On 14 December 2020 the Moscow State Arbitration Court released its judgement on case involving Dutch and Russian companies of Kinross group, Canadian public group.

Facts of the case

The Russian subsidiary of the group, controlled via a Dutch subholding, undergone tax audit for the years 2014-2015. In opinion of the Russian tax authorities, the Dutch subholding was not entitled to reduced 5% dividend withholding tax under the DTT between Russia and the Netherlands as the Dutch subholding does not qualify as the beneficial owner. Instead, 10% WHT should apply as provided under the DTT between Russia and Canada.

Question before the court

The court therefore had to decide whether Dutch subholding was beneficial owner of dividends and therefore was entitled to tax treaty benefits.  

Position of the taxpayer

The taxpayer stated that the Dutch subholding had no legal or other obligations to repay received dividends to other entities of the group, neither was under restrictions in respect of decision-making. It made certain investments and other business driven actions.

Position of the tax authorities

The tax authorities stated that:

• Directors of the Dutch subholding were also directors of other entities within the group, in particular of the parent Canadian company, what in their view resulted in factual dependency of Dutch subholding on decisions of other group entities;
• The dividends received by Dutch subholding were effectively transmitted to the other group entities not always as dividends but also loans and other types of payments which resulted in effective transfer of funds;
• Several transactions with significant amounts such as transfers of loans between group entities did not have apparent business motive;
• Dividends received by Dutch subholding were effectively transmitted to the other group entities not always as dividends but also loans and other types of payments which resulted in effective transfer of funds;
• The Dutch subholding always acted for the benefit of the Canadian parent and did not pursue its own business or investment policy.

Decision of the court

The court accepted arguments of the tax authorities and issued decision in their favor.

Conclusions

Although this is only first instance court decision and may be revised by higher courts, it bears additional risks in respect of international tax structures. Number of criteria, e.g. directorship by representatives of the parent company or coordinated business and investment policy is inherent to subholdings and therefore more groups may be affected.

Number of employees (the Dutch subholding had over 19) is not decisive, the court and tax authorities will look at their functions and actual decision-making power. The consequences in similar cases may be more severe as the tax authorities were not under obligation to apply benefits under Russia-Canada DTT. They might just apply domestic WHT of 15% and then adjustments would be twice as high.