Russian Court Rejects Severstal’s Cross-Border Dividend Appeal

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By Sergei Blagov

A Russian appeals court upheld a ruling by the tax authority that Severstal PJSC, the country’s largest steelmaker by market value, didn’t qualify for a preferential 5 percent withholding tax rate on outbound dividends, but rather should have applied the regular 15 percent rate.

The Feb. 7 ruling of the Ninth Arbitration Court (No. 09-AP-63463/2016) means that an earlier court decision against the company stands. The prior court found the steel giant liable for 13 million rubles ($224,102) in back dividend withholding tax applicable in relation to 696 million rubles in cross-border dividend payments, as well as 286 million rubles in late fees and fines.

That ruling came after Severstal appealed to the Arbitration Court of Moscow to annul the decision ordering the back taxes and fines, issued Sept. 30, 2015, by the Russian Federal Tax Service (No. 56-13/10/1096).

But on Oct, 31, 2016, the Arbitration Court of Moscow rejected the company’s argument that in 2011, as payer of the dividends, it wasn’t required to make sure that recipients of dividends were beneficial owners of dividends.

The Moscow court held that the tax authority properly considered the case—in accordance with Section 2, Article 310 of the Russian Tax Code, Commentary to Article 10 of the OECD Model Tax Convention and domestic clarifications by Ministry of Finance and Tax Authorities—and ordered the metal producer to repay dividend withholding tax and financial penalties.

“The tax authority argued that Cyprus-based companies Rayglow, Loranel, Astroshine, Pearlgreen, were in fact conduit companies for the purposes of the Double Tax Treaty between Russia and Cyprus according to Commentary to OECD Model Tax Convention and domestic clarifications by Ministry of Finance and Tax Authorities,” said International Tax Associates B.V. managing partner, Roustam Vakhitov.

“A rather dangerous statement” was made indirectly on Article 29 of Double Tax Treaty between Russia and Cyprus (Limitation of benefits), Vakhitov noted.

“It was stated that consultation between Russian and Cyprus tax authorities is required for denial of tax treaty benefits only in case when the entity under scrutiny is not registered in either Cyprus or Russia, hence procedure of consultation is not required for denial of Double Tax Treaty benefits to companies registered in Cyprus,” he said.

“Therefore, the tax authority determined that Severstal, as withholding agent, was not allowed to apply the preferential 5 percent rate of dividend withholding tax applicable to dividends,” he said in a Feb. 13 e-mail to Bloomberg BNA.

“The tax authority determined that Severstal was required to pay dividend withholding tax applicable to dividends at a regular 15 percent rate,” he added.

Negative Precedents

According to the practitioner, the ruling is the latest in a series of recent negative precedents in which Russian courts determined against businesses that relied only on the procedural methods of defense, “while the tax authorities appeared to have strong reasoning on the merits of the cases, especially in beneficial ownership cases.”

“These rulings are becoming less unusual against a backdrop of the OECD’s base erosion and profit shifting project,” he said.

Vakhitov said that relying on BEPS Action 6, which deals with preventing the granting of treaty benefits in inappropriate circumstances, the Russian tax authorities seem to be “retroactively applying local concepts of countering tax evasion despite certain provisions of the international tax treaties.”

To contact the reporter on this story: Sergei Blagov in Moscow at correspondents@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

For More Information

Ruling No. 09-AP-63463/2016, dated Feb. 7, is available in Russian at http://src.bna.com/mbX.

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