Repatriating profits from Russia
What is the most common way of repatriating profits from Russia?
If you own stock in Russian entities, either as a stockholder in a Russian corporation or a member of a Russian limited liability company, profits earned in Russia may be paid to investors as dividends.
Stockholders may declare profit distribution on a quarterly basis, every 6 months or annually.
Are there any restrictions on dividend payments?
Yes. The law strictly restricts the distribution of dividends. For example, profits cannot be distributed to investors when:
- a stockholder has failed to make a full contribution to capital;
- the company is insolvent or will be insolvent as a result of profit distribution;
- the company’s net asset value is negative or will be negative as a result of profit distribution.
We have declared dividends. Do we have to pay income tax?
Yes. Dividends are generally recognized as taxable income.
Please note that foreign investors may be subject to double tax treaties entered into between Russia and their state of residence. Many tax treaties allow foreign investors to pay income tax on dividends in the state of their residence.
Please bear in mind that tax treaties may provide for additional specific requirements, such as minimum capital contribution, maximum tax rates for dividends and so on. We therefore strongly recommend getting the opinion of a tax adviser when you apply double tax treaty provisions to dividend income.
If foreign investors – either non-residents or foreign business entities - decide to pay tax on dividends in Russia, they should pay 15 % income tax on distributed profit.
Some countries have pass-through business structures. Is there anything similar in Russia?
A pass-through entity is a special business structure set up to avoid double taxation. Such entities do not pay corporate income tax. Corporate income is distributed to the owners who pay income tax.
Russian corporations and limited liability companies cannot avoid double taxation. This means that entities pay income tax on profit earned, and then stockholders also pay tax on dividend income.
Double taxation is perhaps the only downside of profit distribution through dividends.
We would like to avoid double taxation. Is there any alternative to dividends?
Some companies disguise distributed profits as interest or service fees.
For example, a parent company lends money to its Russian subsidiary and receives interest or provides management services to its Russian subsidiary and receives fees.
The Russian company will then deduct interest and fees as business expenses which, in turn, will result in a smaller taxable income so that the funds actually distributed are not taxed at corporate level.
Interest income and fees received by stockholders will then be subject to income tax, but only once when received by stockholders.
Please bear in mind that such methods are restricted and may sometimes be treated as unlawful transactions.
What are the restrictions on interest?
Russian thin capitalization rules limit the deductions for interest payments by imposing a debt to equity ratio of 3:1.
If interest on any debt exceeds the threefold ratio to equity, it will not be deductible for tax purposes.
How can Accountor help?
Accountor Russia’s tax experts can advise on and devise the most suitable and legally safe scheme for profit repatriation from Russia. We would be pleased to assist you, drawing from our 25 years of tax planning experience and advising foreign companies of all sizes, including Fortune 500 companies, in Russia, so please, feel free to contact us.