Withholding Tax: Pain in the Neck Over?
However, the Tax Code demands payers to have certificates of tax residence of the recipients (usually issued by corresponding foreign tax authorities) before payments are actually made. In practice, one out of three companies fails to obtain the necessary certificates before the payment date. Sometimes it happens because the paying party's officers simply forget about the certificates, while sometimes they have trouble obtaining the certificates as their counterparts in recipient companies just cannot understand the necessity of the certificates.
Unfortunately, Russian tax officials do not share this view, as the law expressly states that the tax must be withheld and remitted to the budget unless the paying party obtains the necessary certificate before wiring the monies. If you provide a certificate dated after the payment date, they will usually (but not always) agree to forego the tax itself and interest penalties on top but still demand that a fine under Article 123 of the Tax Code is paid. The fine amounts to 20 percent of the tax not withheld. The tax in turn amounts to 15 percent of dividends and 20 percent of the interest or royalties (statutory rates used in absence of applicable double tax treaties).
Now this all is going to change for the better. The presidium of the High Arbitration Court has just heard a case of Fashion Press (part of the Independent Media group) on this matter and ruled in favor of the tax agent. The exact wording of the ruling is not yet available but its general meaning can be easily derived from other case documents.
In 2004, Fashion Press paid royalties to companies resident in Cyprus, the United Kingdom and Ukraine. The taxpayer had duly issued tax certificates showing the places of residence of the first two companies but the certificates were issued in 2003. New certificates (and one for the Ukrainian company) were obtained in 2004 only after the payments were made.
The court of the first instance ruled in favor of the tax authorities and found that Fashion Press had violated the law. The court of appeals reversed the ruling and stated that a fine would not be imposed. The cassation court of the Moscow district overruled the court of appeals' decision, upholding the ruling of the first court decision. Luckily for Fashion Press, the case qualified for the review of the presidium of the High Arbitration Court.
Under existing rules, a case can only be referred to the presidium if a panel of three judges rules that it is worth examining on the grounds that the last ruling either contradicts existing case law, breaches human rights under international law, or infringes public interest. In most cases (although not always) the presidium follows the opinion of the three-judge panel.
The panel came to the conclusion that a tax agent cannot be held liable for failure to withhold and remit tax to the budget if under the applicable double tax treaty the corresponding income cannot be taxed in Russia. In this case the treaty prevails and the tax agent paying the passive income to the recipient in full acts in accordance with the treaty. Obviously, this only holds if the tax agent knows that the recipient is indeed resident for tax purposes in the corresponding country. In this case the certificate only proves that the tax agent was correct not to withhold the tax.
As in the case of Fashion Press tax certificates were made available for the tax authorities during the tax audit, thus the panel was of the opinion that the tax office's decision to penalize the tax agent had no legal grounds. Most probably, this logic will also appear in the ruling of the presidium of the High Arbitration Court. Furthermore, under the Russian Constitutional Court's ruling in the case of Vostoksibelectrosetstroi in 2006, evidence to support the taxpayer's position can be submitted for examination directly to the court regardless of whether it was made available to tax authorities during a tax audit or not. Unless we see something really strange in the text of the High Arbitration Court's ruling, Russian subsidiaries have now got rid of an issue that can only be described as a pain in the neck.