Russian Federation Decided on Interpretation of Beneficial Ownership Concept

Russian Federation Decided on Interpretation of Beneficial Ownership Concept

The Moscow City Court issued Ruling on December 25, 2012 № 4g/2-12260/12 regarding the case where the real estate possessed by the debtor through a chain of offshore companies was seized by the creditor.

A bank granted loans to the group of companies in the real estate sector under guarantee of one of the ultimate beneficial owners of the group. Then bank decided to transfer these receivables to a third party. At the maturity date the debt was not paid, and this third party sued the group of companies along with the guarantor. Subsequently the creditor filed a lawsuit in court seeking the seizing of real estate property possessed by the group companies where the guarantor is the ultimate beneficial owner.

After examining the companies owning the property the Court decided that the companies in Cyprus, BVI and the Jersey foundation has transitional role in chain of ownership of Russian real estate by guarantor. Indemnity letters, which eliminate the responsibilities of the nominal shareholders, were provided to the Court and confirmed that the guarantor was the real owner. Taking into account the definition of beneficial owner given in one of the UN conventions and to common knowledge of this concept, and also to the priority of international law over domestic legislation, the Court justified seizure of property owned by the guarantor.

In this case seizure of the property, which the debtor owned through offshore companies chain, took place for the Court qualified them as conduit companies established to conceal the real owner. If the same approach applies in tax disputes, such argument may lead to transfer of tax liabilities from companies to ultimate beneficiaries. This may result in undesirable consequences for taxpayers.

In order to avoid such consequences, it is recommended to conduct real business activity, which is relevant to the main business purpose, at the level of foreign companies within the structure.

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