Payment of dividends to a foreign founder in Russia
- What is necessary to know about dividends
- How to pay dividends to a foreign founder?
- Dividends to a foreign founder – a legal entity from friendly countries
- Payment of dividends to a foreigner from an unfriendly country
Dividends are a part of the profit that a company pays to its shareholders in the form of cash or other valuables. Dividends are one of the ways to compensate investors for their investments in the company’s shares. In fact, they represent a share of profits that is distributed among shareholders. In the last two years, the issue of paying dividends to foreigners from friendly and unfriendly countries has arisen. To answer it, let’s consider the procedure for paying dividends to a foreign founder in 2023.
What is necessary to know about dividends
Before talking about paying dividends to a foreign founder, it is necessary to learn the main aspects of a financial instrument:
- Payment of dividends. Companies usually announce the payment of dividends at the general meeting of shareholders. Dividends can be paid in the form of money, checks, electronic transfers or other valuables.
- The amount of dividends. The amount of dividends is determined by the company and may vary depending on its financial performance and strategy. Dividends are usually expressed in a fixed monetary value per share or as a percentage of the current share price (dividend yield).
- Payout frequency. Dividends can be paid either periodically (for example, quarterly or annually), or not systematically, depending on the company’s decision.
- Source of funding. Companies can finance the payment of dividends from their profits, accumulated reserves or other sources of capital. They can also borrow funds to pay dividends.
- Taxation. Dividends received by investors may be subject to taxation depending on the jurisdiction. In many countries, there are special tax rates and rules for the taxation of dividends.
Dividends are one of the ways to attract investors and can be important for the growth of the company’s share price. They also provide investors with regular income from owning shares.
How to pay dividends to a foreign founder?
The payment of dividends to a non-resident in Russia is regulated by Russian legislation and international tax agreements, if any, between Russia and the country of the founder. Now countries in relation to Russia are divided into two categories: friendly and unfriendly. In each case, there will be different acts regulating relations with such JSC participants.
The main aspects that should be taken into account when paying dividends to a foreign founder in Russia:
- Tax on dividends. According to Russian tax legislation, dividends paid to foreign founders are usually subject to taxation at the source. The tax rate may vary depending on the country in which the foreign founder is registered and the terms of the tax agreement between Russia and that country.
- Tax withholding. Usually, an organization paying dividends must withhold income tax in favor of the state (tax on dividends) and transfer it to the budget. The amount of tax withheld depends on the applicable tax rate and the double taxation avoidance agreement (if any).
- Documentation. In order to pay dividends to a foreign founder, formalities must be observed, including the provision of appropriate documentation. This includes the processing of applications, notifications and other documents, as well as the definition of tax obligations.
- Double taxation avoidance agreements. Russia has agreements on the avoidance of double taxation with some countries. They may affect the taxation of dividends of foreign founders. These agreements often provide reduced tax rates on dividends and mechanisms to avoid double taxation.
- Terms and procedure of tax payment. The tax on dividends must be paid within certain time limits, as stipulated by the legislation of Russia.
- Consultation with a tax expert. Due to the complexity of tax rules and international agreements related to the payment of dividends to foreign founders, it is recommended to contact a qualified tax expert or consultant for advice and to ensure compliance with all legal requirements.
It should also be borne in mind that the rules and rates may change over time. To avoid trouble, it is better to refer to the current tax legislation and consult with financial market professionals for accurate information.
Dividends to a foreign founder – a legal entity from friendly countries
Citizens of friendly countries can have advantages in terms of taxation if a corresponding agreement on the avoidance of double taxation has been concluded between Russia and their country. Here is the general procedure for paying dividends for citizens of such countries in Russia:
- Checking the existing tax agreement. It is necessary to make sure that there is a Double taxation Avoidance Agreement (SIDN) between Russia and another country. This agreement defines the tax rates and rules applicable to dividends received by citizens of the country in Russia. Usually, reduced tax rates on dividends are set in Sydney.
- Receiving dividends from a Russian company. If a foreigner is a shareholder of a Russian company and has the right to receive dividends, the company must pay them in accordance with the conditions established by the CID and Russian legislation.
- Withholding tax on the source. Usually, a Russian company paying dividends withholds tax on dividends at the source, in accordance with the tariffs provided for in the CID. This withheld tax can be written off or returned to citizens by the tax authority of the country.
- Compliance with formalities and documentation. Certain documents and notifications may be required to receive dividends and to be recorded in the tax return.
- Preparation for filling out the tax return. It is needed to fill out a tax return in the country to account for the dividends received and request a possible write-off or refund of the withheld tax.
It is important to note that the specific requirements and procedures may vary depending on the country and the agreement on avoidance of double taxation between Russia and this country.
Payment of dividends to a foreigner from an unfriendly country
The procedure for paying dividends for citizens of unfriendly countries in Russia may be more complicated and strict than for citizens of friendly countries. It may include additional tax and administrative restrictions. Citizens of unfriendly countries may face higher tax rates on dividends and additional procedures. Below is the general procedure for paying dividends to citizens of unfriendly countries in Russia:
- Checking the status of the country. It is necessary to make sure that the country is not under sanctions or restrictions from Russia. This may affect the possibility of receiving dividends and tax liabilities.
