Author — Ekaterina Markova
From 1st January 2020, the amendments to the Tax Code of Russia enter into effect, being enacted by the Federal Law dated 29th September 2019, № 325-FZ. Among other issues, it is important to underline those parts which impact the conducting of international business in some way, or include regulation of an international business relationship.
- The term “dividend” is extended.
The version of paragraph 1 Article 250 of the Russian Tax Code presently in force considers income from the participatory ownership in other organizations to be non-operating income. In such a case, it defines this income in the following subparagraph: “income from participatory ownership in other organizations, which is paid as dividends, shall also include income in the form of assets (property rights), received by an organization’s shareholder (participant) as a withdrawal (disaffiliation) from an organization, or upon the asset distribution of an organization being dissolved between its shareholders (participants), in an amount exceeding what is actually paid (irrespective of the form of payment) by the corresponding shareholder (participant) as the value of the shares (participatory interests, units) of that organization”.
This definition of a dividend income raises additional questions, considering the actual circumstances of performing the corporate affairs and distributions thereof. The version of this paragraph in Article 250 which shall be effective as of 1st January 2020 clarifies the above mentioned dividend definition, altering it with the following additional subparagraph:
“For the purposes of the present chapter, income from a participatory ownership in other organizations, paid in the form of dividends, includes, in particular, income paid by a foreign organization in favour of a Russian organization which is the shareholder (participant) of this foreign organization, as a profit distribution remaining after taxation, irrespective of the taxation procedure with regards to such distribution in a foreign state.”
In other words, when recognizing this income for taxation purposes, a Russian company shall directly consider as dividends the income paid to it by a foreign subsidiary company. This shall take place when the foreign company makes a distribution of its profits remaining after taxation, and it is irrelevant which taxation procedure is implemented, with respect to such payments in a foreign state. This alteration summarizes a case law created in recent years with respect to dividend distribution made by overseas companies to Russia. It also implements the recent international trends in this sphere, bringing in a certainty within the regulations.
The stated alteration continues the process of changes in the regulation of dividend taxation, as set up by the Federal Law of Russia dated 27th November 2018, № 424-FZ. This law enforced the subparagraph of the dividend income definition, as mentioned at the beginning of this newsletter. Before that alteration, the Russian Tax Code had stated only that dividend income shall be considered to be non-operating income.
- Sole proprietor (SP) – withholding agent for foreigners.
It is a common scenario in business for an overseas company to receive some income from a Russian sole proprietor. And for a long time, the question on who would withhold the tax from such income was scheduled for the day. For example, this issue was considered in a Letter of the Federal Taxation Service of Russia dated 11th June 2014, № ГД-4-3/11305@.
The version of paragraph 1 of Article 310 of the Russian Tax Code currently in force states the details on tax assessment and payment with respect to the income received by the foreign company from a source in Russia. In such a case, the tax shall be withheld by a withholding agent, who is responsible for the assessment and payment, but only a Russian company or an overseas company acting through a permanent establishment in Russia may be entrusted with such a liability.
According to Article 246 of the Russian Tax Code, foreign companies, receiving the Russian source income, are considered liable to Russian income tax. Paragraph 1 of Article 309 of the Russian Tax Code states the types of income from foreign companies which come from a Russian source which are liable to tax being withheld in Russia (if not being received through their permanent establishment in Russia).
According to the provisions of Article 24 of the Russian Tax Code, withholding agents are defined as persons (natural or legal entities) obliged by virtue of Russian Tax Code to arrange for the assessment, withholding and payment of taxes into the budget system of Russia. Article 286 of the Russian Tax Code states the following: In cases where the taxpayer is a foreign company receiving income from a Russian source (not connected with its permanent establishment in Russia), then the obligation to assessment and the withholding of taxes is assigned to the payee of such income (a Russian company or foreign company conducting business through its permanent establishment in Russia).
Thus, natural persons shall not be considered as withholding agents in the described situation. This also refers to sole proprietors (natural persons registered for the purposes of conducting the commercial activity). Such an approach is supported, for example, in an official letter from the Russian Ministry of Finance dated 27th March 2012, № 03-03-07/9.
From 1st January 2020, paragraph 1 of the above-mentioned Article 310 shall be considered in an amended version, where withholding agents may include, beside the above-mentioned Russian and foreign companies, sole proprietors.
In such situations, a new version of Article 310 adds obligations to the Russian sole proprietors. After the amendments take effect, expenses of common services for businesses, which are often being charged by overseas companies in this age of globalization (for services like rental of server spaces, software licenses, advertising through a foreign service provider), then Russian sole proprietors should undertake the risk assessment and additional administration of the tax burden of their foreign counterparties. Failing to do this would occur the risk of anticipated claims from the Russian tax authorities over the sole proprietors themselves, since the actual legislation provides for the possibility to charge taxes and penalties to the withholding agents—making them, in fact, responsible for their foreign counterparties’ actions.