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Restrictions for benefiting from the Russian participation exemption have been lifted

Russia
22 Jan 2010

The Russian Tax Code had been recently amended to exclude the requirement of a Russian company's minimum value participation in the capital of its subsidiary distributing dividends for the purpose of exempting such dividends from taxation. Consequently, more companies will be able to benefit from the Russian participation exemption soon. Taxand Russia discuss the benefits for businesses.

The Federal Law No. 368-FZ of 27 December 2009 will be enacted from 2011. The Law abolishes the requirement of minimum RUR 500 mln. participation of a Russian parent company in its subsidiary distributing dividends for the purpose of participation exemption.

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 November 2007, which includes in particular Cyprus, Malta and British Virgin Islands.

The Federal Law No. 368-FZ of 27 December 2009 has abolished the second requirement concerning the minimum RUR 500 mln. value of participation in the subsidiary's capital distributing dividends. This provision is applicable from the 1 January 2011 only, however from that date its application will be extended to taxation dividends, distributed as a result of the subsidiary's business activity during 2010 and subsequent fiscal years.

Therefore for the Russian outbound tax structuring it will be crucial whether Cyprus is excluded from the Russian "black list" of offshore zones in 2010 or not. If Cyprus stays in this list, this amendment can intensify the companies' migration from Cyprus to countries with lower withholding tax rates on dividends, but not on the Russian "black list", such as Luxembourg, Belgium and the Netherlands.

Taxand's Take


As of 2011 a considerable number of Russian companies and multinational groups will be able to apply the Russian participation exemption rule.

Taking into account that it is necessary to participate in the capital of the subsidiary for at least 365 calendar days. By undertaking corporate restructuring in early 2010 companies will be able to apply for the Russian participation exemption already in early 2011.

Your Taxand contact for further queries is:
Andrey Tereschenko
T. +7 495 967 00 07
E. a.tereschenko@pgplaw.ru

Taxand's Take Author