This article covers item C2(b)(i) of the syllabus.
Dividends
General rules of taxation at source
A subsidiary which pays dividends should act as a tax agent and withhold corporate profits tax (hereinafter referred to as tax on dividends or withholding tax) at the time of the dividend payment. Dividends are taxed with the following rates:
- Tax on dividends for residents (which continuously holds not less than 50% of shares for more than 365 calendar days at the time of dividend distribution*): 0%
- Withholding tax rate on dividends payable to Russian residents: 13%
and for non-residents of Russia: 15%
*Distribution of dividends means the making of an official decision by shareholders to provide as dividends a particular share of a company’s profits after tax (which can include both current after-tax profits and profits of previous periods, which were not allocated between dividends and retained earnings).
EXAMPLE 1
OOO Violet’s prior year profits before tax was 25,000,000 RR.
All these profits after tax were distributed between three shareholders:
- OOO Yellow, a Russian company (shares held for two years): 55%
- OOO Red, a Russian company: 15%
- Orange BV, a Netherlands company: 30%
Required:
Calculate the tax on dividends (withholding profits tax) and the net dividends paid.
Answer:
| Gross profits before tax | ||
| Profits tax at 20% | ||
| Profits for distribution |
OOO Yellow
| Gross dividends attributable to OOO Yellow | ||
| Withholding tax at 0% (holds not less than 50% for more than 365 days) | ||
| Net dividends paid |
OOO Red
| Gross dividends attributable to OOO Red | ||
| Withholding tax at 13% (holds less than 50%) | ||
| Net dividends paid |
Orange BV
| Gross dividends attributable to Orange BV | ||
| Withholding tax at 15% (non-Russian resident) | ||
| Net dividends paid | ||
| Total withholding tax |
Incoming dividends reduction
Taxable dividends payable to Russian residents only, can be reduced by the amount of dividends received by the company itself (so-called «incoming dividends deduction»).
If dividends received were subject to 0% rate, they do not qualify for incoming dividends deduction.
This deduction is illustrated in the example below.
EXAMPLE 2
OOO Green’s distributable profits after tax is 20,000,000 RR.
Out of this amount 12,000,000 RR are dividends received by OOO Green itself as shown below:
- 7,000,000 RR received from 20%-owned subsidiary
- 5,000,000 RR received from 50%-owned subsidiary (term of ownership – three years)
All profits after tax are distributed between three shareholders:
- OOO Yellow, a Russian company (holds shares for 2 years): 55%
- OOO Red, a Russian company: 15%
- Orange BV, a Netherlands company: 30%
Required:
Calculate the tax on dividends (withholding profits tax) and net dividends paid.
Incoming dividend deduction is equal to 7,000,000 RR as the remaining 5,000,000 RR were subject to 0% rate.
The deduction is applicable to Russian residents only. The split between Yellow and Red is calculated as follows:
- Yellow – 7,000,000 * 55/(15+55) = 5,500,000
- Red – 7,000,000 * 15/(15 + 55) = 1,500,000
OOO Yellow
| Gross dividends attributable to OOO Yellow | ||
| Withholding tax at 0% | ||
| Net dividends paid |
OOO Red
| Gross dividends attributable to OOO Red | ||
| Less: incoming dividends deduction | (1,500,000) | |
| Taxable dividends after deduction | ||
| Withholding tax at 13% | ||
| Net dividends paid | (3,000,000 – 195,000) | 2,805,000 |
For Orange BV (non-resident of Russia)
| Gross dividends attributable to Orange BV | ||
| Withholding tax at 15% (foreign company) | ||
| Net dividends paid | ||
| Total amount of withholding tax |
Written by a member of the TX-RUS examining team
