11.01.2021 — From 1 January 2021 Russia Limits Application of Benefits under Double Taxation Treaties

The Russian Ministry of Finance issued the notice on Russia’s beginning to apply the rules of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting. The provisions of this Convention considerably limit the possibilities of taxpayers to apply double taxation treaties. The Convention is applicable for many popular jurisdictions, including the Netherlands, Malta, Luxembourg and others.

The Russian Ministry of Finance confirmed that Russia finished fulfilling the domestic procedures required for the application of the Multilateral Convention (MLI) (see Informational letter of the Russian Ministry of Finance on the beginning of application of the MLI Convention dated 20 January 2021).

Under the Convention Russia ratified the number of regulations that restricted the application of double taxation treaties and are aimed at preventing the misuse of such treaties. In particular, Russia ratified the test of the main purpose, according to which benefits under international taxation treaties shall not apply if the main purpose or one of the main purposes of the transaction or the structuring of the group of companies is to receive taxation privileges. At the same time, the taxpayer bears the burden of proving the actual business purpose behind the transaction and the structure of its group of companies.

Moreover, the Convention provides for the possibility to apply the mutual settlement procedures between tax authorities of different states aimed at harmonization of taxation. In particular, the taxpayer is entitled to apply to competent authorities of any country under the Convention if he or she believes that the provisions of an international taxation treaty have been applied incorrectly or one of the countries changed the taxation in respect of the taxpayer (for example, if the profit of the company in one country was adjusted for taxation purposes, the taxpayer may be eligible for symmetrical adjustment in respect of his or her associated companies in other countries).