Clarifications regarding application of the new Russian Tax Code provisions

21 January 2014
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Dear Clients,

Please be informed that we have received the following clarifications from the Ministry of Finance of the Russian Federation (the “Ministry of Finance”) regarding certain issues arising where a depository acts as a withholding agent paying out income on Russian government, municipal, or corporate securities to foreign organizations acting on behalf of third parties.

Under article 2146 or 3101 of the Russian Tax Code, when paying out income on securities held in a foreign nominee account, a Russian organization acting as a withholding agent shall calculate and withhold personal or corporate income tax on the basis of summary information regarding persons exercising rights attached to such securities, or persons on whose behalf a trustee is authorized to exercise such rights (i.e., income beneficiaries treated as taxpayers in accordance with the Russian Tax Code and applicable double taxation treaties).

In the Ministry of Finance’s opinion, a foreign nominee, when submitting such summary information to a Russian withholding agent, must make sure that the income beneficiary holds documents certifying his tax residency status as at the income payment date, as, pursuant to the Russian Tax Code, an income beneficiary’s tax residency status has to be specified in summary information on the basis of documents certifying such tax residency status. Under article 2148 or 3102 of the Russian Tax Code, tax authorities may, in the course of an office audit and/or field audit, request the withholding agent, or the foreign nominee, or the relevant foreign competent authority to provide documents certifying the taxpayer’s tax residency status.

The withholding agent shall calculate and withhold tax on income on securities held in a foreign nominee account at the rates set forth by article 224 or 284 of the Russian Tax Code, if an income beneficiary is a tax resident of a country with which the Russian Federation does not have a double taxation treaty.
Where no information is available regarding an income beneficiary’s tax residency status, the tax rate of 30% shall apply.

Where an income beneficiary is a tax resident of a country with which the Russian Federation has a double taxation treaty, the withholding agent shall apply the tax rate set forth in such treaty.

An income beneficiary’s tax residency status shall be certified in the manner prescribed, subject to the provisions of article 2146 or 3101 of the Russian Tax Code. In accordance with clause 10 of article 2146 or clause 11 of article 3101 of the Russian Tax Code, a withholding agent must pay tax on the 30th day following the tax calculation date. Where, before the expiry of such time period, the withholding agent is provided with updated information (such as documents certifying the income beneficiary’s tax residency in the relevant jurisdiction, or updated information on non-availability of such documents as at the income payment date), the withholding agent shall adjust the tax amount and either withhold and pay additional tax or refund the tax amount withheld.

As there is no specific procedure in effect in the Russian Federation for submission of documents certifying tax residency in a foreign country with which the Russian Federation does not have a double taxation treaty, the Ministry of Finance is of the opinion that such document (tax residency certificate) may be legalized or apostilled in accordance with the laws of the relevant foreign country, and in this case the submission procedure applicable to tax residency certificates issued by foreign countries with which the Russian Federation has double taxation treaties may apply.

Where the beneficiary of dividend income payable to a foreign nominee is a Russian tax resident, a tax residency certificate must also be available as at the income payment date to certify the beneficiary’s tax residency status and apply the relevant personal or corporate income tax rate. The withholding agent shall calculate and withhold corporate income tax on dividend income on the basis of the relevant summary information, by using the formula set forth in clause 5 of article 275 of the Russian Tax Code.

Where the summary information submitted to a withholding agent shows that a beneficiary of interest income on Russian securities (including federal, subfederal, or municipal bonds) is a Russian organization, the withholding agent is not required to calculate and withhold tax, as, in accordance with the provisions of Chapter 25 of the Russian Tax Code, the responsibility to calculate and pay tax on interest income lies with the taxpayer.

However, please note that, in the Ministry of Finance’s opinion, when preparing summary information regarding Russian organizations being income beneficiaries and submitting such information to the withholding agent, a foreign nominee must also make sure that there are documents available certifying that such income beneficiaries are Russian organizations, as such documents may be requested by tax authorities in the course of an office audit and/or field audit.

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