• Tax authorities clarify application of the participation exemption

    Tax authorities clarify application of the participation exemption

    28 October 2021

    Russia’s tax authorities (Federal Tax Service or FTS) issued a guidance letter on 20 August 2021, in which they clarify the requirements to qualify for the participation exemption for dividends where dividends are paid by a Russian company to a foreign company (in this case, a Cyprus company) that has elected to be a tax resident of Russia. 


    Russian tax legislation contains temporary provisions that exempt dividends received by a foreign company from a Russian entity where the foreign company is considered a Russian tax resident and certain other requirements are met. According to the federal law of 23 November 2020 (which repeals application of the participation exemption in certain cases), taxpayers may claim the exemption for a two-year transition period from 1 January 2021 to 31 December 2023. The exemption will no longer apply as from 1 January 2024 unless the government decides to extend the term of the exemption (which is unlikely). 

    To apply the participation exemption, a foreign company must meet all of the following additional requirements:

    • The foreign company must continuously own at least 50% of the authorized capital of the Russian payer company for at least 365 calendar days;
    • The foreign company must be registered in a jurisdiction that is not included in Russia’s blacklist of jurisdictions that have a preferential tax regime and/or do not provide for the disclosure and exchange of information on financial transactions; and
    • The Russian company pays the dividends to the foreign company’s Russian bank account.

    The Russian tax authorities have clarified that the participation exemption also should apply to dividends paid by a Russian company to a Russian bank account held by a Russian branch of a foreign company. This conclusion is supported by Russian civil law, which provides that a branch of a foreign company is not a separate legal entity and represents a subdivision of the foreign company in Russia. 

    • The tax authorities also clarify in the letter that the application of the participation exemption must be in compliance with the anti-avoidance rules in the Tax Code (the “unjustified tax benefit” concept). The tax authorities will presume an unjustified tax benefit is present where a taxpayer reduces or understates its tax base and/or the amount of tax payable as a result of a misrepresentation of information about business operations or taxable assets; 
    • the main purpose of a taxpayer’s transaction is the partial or non-payment of tax and/or to obtain a tax refund; or
    • an obligation relating to a transaction is performed by a party to the agreement concluded with a taxpayer and/or its legal assignee.

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