New Russian arbitration court decision on beneficial owner of income: risks for all international business owners

Owners of Cyprus companies acting as holding companies may soon need to think of restructuring their business operations. Recently, the Russian Arbitration court has taken a new decision regarding the beneficial ownership of dividends payment. The decision concerns PAO “Severstal” and the double treaty benefits typically available to the dividend recipients. In this case, those benefits have been denied since it appeared that the recipients are a number of Cyprus companies. This court decision resulted in additional tax charges of nearly 1 billion rubles on dividends paid.

We suggest clients review their corporate structure and seek professional assistance to proceed with restructuring if necessary.

Our company can assist you with UBO review service where we analyse the current situation and risks of your structure and provide suggestions for improvement, including establishment of economic substance.

To further understand the importance of this alert, please see below more details of the new decision of the court in the Russian Federation on the dividend payments by Severstal company.

The court took its decision based on the situation where Cypriot companies were not the real beneficial owners of the dividends received, but instead acted as agents transferring money to BVI companies which are also related to Severstal. In such case, the dividends should have been subject to 15% withholding tax as there is no double tax treaty between BVI and the Russian Federation.

The facts that made tax authorities consider Cyprus companies to be the non-ultimate beneficial owners are as follows:

  • Dividends from Severstal that were received by Cyprus companies were transferred to companies registered in the British Virgin Islands (BVI) which were also connected with Severstal;
  • The articles of association of the Cypriot companies are almost identical;
  • The rights of Cypriot companies to dispose of their shares in PAO Severstal were limited and the company could not sell shares to an external party outside of their corporate group;
  • The Cypriot companies did not possess any assets other than shares of Severstal, and
  • They conducted only one kind of business activity – transferring dividends.

Taking into consideration the growing transparency of international business and cross-border structuring, such widely used structures involving a treaty signatory country (e.g. Cyprus) and a non-treaty signatory country (e.g. BVI) on top, without actual substance in the treaty country and having as a main activity only loan repayment or payment of royalties and dividends, can no longer be used to prove that the entity in the treaty country is a real and ultimate beneficial owner.

For further information or clarifications please contact us at +357 22 699 222 or