// JURIST.BY - magazine «Lawyer». - 2018. – № 12
The Belarusian company makes deals with foreign counterparties. When can the issue of double taxation be considered and in which cases it is necessary to take into account the specifics of tax regulation both in the territory of the country where the income is paid and in the country where the organization that receives the income is located? Let’s consider the step by step algorithm.
Determination of the conditions availability for double taxation
The issues of income taxation should be worked out at the stage of concluding an agreement, if necessary including conditions on the obligations of the parties in connection with double taxation. Such obligations can be:
If the Belarusian company is the recipient of income
If under the terms of the contract the Belarusian organization is a recipient of income, then while the conclusion of the agreement it is necessary to clarify the possible withholding of tax in the country where the income is paid, since in fact the amount credited to the account of Belarusian company can be reduced by the amount of withheld tax.
For reference. In accordance with paragraph. 3 sub. 1.8 p. 1 of the Decree of the President of the Republic of Belarus of March 27, 2008 No. 178 “On the Procedure for Conducting and Controlling Foreign Trade Operations”, it is allowed that amount of funds allocated for the payment of taxes in accordance with the legislation of a foreign state could be not received on the account of exporter.
For example, if a Belarusian organization provided a Russian organization with a license for usage of computer program, the license payments paid by a Russian organization will be subject to taxation in Russia on income tax at a rate of 20% (Subclause 4 of Clause 1 of Article 309 of the Tax Code of the Russian Federation).
However, in paragraph 2 of Art. 11 of the Agreement between the Government of the Republic of Belarus and the Government of the Russian Federation on the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income and property dated as of April 21, 1995 established that income from copyright and licenses may be taxed in the contracting state in which they arise (that is, Russia), and in accordance with the legislation of this state, in case the recipient has actually the right for these incomes, the tax levied in this way cannot exceed 10% of the gross amount of income from copyright and licenses. Thus, if the Belarusian organization provides the Russian organization with a certificate confirming its permanent presence in Belarus, the tax rate withheld in Russia can be reduced to 10%.
For reference.The fact of the permanent location of the Belarusian organization is certified by a certificate (the form is established by the Resolution of the Ministry of Taxes and Duties of the Republic of Belarus No. 14 as of April 26, 2013) issued by the tax authority at the place of registration of the Belarusian organization on the basis of its appeal (clause 4 of article 144 of the Tax Code).
If the Belarusian company is a payer
If the Belarusian organization, in accordance with the terms of the contract, has an obligation to pay income to a foreign counterparty organization, then the Belarusian organization may be obliged to withhold tax on income of foreign organizations that do not operate in the Republic of Belarus through a permanent establishment (hereinafter referred to as tax on income).
The payer of tax on income is a foreign organization, while the Belarusian organization is a tax agent and is responsible for withholding and transferring of the tax amount to the budget. The obligation to withhold and pay tax in the Republic of Belarus means that during the execution of the contract to the counterparty will be transferred an amount less the amount of tax withheld.
For example, a loan agreement with payment of interest for loan usage has been concluded between the Belarusian organization-borrower and the Cyprus lender. The amount of interest that’s payable by the Belarusian organization in favor of the Cyprus lender will be subject to income tax. The tax rate on interest income is 10% (paragraph 3 of paragraph 1 of article 149 of the Tax Code).
According to paragraph 2 of Art. 11 of the Convention between the Government of the Republic of Belarus and the Government of the Republic of Cyprus for the avoidance of double taxation and prevention of tax evasion in terms of taxes on income and property dated as of May 29, 1998 (hereinafter – the Convention), interest may be taxed in the contracting state in which they arise, and in accordance with the legislation of this state, but if the recipient is the actual owner of interest, then the tax levied should not exceed 5% of the gross amount of interest. Thus, the Convention provides for a reduction in the tax rate up to 5% compared with the national rate of 10%. Belarusian borrowing organization, who applies the Convention, has the right to withhold income tax at a rate of 5% instead of 10% when paying interest.
For reference. The list of income of a foreign organization from sources on the territory of Republic of Belarus, from which income tax is due to payment in the Republic of Belarus, is provided for in Art. 146 of the Tax Code.
Международные соглашения определяют право государства на удержание налога через формулировку «доходы могут облагаться в том государстве, в котором возникают». То есть если национальное законодательство страны выплаты дохода предусматривает налогообложение, то доход будет облагаться налогом. Положения национального налогового законодательства могут быть изменены положениями международных договоров по вопросам налогообложения (соглашениями, конвенциями об избежании двойного налогообложения). Международный договор может предусматривать пониженную ставку налога либо определять налогообложение дохода только в стране получателя дохода. Так, доходы от предпринимательской (коммерческой) деятельности, как правило, облагаются в стране получателя дохода. Доходы в виде дивидендов, процентов, роялти могут облагаться в стране выплаты дохода.
For reference. The procedure for applying international treaties for the avoidance of double taxation for income tax purposes is set out in Art. 151 of the Tax Code.
