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. Last Updated: 07/27/2016

New Russian 'Participation Exemption' Rules for 2008

UnknownBy Sergey Chelyshkov<br>Senior tax associate, DLA Piper
On May 4, the Federation Council approved the draft of the law concerning the amendments to Articles 224, 275 and 284 of Part II of the Tax Code. The new law creates a special tax "participation exemption" regime for holding companies in Russia. This change should encourage the establishment of holding companies in Russia rather than in foreign jurisdictions and reduce the attractiveness of transfer pricing schemes for Russian legal entities.

Under current tax law, a Russian shareholder's dividend income is taxed in Russia at either a 9 percent rate (if paid by a Russian company) or a 15 percent rate (if received from a foreign subsidiary). Although in the latter case the tax payable in Russia may be offset against the tax withheld in foreign jurisdictions if a double tax treaty applies, the overall effective tax rate on the transaction usually remains at 15 percent. As a result the majority of Russian and foreign investors prefer to invest in Russia via foreign holding vehicles and often establish holding companies outside of Russia for IPOs.

To encourage holding companies in Russia, the government proposed exempting Russian companies' dividend income from taxation. Specifically, the draft of the law, which should come into force in 2008, establishes a zero percent tax rate for dividend income if all of the following conditions are met:

• the payee must hold at least a 50 percent stake in the charter capital of the dividend paying entity or in the depositary receipts that entitle it to receive dividends of at least 50 percent of the total dividends payable;

• the acquisition cost or investment in the charter capital or the depositary receipts must exceed 500 million rubles (about $20 million);

• the holding period of the distributing entity must be at least 365 days without interruption;

• if the dividend is paid from abroad, the foreign payer's country of residence cannot be included in the list of countries and territories which provide a preferential tax regime (offshore areas). This list will be defined by the Finance Ministry.

If the above requirements are not met, income will be taxed at the applicable current rate.

To be eligible for the exemption, taxpayers must present a number of documents (duly legalized and translated into Russian) to the tax authorities. These documents must contain information on the date and price at which the ownership right to the stake in the charter capital of the dividend payer or the depositary receipts was acquired.

The draft also reduces the withholding income tax rate from 30 percent to 15 percent on dividends paid to "non-tax resident" individuals to make the tax burden on foreign physical persons even with the burden on foreign corporate shareholders.

In short, the proposed amendments will facilitate the establishment of large group holdings in Russia, which is advantageous for Russian-based owners, but are not likely to impact small and medium-size companies. It may also increase the transparency of Russian outbound holding structures.