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Private ruling on beneficial ownership in tax treaties issued — Orbitax Tax News & Alerts

On 21 April 2006, the Ministry of Finance issued a private ruling No. 03-08-02 (the "Ruling") on the beneficial ownership test for tax treaty purposes.
According to the Ruling, the term "beneficial owner" shall be interpreted from a teleological perspective, i.e. taking into account the objectives and basic principles of a treaty. In this context, the Ruling identifies the "avoidance of double taxation and tax evasion" as an objective of a treaty, and "the principle of non-abuse" and "substance-over-form" as basic principles of a treaty.

The Ruling determines that mere residence of the recipient is not sufficient to make the income eligible for treaty benefits. Indeed, the recipient must qualify as a beneficial owner, i.e. the person who can dispose of the income at his discretion, in order for the income to be eligible for treaty benefits. The Ruling states that a nominal holder, while not the beneficial owner, may still apply for treaty benefits on behalf of the beneficial owner, if such action is authorized and properly documented.

This Ruling confirms that beneficial and legal ownership could be separated. This is in accordance with an opinion previously expressed by the Ministry of Finance in another private ruling. However, the wording of the Ruling relied more strongly on international standards and principles, in particular with direct reference to the OECD Model and the UN Model Commentaries. This confirms a higher status given to these documents by the Russian authorities over the years.

Interestingly, the Ruling characterizes the OECD and the UN Models as "sources of international tax law". This characterization, however, does not apply to the Commentaries on the OECD and UN Models