Prove the location of the counterparty with confirmation
A mandatory condition for the application of an international treaty on the avoidance of double taxation is the provision by a foreign organization of the confirmation that it has a permanent location in the foreign state who has an international treaty with the Republic of Belarus (hereinafter - confirmation). The confirmation must be certified by the competent authority of the relevant foreign state, may be provided in electronic form (must contain EDS and verification code). Upon receipt of confirmation, it is necessary to verify the indication of the name of the foreign organization (may be registered in the national or English language) in the confirmation (certificate) and in the contract on the basis of which the income is paid.
For reference. The instruction on the procedure for submitting confirmation of the permanent location of a foreign organization was approved by Resolution of the Ministry of Taxes and Duties of the Republic of Belarus No. 42 dated as of December 24, 2014.
For example, the tax authority questioned the validity of the certificate, as the certificate contained the name of the foreign company in Swedish, and the contract – the name of the counterparty-company in English. To confirm the substantiation of the certificate, the Belarusian organization additionally provided an extract from the register in relation to a foreign company, where the registration of the name of the foreign company in two languages (in Swedish and in English) was indicated.
If the confirmation specifies the period of its validity, it is applied during this period. A confirmation issued without specification of validity period in the fourth quarter of the current year can be used for the next calendar year, provided that in the current calendar year the tax authority was presented with a confirmation of the permanent location of the foreign organization. If there is no confirmation in the tax authority issued for the current calendar year, and if such a document is available, certified in the fourth quarter of the current calendar year, it is used as confirmation for the current calendar year or for the period specified in it (if the period is indicated). In practice, there were situations when the tax authority requested confirmation in the current calendar year, despite the presence of confirmation presented in the fourth quarter of the previous year without validity period.
For reference.The confirmation is submitted to the tax authority annually and is valid for the calendar year in which it was issued.
The confirmation may be applied during the next two calendar years if the following conditions are met:
In such a situation, the tax authority is entitled to request from the tax agent a contract (its copy), as well as documents (their copies) that confirm the payment of income to the foreign organization according to the details specified in the contract.
For reference. If foreign organization submitted a confirmation to the tax authority independently or through a Belarusian organization, then other Belarusian organizations may, under certain conditions, use such confirmation.
If the confirmation is provided by one Belarusian organization, the legislation provides for the possibility that such an organization, upon request of other Belarusian organizations or on behalf of a foreign organization, translates the submitted confirmation into Russian or Belarusian, makes the required number of copies and submits the original copy and copies to the tax authority by place of its registration. The tax authority certifies copies and returns them to the representative of the Belarusian organization, and leaves the original copy.
The legislation does not provide legal grounds for forcing the Belarusian organization, which has been granted confirmation, to make copies of the confirmation for other Belarusian organizations. Such an order may come from a foreign company. However, it is likely that the Belarusian organization will refuse to make copies and certify them in the tax authority.
For reference. The tax authority has the right to refuse to provide a copy of the confirmation if the original copy of the confirmation contains information constituting a tax secret, has not been submitted to such tax authority on paper or does not apply to the period specified in the appeal of the tax agent.
In a situation where the original copy has already been submitted to the tax authority, other Belarusian organizations that are tax agents of the relevant foreign organization are entitled to apply for a copy of the confirmation to the tax authority that has the original copy of the confirmation. If such a request is received, the tax authority shall certify a copy of the confirmation and transfer it to the requesting tax agent.
Confirm the actual status of the owner
If the terms of an international agreement determine the procedure for taxation of income of the beneficial (actual) owner of income, then the Belarusian organization must receive evidence that confirm status of the actual owner of the paid income to apply the relevant taxation rules.
For reference. When determining the status of a foreign organization as a beneficiary of income, the following is taken into account:
- the functions it performs in order to receive such income, the powers that it has and the risks it takes;
- additional grounds, including when conducting a mutually agreed procedure by the Ministry of Taxes and Duties of the Republic of Belarus with the tax authority of a foreign state in the framework of an international treaty of the Republic of Belarus on taxation issues.
According to paragraph 2 of Art. 151 of Tax Code foreign organization is recognized as having the status of the actual owner of income under simultaneous execution of the following conditions:
In accordance with Part 3, Section 2, Art. 151 of Tax Code foreign organization is not considered as the actual owner of income, if one or more conditions are met:
The right of organization to use and / or dispose of income is limited to contractual or other obligations in terms of payment (transferring) of income (in full or at least 60% of such income) in the time frame (but no later than 12 months after receiving paid income) in favor of tax resident of a foreign state who, if directly receiving such income, would not have the right to benefit from the income of the actual owner or would have the right to apply the less favorable provisions of an international treaty.
If an international agreement provides for preferential taxation of income only in relation to a foreign company-the beneficiary recipient of income, in such case the Belarusian organization that pays income must have evidence that the recipient of income is its beneficial owner.
Checklist on issues for taxation of transactions with non-residents
— qualify the type of income to determine the tax rate or the possibility of applying the tax exemption based on the agreement on double tax avoidance;
— request from the foreign counterparty confirmation that he is the beneficiary recipient of the income.