How to apply the concept of the actual right to receive income?

We view in detail the opinion of the Federal Tax Service (FTS) of the Russian Federation (RF) in our review. The RF Federal Tax Service summarized the practice of disputes on the application of the concept of the actual right to receive income and issued Letter N CA-4-9/8285@ of April 28, 2018 to orient the lower-level tax authorities, how it should be applied in practice.

We should start with the fact that the FTS generalizes the arbitration practice on this issue not for the first time. A previous Letter N CA-4-7/9270@ was issued on May 17, 2017, which is almost a year ago. What has changed over the past year, and has the FTS changed its approach?

What is this letter about?

Most of the criteria and methods written in the new letter are already familiar to taxpayers. Like in the previous letter, the matter is that if a foreign company using the benefits of a double taxation treaty is not the actual recipient of this income, but participates in the operation purely technically, the benefit will be deemed applied without justification.

The application of benefits without grounds is evidenced by the following criteria:

  • relations with the participation of a foreign company are not connected with the attraction of capital to Russia
  • lack of a business objective in the conducted transaction
  • absence of a foreign company’s business activities
  • the foreign company has no other sources of income, except for loans and interest to interdependent and affiliated entities
  • insignificant expenses for salaries and social contributions from a foreign company
  • “transit character” of payments
  • the activities of a foreign company are not subject to financial and other risks
  • a foreign company has no authority to dispose of income
  • lack of independence in the decision-making by directors of a foreign company

What is meant by entrepreneurial activity?

It is noteworthy that the FTS provides more detailed explanations as to what is meant by the entrepreneurial activity of a foreign company. There were no such explanations in the previous review.

For example, it is explained that activities in the form of investments and financing of companies of a group (holding) or interdependent, affiliated companies, are not considered entrepreneurial. At the same time, the use of such a business model is very popular. Often a group of companies appoints one company that finances all other group of companies. Such companies accumulate monetary funds either by attracting third-party financing, or by obtaining all temporarily free funds of the group of companies on their accounts.

Since such activities are not recognized by the tax authorities as entrepreneurial, interest payments to such companies should not use tax preferences, according to the tax authorities. Thus, in fact, discrimination of some business models is introduced in comparison with others. Thus, payments to the companies, which by the main type of activity finance the companies belonging to the group, fall into the risk zone.

Also, the FTS do not recognize as business activity providing information and consulting services, performing operations to acquire shares of various companies, if the company owns them formally and does not participate in their activities independently and / or these companies do not conduct real business activity. Moreover, payments for information, consulting and other similar services provided by the parent company to a subsidiary company can be recognized as a payment of dividends.

What happens in practice?

In practice, we often see situations when a subsidiary company in the Russian Federation does not have employees in all competencies that the company needs, for example, many functions are outsourced to the parent company, which determines how the business of all the group of companies will be built and actually operates subsidiaries.

There are also cases when the management of a group of companies is allocated to a separate business and this company does not produce anything except for consulting and its main clients are the companies of the group. If you read the letter of the Federal Tax Service literally, it turns out that such schemes of building a business are also not acceptable. To be exact, they are permissible, but tax benefits under double taxation treaties to payments to such foreign companies are not applicable. Speaking about this, the FTS obviously forget that they do not have the right to discriminate certain schemes of doing business and cannot arbitrarily decide in which cases the business is conducted in such a way that the benefit is applicable and in which it is not.

What can be said as a conclusion?

Thus, the position of the RF FTS does not agree with the position expressed by the Plenum of the Supreme Arbitration Court of the Russian Federation in Resolution No. 53 of October 12, 2006 “On Evaluation by Arbitration Courts of the Justification of Receiving a Tax Benefit by the Taxpayer”, according to which it should be taken into account that the possibility of achieving the same economic result with a lower tax benefit received by the taxpayer through the commission of other transactions that are or may not be prohibited by law, is not grounds for recognizing the tax benefits unreasonable. As a criterion for determining the possibility of applying benefits, the FTS proposes to test the deals involving foreign companies for a business purpose. Thus, the tax authorities apply this criterion, developed within the framework of the concept of unreasonable tax benefit.

What we offer to support you

SCHNEIDER GROUP employees who are familiar with judicial and law enforcement practice, will help you test the risks before the conclusion of a deal, and also verify the correctness of the primary documents preparation. We will analyze the planned deal(s) and supporting documents for legal and tax risks, help to build a competent structure for owning and managing the business and cash flows, taking into account the latest requirements of the tax authorities.

If you have any questions, please contact us. We will help you find a way out of this situation.


Sergey Leoshko
Head of Tax Department
+7 / 495 / 956 55 57
Artem Ardashev
Tax Expert
+7 (495) 956 55 57
Olga Lux
Tax Expert
+7 / 812 / 458 58 00