Attn.: NSD's Clients
Last year, Russia revised its double taxation treaties (DTT) with a number of jurisdictions, namely Cyprus, Malta, and Luxembourg, to increase the withholding tax rate for dividend and interest income to 15%.
The new DTTs provide for a number of exceptions pursuant to which the reduced tax rate of 5% will apply to dividend and interest income. Such exceptions are provided for institutional investments, as well as for public companies.
The Russian Ministry of Finance has clarified the DTT provisions concerning the criteria to be satisfied by a public company to be able to apply the reduced tax rate for dividend or interest income paid to it.
The DTTs provide that the tax rate of 5% applies to dividend or interest income paid by Russian organizations to public companies from the Contracting States, provided that a company to which such income is paid satisfies certain criteria. In particular, the company must be the beneficial owner of the income, its shares must be listed on a registered stock exchange, no less than 15% of the shares of that company must be in free float, and it must hold at least 15% of the capital of the company paying the income throughout a 365 day period.
As regards the requirement for such companies to be listed on a registered stock exchange, please be advised as follows:
As follows from the provisions of the DTTs with Cyprus, Luxembourg, and Malta, the term "registered stock exchange" means any stock exchange incorporated and regulated as such under the laws of any of the Contracting Parties, i.e. Russia or its counterparty under the DTT.
Such interpretation is based on the fact that all of the DTTs in question determine the personal scope of the DTTs which apply to persons who are residents of one or both of the Contracting Parties. In view of this and that the DTTs are bilateral international treaties, their provisions are not applicable by residents of third jurisdictions, unless otherwise is expressly provided for in the DTTs.
According to the definitions contained in the DTTs with Cyprus and Luxembourg, to enjoy the reduced tax rate for dividend income, either shares or depositary receipts on shares of a company may be listed on a stock exchange, while to enjoy the reduced tax rate for interest income, the listing criterion applies to shares only.
As regards the Convention between Russia and Malta, the definitions contained therein allow applying the 5% tax rate neither to dividend payments, not to interest payments to public companies with depositary receipts (but not shares) in free float.
As explained by Alexey Sazanov, State Secretary and Deputy Minister, "Following the amendments made to the double taxation treaties with the countries, businesses have raised questions regarding the application of the new provisions, in particular regarding the possibility to apply the reduced tax rate of 5% to dividend and interest payments to public companies. We have thoroughly analyzed the issue and concluded that the provisions of the DTTs with Cyprus and Luxembourg allow applying the reduced withholding tax rate to dividend payments to companies with either shares or depositary receipts on them being traded on an exchange. However, according to the provisions of the DTTs with Cyprus and Luxembourg, that approach is not applicable to interest payments; in this case, only shares must be in free float."
Key conclusions
The communication contains the following conclusions:
- For a company to be treated as public, the criterion of listing on a registered stock exchange can be satisfied either with respect to shares of that company, or with respect to depositary receipts on its shares. Overall, this conclusion is a favourable one, given the previous stand taken by the Ministry of Finance in the Letter mentioned above. At the same time, the communication refers to a number of exceptions:
- The said approach does not apply to the DTT between Russia and Malta;
- It is also not applicable to interest paid from sources in Russia under its DTTs with Luxembourg and Cyprus.
As follows from the communication, the Ministry of Finance believes that the listing criterion applies to shares only, but not to depositary receipts.
- In addition, in the opinion of the Ministry of Finance, the term "registered stock exchange", as used in the DTTs, means any stock exchange incorporated and regulated as such under the laws of any of the Contracting Parties, i.e. Russia or its counterparty under the DTT. Accordingly, if shares or depositary receipts are listed and traded on a stock exchange of a third jurisdiction, this will not count as satisfaction of the listing criterion under the DTTs. This may result in the reduced tax rate being unavailable to some public companies resident in the Contracting States. For example, in the opinion of the Ministry of Finance, if a Cypriot company is listed on the London Stock Exchange or NASDAQ, it will not be treated as public company for the purposes of the DTT.
As of now, the clarifications given by the Ministry of Finance have not been published; therefore, the above conclusions made by reference to the communication may need to be updated following the publication of the clarifications.
If you have any questions related to this communication, please contact your account managers by telephone: +7 495 956-27-90/91