- Withholding tax on the source. As in the situation with a founder from a friendly country, a Russian company paying dividends is obliged to withhold tax on dividends at the source. The tax withholding rate may be high for citizens of unfriendly countries. Withheld tax can be deducted or refunded in accordance with the laws of the country.
- Filling out tax forms. Citizens from unfriendly countries need to fill out tax forms and provide the necessary documentation to receive dividends.
- Compliance with international agreements. Some unfriendly countries may have international tax agreements with Russia that may affect the taxation of dividends.
- Preparation for filling out the tax return. It is also necessary to fill out a tax return in the country of citizenship in order to take into account the dividends received and request a possible write-off or refund of the withheld tax.
It is important to note that tax rules and rates may change over time, and requirements may vary depending on specific circumstances.
Obtaining permission from the government commission for receiving dividends for a foreigner from an unfriendly state.
The payment of dividends by LLC to foreign participants from unfriendly states may be subject to certain restrictions and temporary procedures for the fulfillment of obligations.
- Decision on profit distribution. The law on LLC allows the company to make a decision on the distribution of its profits among the members of the company quarterly, semi-annually or once a year. The legislation does not establish specific terms for the payment of dividends.
- Decree of the President of the Russian Federation No. 254. The Decree establishes a temporary procedure for the fulfillment of obligations to pay profits to foreign LLC participants who carry out unfriendly actions against the Russian Federation. They include participants who have the citizenship of unfriendly States, the place of registration, conducting business activities or making profits in unfriendly States.
- Payment procedure. If a decision is made on the distribution of profits of the LLC to participants subject to these restrictions, the payment of profits is carried out in accordance with paragraphs 2-9 of Decree of the President of the Russian Federation No. 95. This Decree establishes a specific procedure and conditions for the fulfillment of financial obligations to certain foreign creditors, including foreign participants of LLC.
- Control over residents of “unfriendly” states. Decree No. 254 also establishes restrictions for persons who are under the control of unfriendly States, regardless of their place of registration or business activities.
Decree No. 95 establishes that the procedure for fulfilling obligations applies to amounts exceeding 10 million rubles per month. The fulfillment of obligations over this amount must occur through accounts of type “C”. If an LLC has to pay dividends to a foreign participant from an unfriendly state, it can request the opening of a type “C” account in a Russian bank in the name of this foreign person.
After the transfer of dividends to this account, a foreign participant may apply to the bank for the use of funds, taking into account the rules established by the Central Bank of the Russian Federation for the fulfillment of obligations by credit organizations and other financial organizations.
Fulfillment of obligations in the amount exceeding 10 million rubles per month must occur through accounts of type “C”. Currently, there is no approved special procedure for obtaining permits for other performance of obligations. The Government Commission for the Control of Foreign Investments is not authorized to issue such permits.
The Ministry of Finance of the Russian Federation may issue permits for residents for other fulfillment of obligations, but specific rules and procedures for obtaining such permits have not yet been established. It is necessary to contact the Ministry of Finance of the Russian Federation to find out whether it is necessary to obtain permission for other fulfillment of obligations without using a type “C” account. It all depends on the restrictions imposed on the state.
According to the Decree of the President of the Russian Federation dated September 8, 2022 No. 618 “On the special procedure for the implementation (execution) of certain types of transactions (operations) between certain persons,” paragraph 1 of Decree No. 254 is supplemented by the provisions of paragraph 12 of Decree No. 95. In accordance with these paragraphs, “unfriendly persons” are not considered persons who meet the following conditions:
- They are under the control of Russian legal entities or individuals, including control through foreign legal entities associated with such foreign states.
- Information on their control has been disclosed by the above-mentioned controlling persons to the tax authorities of the Russian Federation in accordance with the requirements of the legislation of the Russian Federation.
Thus, if the ultimate beneficiary of a foreign organization that is a participant of a Russian LLC is a citizen of the Russian Federation, and information about control over this organization is notified to the tax authorities in accordance with Russian law, then in order to pay dividends to a foreign participant of a Russian LLC, it will not be necessary to open a type “C” account or obtain permission from a Government commission.
Paying dividends to foreign investors in Russia is a complex and multifaceted process that depends on many factors. This applies to tax legislation, tax agreements and other regulatory issues. For successful receipt of dividends and compliance with all requirements, it is important to have a good understanding of tax rules. In some cases, consultation with professional experts is required. VALEN’s lawyers are ready to assist in obtaining detailed and up-to-date information on the payment of dividends to foreign investors.
Question and answer
The regulatory legal acts of the Russian Federation do not establish special requirements for documents for the payment of dividends. Usually, a decision of the general meeting of the company’s board of directors on the distribution of profits among shareholders is sufficient.
However, it is important to prepare primary documents where certain amounts would be reflected and taxes would be calculated.:
• Accounting reference-calculation.
• Payment orders for non-cash payments.
• Cash withdrawal order for cash payment.
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