The de-offshorisation of the Russian economy that started in 2014, introduced a new reality for Russian business, which requires adaptation by way of revising business structuring schemes that have been used for years. Within the framework of the battle against tax evasion, the government is establishing new rules aimed at the prevention of profit related to Russian assets being taken abroad. This provided, considering the international policy, according to which all countries of the world should be engaged in a joint battle against aggressive tax planning within the BEPS plan, each year the tax authorities have more and more instruments for exercising control over transactions.
Many precedent decisions for taxpayers have been made by Russian courts in the last year, reflecting new approaches in the law enforcement practice, including approaches to using international treaties. In particular, analysis of court decisions shows intensification of the trend in restricting benefits under double tax treaties (hereinafter the “DTTs”).
This is due to the fact that the courts began to actively use the doctrine of a beneficiary or entity actually entitled to income, which was entered into the Russian tax law at the end of 2014, and as a result the practice turned to a notable extent against the taxpayers. The so-called conduit structures, in other words, transit companies which are actually entitled to benefits under international agreements (DTTs), but have no actual right to income, may be said to have become victims of the government policy. In the event such a structure is revealed, the tax authorities and courts acknowledge the use of benefits under the respective DTTs as unjustified and insist on payment of tax in Russia if the ultimate beneficiaries are unknown or are located in jurisdictions which do not have international agreements with Russia.
It is worth noting that in order to make a decision as to who the entity that actually controls the assets is, tax authorities assess the economic nature of transactions on transferring assets and define a taxpayer’s rights and obligations in terms of the true economic purpose of the transaction (in the inspector’s judgement). The problem is that such assessment can be rather subjective and can disregard or ignore objectives of the business on protecting its assets. As a result, even though under the law it is the tax authority’s responsibility to prove that a scheme was created for receiving unjustified tax benefits, in such disputes the taxpayer also has to collect sufficient evidence in order to prove reasonable economic grounds for transferring assets to a particular company, as well as to substantiate the entire ownership legal structure in general.
Meanwhile, court practise shows that simple arguments regarding the multistage scheme for transferring shares being created for protecting them against being seized unlawfully, are insufficient for justifying a company’s position. For example, in one of the most high-profile cases this year on a complex share holding structure in a Russian company, the tax authorities assessed the following: aggregate of actual relations within the entire group of foreign companies, the interdependency between all members of the group and the rights of owners holding Class A and Class B shares. The tax authority, having analysed the said circumstances, determined that the Cyprus company was a formal/technical one to which the assets were transferred, and the BVI entity was the one with actual control over the shares.
As a result, the tax authority, and later the court, arrived at a conclusion that the Russian company has not fulfilled its obligations of a fiscal agent and has not paid taxes to the Russian state budget on the foreign organization’s income received from sources in Russia in form of property divided in transactions among foreign companies to the benefit of companies on the British Virgin Islands which do not have a DTT with Russia.
At the same time, the tax authority and court also referred to “the actual goal pursued by the taxpayer when conducting disputable operations,” which according to the conclusion of the tax inspectorate was solely that of transferring the property to an offshore company and of tax evasion. It is worth noting that this scheme of creating a holding company for better legal protection of assets did not violate legislation in force during the time period being inspected. Therefore, the decision of the tax authority and court was not based on any legal regulations, but only on the court concept of “unjustified tax benefits,” which is interpreted more and more broadly each year.
As the main argument in court, the tax authorities use the legal position of the Russian Supreme Commercial Arbitration Court that tax benefit can be recognised as unjustified, in particular, in casesfor tax purposes when transactions are registered not in accordance with their true economic essence or operations are included that are not supported by reasonable economic or other grounds (business purposes). The broad interpretation of this position eventually leads to taxes on a transaction, which are paid in a reduced amount or are not paid at all (which is lawful from a formal perspective), being by default recognised by the supervisory authorities as an unjustified tax benefit.
The case described above confirms that the redistribution of Russian assets among foreign structures is now under the scrutiny of the tax authorities which are very sensitive to Russian companies being owned using offshore companies. At the same time, it is necessary to take into account that irrespective of the fact that the de-offshorisation policy was adopted in 2014, and the respective concepts were introduced into law and became applicable from 2015, the courts acknowledge the right of the tax authorities to determine the tax consequences after identifying the beneficiary of income for periods before 2015, when such notion did not yet exist in the tax law.
It should be noted that pursuant to the tax legislation, the depth of a tax inspection is restricted by a three-year period. Meanwhile, the regulatory authorities are entitled to go beyond these limits and inspect the taxpayer’s actions for the preceding 10 years within the framework of criminal cases initiated in respect to tax crimes.
It is important to note that due to the changes in the criminal procedure laws in 2014, the law enforcement bodies got an opportunity to initiate criminal cases independently without the need to obtain results of tax inspections performed by territorial tax inspectorates. Based on information of the General Prosecutor’s Office and investigating agencies, after the said changes, and after the police were once again granted the powers to perform investigative activities on tax crimes, the number of tax evasion criminal cases increased approximately by 68% in 2015, as compared to 2014, and it seems that the figures in 2016 will not decline.
Such frightening statistics mean that companies adopting decisions on using offshore entities when building cross-border business structuring schemes are under risk. And at the same time, such business decisions can become the subject matter of an inspection conducted by the investigating agencies for a period exceeding 3 years.
Considering the court practise being formed, the trend of inspecting companies whose assets are owned by foreign structures, as well as the development of cross-border exchange of tax information, companies need to assess all existing tax risks within the conditions of a new economic reality and, if needed, to revise their business structure.
 Resolution of the Commercial Arbitration Court for North-West Circuit dated 15 March, 2016 on case No.А13-5850/2014.
 Decree No.53 “On Commercial Arbitration Courts’ assessment of grounds for a taxpayer receiving tax benefit as to being justified” of the Plenum of the Russian Supreme Commercial Arbitration Court dated 12.10.2006