Generally, one of the main concerns of foreign investors in Russia is the transfer of funds out of the country, most frequently in regards to dividends transfers. To be clear on this point, the payment of dividends by a Russian company to a foreign shareholder is subject to taxes, but is not generally restricted by Russian laws.
Roots of Concerns and Actual Restrictions
Before the introduction of the Currency Law in 2004, transfers to foreign bank accounts were capped at USD 10,000. The Currency Law and amendments to the law dated 2006 and 2007 respectively removed this restriction and oversaw a guarantee of the free movement of capital between residents and non-residents (Art. 6).
The provision that may actually constitute an obstacle for the transfer is foreseen by the Law on Countering the Money Laundering and Financing of Terrorism of 2001 (Art. 6.1.2). Basically, the transfer of more than RUB 600,000 (around USD 8,200) to banks or beneficiaries domiciled in countries which do not follow the recommendations of the Financial Action Task Force (FATF) shall go through the control procedures of Russian banks. In cases where a depositor could not clarify the grounds of the transfer, the bank can reject the transfer and implement other negative measures in case of any further doubts.
Currently, the list of suspicious countries includes: North Korea, Iran, Albania, the Bahamas, Barbados, Botswana, Cambodia, Ghana, Iceland, Jamaica, Mauritius, Mongolia, Myanmar, Nicaragua, Pakistan, Panama, Syria, Uganda, Yemen and Zimbabwe.
These additional verification procedures may be foreseen by banks in your country due to economic sanctions introduced against Russia since 2014. Generally, it will cause the delay of the arrival of funds to your personal bank account for the period they are stuck within the verification procedure.
Tax Clearance Requirement
Returning to the point of the major requirement for the dividend tax clearance mentioned at the beginning, the general rate of tax on dividends is 15% and may vary based on the Tax Code.
Lower dividend tax rates may be applied pursuant to double taxation treaties between the countries of the depositor and the beneficiary. For example, shareholders from China are eligible to a 10% dividend tax rate. In scenarios where the Chinese company directly owns at least 25% stake in the registered capital of a Russian subsidiary which is equal or more that EUR 80,000, it may also receive a 5% dividend tax rate.
In order to enjoy these preferential rates, a foreign investor (foreign legal entity or individual) that receives dividends from a Russian company must provide a legalized (or appostalized) residency certificate in the state which has such double taxation treaty with Russia.
Where a foreign company has established a branch office in Russia, the transfer of funds by the branch to the parent company is not considered to be payment of dividends and is exempt from the tax on dividends. In this case the branch is subject to the payment of profit tax (the general rate is 20%) after which the branch office may repatriate profits to the parent company.
On March 25, 2020, Russian President Vladimir Putin announced that the country is ready to consider unilateral withdrawal from the double taxation agreements with countries that do not agree with the country’s measures on dividends. Vladimir Putin proposed to use a general dividend tax rate of 15%. The Ministry of Finance of the Russian Federation announced clarifications that this amendment will be introduced only for countries of offshore jurisdictions, such as Cyprus, and will begin to be levied from 2021.
On August 3, 2020, the Ministry announced that Russia has rescinded the double taxation agreement with Cyprus. Investors may see more amendments in the upcoming months in this sphere, therefore it is better to keep yourself updated on these issues.
In case you have any concerns regarding repatriation of profits from Russia or other FDI issues please do get in touch with our team of legal experts at D’Andrea & Partners through email@example.com.