Russia tax: MOF clarifies PE issue under tax treaty with U.S.

The Russian Ministry of Finance (MOF) in a letter dated 7 May 2009, clarified that no permanent establishment (PE) will be created where a U.S. legal entity holds its board of directors meeting(s) in Russia, regardless of where the board members are resident.

The guidance was issued in the context of a U.S. company's board of directors holding a meeting in Russia with the board consisting, at least in part, of Russian citizens (tax residents of Russia). While the description of the case does not specifically state whether the board of directors consisted of executives (with management functions) or other members of the parent organization which could affect the outcome, the MOF's opinion does offer some basic guidance on the PE issue.

According to the MOF, holding such meetings in Russia does not give rise to a PE regardless of the tax residence of the board members. Both article 5(1) of the Russia-U.S. treaty and the Commentary to the OECD model treaty provide that a PE is a fixed place of business through which a resident of a contracting state (the U.S. in this case), whether or not a legal entity, carries on business activities in the other contracting state (here, Russia). A fixed place of business for these purposes implies:
- The existence of a "place of business";
- A place of business that is "fixed" (i.e. it is established at a distinct place with a certain degree of permanence); and
- The business of the enterprise is carried on through this fixed place of business, i.e. persons who, in one way or another, are dependent on the enterprise (personnel) conduct the business of the enterprise in the state in which the fixed place of business is situated.

A place of business also may exist despite the absence of premises or in situations in which the "carrying on" of the business can be done in a space at the disposal of an enterprise. Moreover, the place of business may be situated in another enterprise. On the other hand, if a foreign legal entity has a fixed place of business in Russia for conducting business activities similar to the activities it carries out based on its documents of association or if the main goal of such fixed place of activities is identical to the main goal of the head office, the activities may be regarded as the main (common) activities of the foreign legal entity and may lead to a PE in Russia.

While it is the opinion of the Russian MOF that no PE will arise from the holding of board meetings in Russia, and in the specific context of the Russia-U.S. treaty, a U.S. legal entity having assets and personnel, and conducting business activities, beyond the territory of the Russian Federation will not have a PE in Russia merely from the above activities of Russian tax residents who are members of the board of directors of the U.S. company, it will still be important in all cases to examine the facts.