Tax Digest #5: Clarifications 2019

Let us provide you with the digest of the clarifications of the Ministry of Finance (MoF) as well as the Federal Tax Service (FTS) of the Russian Federation issued in 2019, which is important for most taxpayers.

1. The Letter of the FTS dated 24.04.2019 # СД-4-3/7937 (VAT for electronic services provided in Russia by foreign companies)

Due to the lack of certainty in legislation on the issue of VAT taxation of services in electronic form FTS proposed the following approach in favor of taxpayers.
If:

  • foreign company rendered electronic services with the place of supply in Russian Federation or
  • foreign company, registered with the tax authority according to clause 4.6 of the Article 83 of the Russian Tax Code (RTC), rendered any other services with the place of supply in Russian Federation,

and the buyer acting as tax agent calculated, paid and offset VAT, then tax authorities should not repeatedly charge the VAT on the transactions to the foreign company as well as claim for its accounting in foreign companie’s VAT return and claim for any recalculation of tax obligations of the buyer (including VAT accrued and offset).

2. The Letter of the FTS dated 06.05.2019 # СА-4-7/8448@ (Cross-border litigation review)

In the Letter dated 06.05.2019 FTS summarized in short topics the key points from the tax disputes in commercial courts on the issues of:

  • applying the concept of the actual right for income (beneficial ownership),
  • “thin cap” rules and
  • cases on tax abuses in cross-border transactions.

The most interesting court cases we observed last year in our Tax Digest of Court Case Law # 3 (on the hot topics for multinational companies in Russia).

3. The Letter of the FTS dated 08.08.2019 # ЕД-4-13/15696@ (About the actual right of holding companies for income sourced from Russia)

In the Letter dated 08.08.2019 FTS clarified its position on the issue of the actual right for income for holding companies:

  • performing by the company only holding / investment nature activities cannot be an independent and sufficient criterion in favor of the presence or absence of an actual right to income;
  • the evidence of artificiality in the activities of the holding company, including signs of a lack of independence in terms of decisions regarding the asset owned by the company and regarding the income from the source in the Russian Federation should be scrutinized by the tax authorities.

4. The Letter of the MoF dated 24.09.2019 # 03-03-06/1/73272 (On confirmation of expenses on intra-group services)

In the Letter dated 24.09.2019 the MoF recommended the following approach on the issue of scrutinizing the intra-group costs:

  • first of all – to determine whether such services were actually rendered;
  • on the second – to define the cost of the services for tax purposes based on “arm-length principle”.

The approach is based on the provisions of clause 7.5 of the Section VII of the OECD Transfer Pricing Guides 2017 which the MoF believes if fully consistent with the provisions of the Article 252 of the RTC.
In 2019 we observed three the most interesting cases on the issue of deducting intra-group services in our Alert.

5. The Letter of the FTS dated 20.11.2019 # СД-4-3/23559@ (On the calculation of the share of real estate in the assets of a company for tax withhold at source)

According to subclause 5 clause 1 of the Article 309 of the RTC the income from the sale of shares (participating interests) in organizations more than 50 per cent of whose assets consists directly or indirectly of immovable property situated in the territory of the Russian Federation shall be classified as income of a foreign organization from sources in the Russian Federation.
In the letter dated 20.11.2019 the FTS clarified that the share of real estate in the assets of a company for the tax purposes may bay calculated based on the share of the accounting cost of the real estate in the total accounting cost of the assets of the company according to its balance sheet, prepared closely to the date of determination of a share of real estate (i.e. interim (for example, quarterly or semi-annual) or annual balance sheet).

6. The Information Letter of the MoF dated 24.12.2019 (about applying MLI provisions not earlier than starting from 01.01.2021)

The MoF noticed taxpayers that Multilateral Instrument, MLI will be effective starting not early than from January 1, 2021 because parties of the MLI had still not exchanged the mandatory notifications on completion of intra-countries formal procedures.