On 4th of October 2016 the Commercial Court of Tambov Region
delivered a judgement in case No. А64-3695/2016 under the
claim of "Uvarovsky Sugar Plant" Closed Joint Stock
Company (the "Company").
The case demonstrates that the courts are ready to support an
application of reduced tax rates under double tax treaties in
The court deemed that the Company had lawfully applied
withholding tax at the tax rate of 5% with respect to dividends,
which were distributed to the Russian branch of the Cypriot parent
company. The branch had furtherly transferred the dividends to a
third party as repayment under a loan agreement.
It should be noted that the Company hadn't withheld the tax
when distributing dividends (as the Russian tax law requires). But
while the tax authority had been examining tax audit's
materials, the Company had paid the withholding tax at the tax rate
The court took into account the following circumstances:
there was a certificate of tax residency of the Cypriot parent
company in the case file;
the tax authority did not challenge the fact that the Cypriot
parent company had invested more than €100,000 in the
according to Article 10(4) of the Russian-Cypriot double tax
treaty, preferential tax rates for dividends shall not apply if the
beneficial owner of the dividends, being a resident of Cyprus,
carries on business in Russia through a permanent establishment
located in Russia, or performs independent personal services from a
fixed base situated therein, and the dividends are effectively
connected with such permanent establishment or fixed base;
the Cypriot parent company, being the shareholder that received
dividends from shares, was entitled to dispose the entire amount of
dividends at its own discretion, determining destination and timing
there was an evidence in the case file that the branch had
followed the explicit instruction from the Cypriot parent
company's head office about where to pay the dividends;
the tax authority failed to prove that the disputed dividends
were related to the branch's activity and that the branch
disposed those amounts at its own discretion.
In this case the tax authority focused on the formal
circumstances of inability to apply the benefit under the
Russian-Cypriot double tax treaty. In turn, the court took a rather
brave stance and allowed the taxpayer to apply the reduced
withholding tax paid within the tax audit.
Dentons' Tax practice experts have an extensive experience
in supporting tax audits of Russian companies paying income to
foreign companies. Dentons' tax practice experts would be happy
to review your process of application of tax benefits under double
tax treaties and if needed to support you in tax audits,
considering the latest trends in the practice of applying the
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