The Russian Tax Code had been recently amended in order to exclude the requirement of minimum value of Russian company’s participation in the capital of its subsidiary distributing dividends for the purpose of exempting such dividends from taxation
We inform you that recently the Federal Law No. 368-FZ of 27 December 2009 enacting from 2011 FY, which abolished the requirement of minimum RUR 500 mln. participation of a Russian parent company in its subsidiary distributing dividends for the purpose of participation exemption rule, had been adopted.
At present dividends, received by a Russian parent company from its subsidiary, are subject to Russian CIT 0 % rate only if the following requirements are simultaneously met:
1) at the date of taking the decision on distribution of dividends the parent Russian company receiving the dividends has to permanently own not less than 50 % of the subsidiary’s capital on the ownership basis during at least of 365 calendar days, and
2) the minimum value of acquisition or reception of this participation in the subsidiary’s capital distributing dividends has to exceed RUR 500 mln., as well as
3) the subsidiary distributing dividends does not have to be a resident of any country from the “black list” of offshore zones, approved by the Order of the Russian Ministry of Finance No. 108n of 13 November2007, for example, of Cyprus, Malta or British Virgin Islands.
The Federal Law No. 368-FZ of 27 December 2009 has abolished the second of the above requirements concerning the minimum RUR 500 mln. value of participation in the subsidiary’s capital distributing dividends. This Federal Law had enacted from 29 December 2009 (from the date of its official publication in the Rossiiskaya Gazeta). Though the relative amendment is applicable from the 1 January 2011 only, however from that date its application will be extended to the legal relations of taxation with regard to dividends, distributed as a result of the subsidiary’s business activity during 2010 FY and the subsequent periods.
Therefore, starting from 2011 FY considerable number of Russian companies will be able to apply the Russian participation exemption rule.
Taking into account the uncertainty regarding whether Cyprus is going to be further included into Russian “black list” of offshore zones after 2010 FY, in our opinion, this amendment can intensify the companies’ migration from Cyprus to countries with lower withholding tax rates on dividends, but not included into Russian “black list”, such as Luxembourg, Belgium and the Netherlands.
Taking into account, that it is necessary to participate in the capital of the subsidiary for 365 calendar days at least in order to apply the Russian participation exemption rule, companies, undertaking corporate restructuring in 2010 FY, will be able to apply the participation exemption in 2011 FY already.
For further information, please contact:
in Moscow – Andrey
in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail: spb@pgplaw.ru