On 27 May 2020, a new version of the draft federal law on amendments to the Russian Tax Code was posted on the portal of draft legal acts of the Russian Federation. The draft law introduces a number of significant changes – in particular with regard to limiting the possibility of applying a “look-through” approach and to the taxation of holding activities in the Russian Federation.
The planned amendments to the Russian Tax Code include a number of significant restrictions on applying the “look-through” approach:
- Dividends received by a company (Russian tax resident) under the “look-through” approach cannot be taxed at the 0% rate – the standard 13% income tax rate will be applied.
- The provision that an indirect participation of one company in another equates to a direct participation for the purpose of applying the “look-through” approach has been deleted. Given that the draft law cancels the possibility of applying a zero rate on dividends for Russian companies, it would seem logical to exclude this provision. However, we should not forget that the “look-through” approach was used not only by Russian but also by foreign holding companies, albeit in very limited cases. The exclusion of the provision on equating indirect participation with direct participation actually introduces additional restrictions on the application of the “look-through” approach by foreign holding companies.
It should be noted that the above rules only apply to the taxation of dividends, and the procedure for applying the “look-through” approach to other types of income (interest, royalties, etc.) remains unchanged.
Application of dividend exemption by foreign companies that are tax residents of the Russian Federation
The amendments to the Russian Tax Code would exclude the rule that – provided some conditions are met (including holding an investment for more than a year and at least 50%) – foreign companies that are tax residents of the Russian Federation can apply the 0% rate to dividends received if they have voluntarily recognised tax residency in the Russian Federation.
Although we can conclude from reading some of the remaining rules that this is technically possible, together with the above-mentioned cancellation of the “look-through” approach, it can be assumed that the intention is to prevent a situation where a Russian company transfers dividends to a foreign company without paying income tax, even if such a foreign company is a tax resident of the Russian Federation. Thus the above change creates serious uncertainty in the taxation of dividend income received by foreign companies that are tax residents of the Russian Federation.
It is important to monitor the further development of the draft law and the appearance of additional explanations.
Elimination of double taxation for individuals in respect of dividends from foreign public companies
According to the planned amendments to the Russian Tax Code an individual who is a tax resident of the Russian Federation can voluntarily recognise their dividend income from a Russian company that is paid through a foreign organisation, as well as reflect them in the personal income tax declaration (subject to a number of conditions).
At the same time, an individual who has reflected such dividends in their income will be able to reduce the amount of personal income tax on these incomes by the amount of tax withheld by a Russian company when transferring dividends to a foreign organisation.
Clarification of the five-year exemption for the sale of shares of Russian organisations
The amendments to the Russian Tax Code would also exclude the condition that the 0% rate could be applied for the sale / disposal of listed shares of Russian organisations if the share of real estate in the territory of the Russian Federation as part of the assets of such companies was less than 50%.
Current status of draft law on amendments to the Russian Tax Code
After the end of the current stage (public discussion), the draft law will be considered by the Government of the Russian Federation. We hope that when formulating the final text of the draft law, the ambiguities and contradictions contained in the current version will be eliminated.
If you would like to know more about the planned amendments to the Russian Tax Code or receive further information about the future status of the draft law, please contact the experts of ALTHAUS Group, the exclusive representative of WTS Global in Russia.