THE SUPREME COURT EXPLAINED IN WHICH CASE IT IS IMPOSSIBLE TO APPLY A REDUCED TAX RATE FOR CROSS-BORDER PAYMENT

The highest authority noted that in cases where the counterparty organization in the country with which the agreement on avoidance of double taxation was signed is, in fact, an intermediary of an offshore company, the Russian taxpayer will not be able to apply a reduced rate.

In case no. A40-121109/2022, the Supreme Court issued ruling no. 305-ES23-13710 clarifying the position of the highest instance on the above issue. In particular, it discusses the nuances of applying a reduced tax rate on the profits of foreign companies when covering the interest of a domestic credit institution on subordinated loans of a foreign company in accordance with the agreement between Singapore and the Russian Federation on the avoidance of double taxation.

In 2021, the Federal Tax Service for the largest taxpayers No. 9 conducted an audit of PJSC Ural Bank for Reconstruction and Development. During the audit, it turned out that between the Russian and the credit institution and the Singapore company XANGBO GLOBAL MARKETS PTE. LTD. subordinated loan agreements were concluded, thanks to which PJSC Ural Bank for Reconstruction and Development in 2012-2014 attracted financing in the total amount of 145 million US dollars. According to the terms of the agreements, payments were to be made at the end of each half-year to the settlement accounts of a foreign organization, and interest was accrued daily in the equivalent of the US dollar. During the audit period, the Russian credit institution made interest payments of 2 billion rubles, while tax exemption was applied in 2017 and 2018 and a reduced tax rate of 7.5% in 2016.

The tax Service concluded that the application of the reduced tax rate was unlawful, since XANGBO actually had no right to the income received and acted as an intermediary. Subsequently, PJSC Ural Bank for Reconstruction and Development was subjected to tax liability in accordance with Article 123 of the Tax Code of the Russian Federation in the form of a fine of 7.4 million rubles. In addition, the bank had to pay an additional tax on the income of a foreign company received from sources in the Russian Federation, which was equal to 405 million and 167 million rubles in penalties in addition.

The credit institution, in connection with the above circumstances, filed a statement of claim with the Arbitration Court of Moscow. The latter satisfied the bank's requirements in full, recognizing the legitimate application of the provisions of Article 11 of the Agreement, because XANGBO had a permanent location in Singapore for the disputed period and was not a transit organization. Moreover, it does not have any signs of a "conduit" company, since XANGBO is a global trading and financial network with offices in 15 jurisdictions.

The court stressed that in order to apply the reduced tax rate, it was enough for the bank to prove that the foreign company was actually located in Singapore, since in 2016 a different version of the Tax Code was in effect, according to which it was not necessary to prove the existence of an actual right to receive income from a foreign company. Such a requirement became mandatory only in 2017. Subsequent instances supported the first one.

However, the Supreme Court did not agree with the position of the lower courts, noting that already in 2016 the Tax Code contained a condition on the need for a foreign company to provide confirmation of the actual right to receive income and the right of a tax agent to request from such a company the necessary documents that confirm the right to apply a reduced tax rate. In particular, the amendments to the Tax Code of 24.11.2014 were supplemented by Article 7. Within the framework of these changes, the concept of a person who has the actual right to income was disclosed, and the conditions by virtue of which a foreign company cannot be recognized as such a person were also determined. Thus, in cases where an international treaty of the Russian Federation on taxation issues allows exemption from taxes or the application of reduced tax rates in respect of income received from sources in Russia for foreign persons who are entitled to such income, a foreign person cannot be recognized as eligible to receive such income when he has limited powers in part of the disposal of these incomes and performs the functions of an intermediary in relation to them in the interests of a third party, being not endowed with other functions and not taking any risks, directly or indirectly transferring such income to the account of a third party who, if directly receiving such income from sources in the territory of the Russian Federation, could not have the right to apply the above provisions of the international treaty of the Russian Federation on taxation.

During the disputed tax periods, Article 11 of the Agreement included the possibility of applying a reduced income tax rate in 2016 and exemption from taxation in 2017-2018, as well as interest arising in one of the states and paid to a resident of the other party-the state. However, these provisions are not applicable in accordance with clause 6 of Article 11 of the Agreement in cases where the main purpose of any person participating in the agreement was to obtain appropriate tax relief. The existence of an actual right to the interest due to such a person is a mandatory requirement.

The Supreme Court explained that when checking the grounds for applying a reduced tax rate or for exemption from taxation, the courts had to assess whether the person who intended to use the relevant benefits was the actual recipient of income.

During the on-site inspection, the tax service received a response to an international request from the competent authorities of Singapore, of which XANGBO is a resident. Based on the response received, the Federal Tax Service concluded that the parent holding company MARITIME TRADE CORP (MTS) is a resident of an offshore jurisdiction. From the explanation of the Singapore company, it became clear that the material funds for subordinated loan agreements were received from this company. At the same time, XANGBO itself performed exclusively agency functions and did not reflect interest in its tax returns. Accordingly, the Singapore organization was not the actual recipient of income, since its powers in terms of income disposal were limited, and the company performed intermediary functions in the interests of a third party.

The Supreme Court also noted that the Russian credit institution submitted to the Federal Tax Service an agreement on the provision of consulting services, which was signed by XANGBO and MTS, as well as acts of acceptance and transfer of services. Based on these documents, the bank stated that the Singapore organization made payments to it solely as a reward for services rendered. The courts supported the bank's arguments.

However, the Federal Tax Service drew the attention of the courts to the fact that in accordance with the primary accounting documents, the purpose of these payments was "Refund for MARTIME TRADE CORP.". Together with the company's reporting, this allows us to conclude that in fact these payments were intended for the transfer of interest on the loan.

At the same time, the Supreme Court stressed that the high level of XANGBO's economic presence in the Singapore market and its entrepreneurial activity does not have significant legal significance in resolving a dispute about obtaining income in the interests of a third party under a subordinated loan. In connection with the above, the Supreme Court annulled the lower judicial acts and sent the case for reconsideration to the Arbitration Court of Moscow.

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