The Way of Paying Dividends to a Foreign Founder as a Legal Entity in Russia

When paying income to enterprise participants, it is necessary to follow the provisions of article 284 of the Tax Code of the Russian Federation. In turn, the obligation to pay income tax by foreign organizations that receive income from the Russian sources is established by article 246 of the Tax Code of the Russian Federation.

Russia and a number of countries have agreements on avoiding double taxation. If the owner of a part of a business has the status of a resident of one of these states, the tax is calculated in accordance with these agreements. As for the dividends to a non-resident legal entity, they are to be paid after the company’s profit amount is determined.

To take advantage of the tax relief, a foreign founder of a Russian organization shall provide a tax agent — the person who pays out the income — with documentary evidence of his or her permanent residence in the territory of the state which the Russian Federation signed the abovementioned bilateral agreement with.

If the tax agent does not receive the necessary documents, the dividend tax will have to be paid at a rate of 15%. However, if the relief right evidence is provided, the funds paid to the state budget can be returned (article 312, paragraph 2 of the Tax Code of the Russian Federation).

This indicator is most often used when you need to determine the enterprise’s efficiency. There are several simple formulas for calculating it. Their general meaning can be formulated as follows: net income is the result of the subtraction of all its costs together with the paid fiscal charges from the total revenue of the company.

The following factor should be taken into account: the distribution of net income between the founders of the organization for dividends may contradict the current legislation. The cases when this procedure is prohibited for legal entities of certain forms of ownership are specified in the following regulatory documents:

• for JSCs — in the Federal Law On Joint-Stock Companies (No. 208-FZ of 26.12.1995);
• for LLCs — in article 29 of the Federal Law On Limited Liability Companies (No. 14-FZ of 08.02.1998).

In order to avoid unexpected situations while interacting with the fiscal authorities, on the day of making a decision on the distribution of dividends among participants, experts recommend arranging a note confirming that there are no legal grounds to regard such a decision as illegal.

The distribution of dividends is the prerogative of the general assembly/meeting of the organization’s shareholders that puts this issue on the agenda. Depending on the degree of the company’s success, it can be considered once a quarter, six months or once a year. The latter option is the most preferable. It will allow estimating the most accurate income amount.

Decisions that determine the net income distribution shall be made exclusively by voting. If there is no quorum, this procedure can be rescheduled.

The net income is distributed in the following areas:

• payments to the company’s founders;
• awarding of the company’s particularly distinguished employees;
• financing of the organization’s actual social programs;
• strengthening the enterprise’s financial reserves;
• replenishment of the priority funds;
• development of business activities.

The purposes that profit can be directed to are often stipulated in the company’s charter. In the same document, the terms during which payments should be made to the organization’s founders are also often set. In the latter case, these financial transactions shall be reflected in the accounting documents.

In other cases, the amount of annual income is announced after a specific date. As a result, this information is not to be reflected in the accounting documents for the last period.

Today, there are several forms of dividend payments prescribed for a legal entity having the status of a non-resident. They can be carried out not only with money but also by transferring certain property to the owner. The admissibility of payments in the latter way should be stipulated in the enterprise’s constitutive documents.

Until the beginning of the current century, dividend payment in the form of the organization’s shares was very popular in domestic practice. But since 2001, it has been used quite rarely because of the loss of its reasonability due to the introduction of certain amendments to article 25, paragraph 5 of the Federal Law On Joint-Stock Companies.

The dividend payment to foreign individuals and companies that are not residents of the Russian Federation is necessarily taxed. In both cases, the amount of the fiscal charge is calculated using the following simple formula:
T = DA x TR,
where T is the required indicator — the tax;
DA — dividend amount;
TR — the tax rate that in general case is 15%, that is, the number 0.15 is to be substituted into the formula.

As for the last parameter, there is one reservation. It was mentioned above that a reduced or zero tax rate may apply to foreign legal entities that are founders of Russian organizations if they are registered in certain states.

In 2019, reduced tax rates are set for residents of such countries as the United Kingdom (10%), Germany (10%), and Italy (5%).

Dividends are considered to be any income that the shareholder received from the company when distributing the net income remaining after payment of all taxes and fees (article 43, paragraph 1 of the Tax Code of the Russian Federation). This income is taxed at the rate of 15% (article 284, paragraph 3 of the Tax Code of the Russian Federation), but in practice, this figure is usually less.

The fact is that Russia has concluded agreements with more than 80 countries that allow avoiding double taxation. In order to take advantage of this benefit, a foreign company receiving dividends shall confirm its permanent location in the Russian Federation and the actual right to this kind of income.

If this requirement is not met, the foreign investor will have to pay taxes in a larger amount than it should. But the amount overpaid to the state budget will be refunded after providing documentary evidence of the permanent location in Russia.