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On Dividends


According to the Tax Code, dividends are any profits received by a shareholder from the distribution of profits after taxes where distribution is based on shares held in proportion to number of shares total in the registered capital of the organization. Dividends also include any profits received from sources outside of Russia considered as dividends by the appropriate country’s legislation.

However, the main legislative statute regulating the taxation of dividends is Article 275 of the Tax Code of the Russian Federation, which gives another definition of dividends as profits from shared partnership in a company’s activity. As we can see, this latter norm (which must be used in taxation of profits) does not speak of proportionality. More on this issue will be discussed later.

In the strict sense, the decision to pay dividends may be made only in cases when it is not prohibited by other regulations.

In particular, this decision may not be made in following instances:

  1. Prior to the completed payment of company’s registered capital;
  2. Prior to pay-off of the actual value of shares or parts of shares of an LLC shareholder in cases prescribed by the Law on LLCs and also prior to redemption of all shares that have to be redeemed in accordance to Article 76 of the Law on JSCs;
  3. If, at the time of the decision, the company is insolvent as defined by the Law on Bankruptcy, or if the company will be made insolvent by the dividend payment;
  4. If, at the time of the decision, the value of company’s net assets is less than its registered capital and safety fund, or if it will become less as a result of the dividends paid.

If a Russian organization as a tax agent pays dividends to a foreign company and/or an individual who is not a tax resident of the RF, the taxable base for each dividend recipient with a 15% tax rate applied to full amount of the dividends received by that recipient (Article 284 paragraph 3 subparagraph 3; Article 224 paragraph 3 of the Tax Code). This is the case unless otherwise stipulated by a related treaty. It must be noted that as of January 1, 2009 there are 74 such treaties (see Annex to Letter of the Federal Tax Service of the RF # ВЕ-22-2/20@ from January 15, 2009). In this case, dividends received by organizations are not taken into consideration (Letter of Russia’s Ministry of Finance # 03-03-06/1/134 from March 15, 2010).

In paying dividends, a foreign company must take into consideration that the tax withheld is not listed in the tax declaration but rather should be included in the Income Tax Computation of profits paid to and taxes withheld from foreign companies (Letter of the Federal Tax Service of the RF # ВЕ-17-3/12@ from January 19, 2009). The tax paid to the state within one day following the day of dividend distribution (Article 287 paragraph 4 of the TC).

If dividends are paid to an individual who is not a tax resident of the RF, the tax must be paid to the state on the same day as the funds were transferred to the shareholder’s bank account or another third person’s bank account based on the shareholder’s instruction.

However, in the case that the dividends are paid not via bank transfer, the tax withheld must be paid on the following day after funds were distributed (Article 266 paragraph 6 of the TC).

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