but may also be found to exist on the basis of facts and circumstances showing that, in substance, the recipient clearly does not have the right to use and enjoy the income.

The Commentary stresses that the beneficial ownership concept should be applied only in relation to passive income such as dividends, royalties and interest.


In an effort to interpret the meaning of actual right to use/or dispose the income the FTS issued a letter in 2017 [1], explaining that the beneficial owner of income can be determined through a limited list of criteria:

  1. Independence of directors in decision-making;

  2. Power to dispose of the income;

  3. Availability of personnel, office and related general administrative expenses;

  4. Use of the income in entrepreneurial activities (enjoying the economic benefits from the income);

  5. Absence of any legal or actual obligations to further transfer the income, including the systemic nature of any transitory (back-to-back) payments;

    The FTS noted that the beneficial ownership concept applies to all types of income.


In 2018, the FTS provided further guidance [2] as to the criteria which were initially analysed in 2017 which has now led to an increase in the requirements for a foreign entity to qualify as the beneficial owner of the income. The new criteria for the beneficial owner of income are can be summarised as follows:

  1. Sufficient level of substance

The FTS guidance states that a foreign company should be in the position to demonstrate the right to use and dispose the income independently (as per the requirements of the 2017 letter) AND also to demonstrate that the foreign company operates as an independent business. If no independent business is performed then it is an indication of a conduit company. According to the new guidance a conduit company is a company which has the following characteristics:

  • Has no independent operating activity.

  • Absence of non-Russian Income.

  • Principle purpose is to redirect income to shareholders or group entities.

  • The company takes minimum financial and commercial risks.

  • Its employees perform minimum functions.

  • Minimum administration costs.

  • No significant income other than dividends and interest from related entities.

According to the FTS guidance, the below do not constitute valid arguments to prove that a company operates as an independent business:

  • Holding and financing activities are not considered as operational activities.

  • The investing in the shares of a company without involvement in the operations of the subsidiary do not constitute active business.

  • Minimal personnel cost doesn’t not evidence the employment of qualified staff.

  • The only administration expenses of the company are for the compliance with the local regulations. This is an indication that the company does not operate independently.

  1. Genuine business activities

This approach focuses on the business purpose and nature of the transactions. More specifically, in order for a company to qualify as the beneficial owner of the income, the Russian taxpayer has to justify the need for involving a foreign company in their business structure and operations. Further, evidence should be provided that the involvement of the foreign company was reasonable and also to present the associated business risks.

In case the Russian taxpayer is unable to demonstrate the business rationale for involving a foreign company the tax authorities have the right to deny treaty benefits and also to reclassify the payment, for example from debt to equity.

  1. Disclosure Requirements

The new interpretation enforces extensive disclosure, since the burden of proof in relation to the qualification of the beneficial ownership concept, has shifted from the Tax Authorities to the taxpayers, since all the above-mentioned criteria necessary to be met, should be proved and justified by the taxpayer in order to receive the treaty benefits.


The new approach mainly focuses on attacking the holding, treasury, licensing, and intermediary group financing companies in an effort to extinguish all the previously adopted tax planning practice followed with the purpose of tax avoidance and tax minimisation.

On top of this, the fact that this is a change in interpretation rather than a formal amendment to the Russian Tax Code, means that this approach may apply to transactions for the past three years that are still open for tax audit.

It is evident through the years, that the Russian Tax Authorities follow an aggressive approach. Therefore, there is need for a more in-depth and sophisticated analysis of the existing structures, in order to reassess the viability and the corresponding tax risks based on the current tax developments.

Our Tax Department will be able to prepare a diagnostic review and propose possible solutions to your structure.


Kinanis LLC is in a position to assist you with the provision of the following services:

  • Reviewing your existing structures and report with suggestions on the possible risks and possible solutions based on the new developments

  • Tax Advice on possible restructuring

  • Assistance in the creation of substance and relocation of personnel to Cyprus


This publication has been prepared as a general guide and for information purposes only. It is not a substitution for professional advice. One must not rely on it without receiving independent advice based on the particular facts of his/her own case. No responsibility can be accepted by the authors or the publishers for any loss.

November 2018


MARIOS PALESIS, Manager – Tax Department,, Kinanis LLC


ARTEMIS KYRIAKOY,  Tax Advisor – Tax Department,, Kinanis LLC

Our Firm

Kinanis LLC, a law and consulting firm, is one of the leading and largest business law firms in Cyprus and advises for over 35 years the international investor and private clients on all aspects of law, tax and accounting.

Kinanis LLC absorbed the business of its shareholders which are in the legal and consulting profession since 1983, with local and international dimensions. 

Experience and practice over the years brought forward the need for transformation from a traditional law firm to a more innovative multidisciplinary firm providing a full range of services combining law and accounting with the extensive expertise in corporate and tax advice to ensure that our clients will obtain the best possible spherical advice adopting the principle as to the services offered "All in one place", so that the client will find a quick, correct and efficient solution to its daily legal, accounting and tax issues in a trustworthy environment.

 This combination of legal, accounting and tax services through our well qualified personnel and our involvement and participation in international transactions over the years, have established our firm as one of the key players in the field. Our involvement in international financial transactions has also provided us with the extensive expertise in representing groups, corporations, funds as well as the private client.

The firm is staffed with around 80 young, energetic and ambitious professionals, including lawyers, accountants and administrators who provide prompt, efficient and high quality services and who are capable of meeting the current demanding challenges of the local and international business environment.

We always look to give solutions in a simple and as possible quick way focusing on the needs of each client trying to anticipate the issues before becoming a problem.

Kinanis LLC

Lawyers’ Limited Company

12 Egypt Street, 1097, Nicosia

P.O. Box 22303, 1520 Nicosia, Cyprus

Tel: + 357 22 55 88 88 – Fax: + 357 22 66 25 00

E-mail: – Web site:

KINANIS is the service mark through which Kinanis LLC of Cyprus, Kinanis Fiduciaries Limited of Malta and their affiliated companies are conducting business each of which is a separate legal entity.

[1] Letter ХА-4-7/9270@ of 17.05.2017

[2] Letter CA-4-9/8285 @ of 28.04.2018