THE PRINCIPLE OF PASS-THROUGH TAXATION IN APPLYING THE CONCEPT OF THE BENEFICIAL OWNER OF THE INCOME

Abstract

The article is devoted to the analysis of the problems of applying the principle of "pass-through taxation” when using the concept of the beneficial owner of the income. The article describes general rules for application of the principle of transparency; when a Russian organization paying passive income to a foreign person shall act as a tax agent and when not. The research in question has shown that a Russian organization acts as a tax agent with respect to a Russian beneficiary owner when it pays any revenue to a physical entity and when it pays dividends to a legal entity. Also, the paper considers special rules of "pass-through taxation" when paying dividends. On the basis of the study carried out by the author a following important conclusion has been made. If a foreign company is resided in the country of an agreement and does not act as a beneficiary owner of a passive income received from Russia because it transfers the income to a foreign company, a Russian company must deduct income tax from an institution in Russia at common rates of the Tax Code equal to 20% or 15% regardless of who is a final shareholder (beneficiary) of an offshore company - a tax resident of a third State or the Russian Federation. This approach to greater extent deprives Russian beneficiaries of tax incentives to create offshore companies and is correct, whereas the interpretation given in the Letters of the Ministry of Finance of the Russian Federation that allows ignoring all intermediate foreign (offshore) structures up to an ultimate beneficiary who is a resident of the Russian Federation should be avoided