Recently, the Federal Tax Service published Letter No. 03-08-13/55719 issued by the Ministry of Finance on 18 December 2013 clarifying the tax treatment of dividends paid by a Russian company to its shareholder, tax resident in Sweden, based on the Russia-Sweden Income Tax Treaty (1993) (Treaty).
The Ministry of Finance pointed out that pursuant to article 10 of the Treaty, dividends paid by a company resident in Russia to a resident of Sweden may be taxed in Sweden. However, such dividends may also be taxed in Russia, but the tax shall not exceed 5% of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly 100% of the capital of the company paying the dividends and the foreign capital invested exceeds USD 100,000 or the equivalent in Russian rouble.
The Ministry of Finance pointed out that the mentioned capital investment threshold could be paid not only all at once, but also in instalments, and over more than 1 year. Once the above capital investment threshold is reached, the right to the reduced withholding tax rate arises. The threshold is also not subject to adjustments depending on the fluctuations of the currency or stock exchange rates.
As the shares of the Russian company were acquired by the Swedish shareholder as a contribution into the share capital from another Swedish company, the documents presented by the tax agent on the transfer of shares did not contain any information on the amount of share capital and valuation of stock. However, based on the information provided by the taxpayer, it is acknowledged that the Swedish company owns 2,456,056 shares with a nominal value of RUB 1, which constitute 100% of the share capital of the Russian company.
Pursuant to article 99 of the Civil Code and paragraph 1 article 25 of the Federal Law "On Joint Stock Companies", the share capital of a joint stock company consists of the nominal value of the shares acquired by the shareholders.
Consequently, the Ministry of Finance concluded that the reduced withholding tax rate on dividends paid by the Russian company should apply provided the amount of the nominal value of shares in the share capital of the Russian company constitutes at least USD 100,000.
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