Rome, 19 September 2019 The multilateral Convention to implement tax treaty related measures to prevent base erosion and profit shifting (signed in Paris on 24 November 2016) (“Convention”) was ratified by Russia with the Federal Law of 1 May 2019 n. 79-FZ.
The Convention was developed by the Organization for Economic Cooperation and Development (OECD) with the aim of preventing abuses in the application of international agreements for the avoidance of double taxation with respect to taxes on income (ADT) and of cases of reduced exemption or taxation through tax evasion or avoidance (including treaty-shopping strategies aimed at obtaining the benefits provided by these agreements for the indirect benefit of residents in third-party jurisdiction).
The Convention does not replace the provisions of ADT, which will remain in force. In fact, the Convention merely modifies or clarifies certain provisions of the current ADT, providing for various solutions that the contracting jurisdictions may choose to apply to the ADT in the ratification act.
Russia decided to apply the provisions of the Convention to 71 ADT. Therefore, it is necessary to check, from time to time, the entry into force of the Convention for a specific contracting jurisdiction and the reservations made in the ratification act.
The Convention provides measures concerning, inter alia:
- hybrid mismatch arrangements;
- prevention of ADT abuse;
- prevention of artificial avoidance of the status of permanent establishment.
Russia has chosen the following two mechanisms to limit the benefits:
- principal purpose test;
- simplified limitation of benefits.
Most contracting jurisdictions have chosen the main purpose test for ADT with Russia.
This test allows the tax authorities not to allow the granting of benefits provided by the ATD if the main purpose or one of the main purposes of any agreement or transaction, or of any person affected by an agreement or transaction, is to obtain such benefits.
Furthermore, the changes to the taxation of the permanent establishment are introduced and the definition of the “preparatory and auxiliary activity” is restricted.
As regards the indirect sale of real estate properties through the disposal of shares or other participation rights, the relative profits are taxable in the other contracting jurisdiction on condition that such shares or rights derive their value, for a determined quota, from real estate property located in the other contracting jurisdiction or on condition that more than a certain portion of the ownership of the entity is constituted by such real estate, provided that this relevant value threshold is reached at any time during the 365 days preceding the sale.
With regard to persons residing in more than one contracting jurisdiction, with the exception of natural persons, the competent authorities of the contracting jurisdictions will have to determine amicably which is the contracting jurisdiction in which this subject must be considered resident, taking into account the seat of effective management of the place where it was registered or in any case constituted, as well as any other relevant factor. In the absence of such agreement, such person will not be entitled to any tax relief or exemption provided by ADT, except to the extent agreed by the competent authorities of the contracting jurisdictions, with the modalities agreed by them.
The Convention provides different terms of application of its provisions related to:
- taxes withheld at source;
- taxes other than withholding tax;
- mutual agreement procedure.
The Convention will enter into force for Russia on 1 October 2019.
The Convention was signed by 89 jurisdictions. In particular, Italy signed the Convention on June 7, 2017; however, the ratification act has not been deposited yet.
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