Russian Eurobond issuers will have to show tax residency of investors
MOSCOW. Jan 26 (Interfax) - Russian issuers of Eurobonds will have to show the affiliation of end investors to foreign tax jurisdictions with which Russia has double taxation treaties in order to avoid additional profit tax payments.
This clarification is set out in a letter Deputy Finance Minister Sergei Shatalov sent to the Federal Tax Service, a copy of which has been obtained by Interfax.
The letter describes the arrangement used by Russian borrowers when raising financing with Eurobond issues.
A company sets up a special purpose vehicle (SPV) registered in a foreign country, "including in Ireland," that is used to issue the Eurobonds under guarantees from the company and to pay coupon yields to investors. The money raised with the bonds is deposited by the SPV in accounts at Russian banks, which pay the SVP interest that is then used to pay interest to bondholders.
The letter states that Russia's double taxation treaties with other countries should be applied to payment of interest income on Eurobonds depending on the tax residency of the specific bondholder receiving the coupon payments, not the SPV through which the payments are made to end investors. Foreign SPV that are the nominal issuers of Eurobonds cannot be considered to be the entity that has the actual rights to this interest income.
International Tax Associates B.V. partner Rustam Vakhitov told Interfax that the Finance Ministry is very strictly interpreting the status of SPV as legal entities that are not the actual recipients of the income. This probably applies only in cases where the SPV is registered in a country with which the treaty stipulates the status of the legal entity as a beneficiary owner as a condition for avoiding taxation of interest.
Vakhitov said the new interpretation could create additional difficulties for Russian borrowers whose SPV are registered in such countries, since it will require them to provide information on the tax residency of all ultimate bondholders.
The requirement in double taxation treaties that the recipient of the interest must have the status of beneficiary owner of the received funds is, for example, typical for Ireland, which is mentioned in the letter, but not typical for the Netherlands, another popular jurisdiction for Russian Eurobond issuers.