- If its share capital is not paid in full;
- Before payment of the actual value of a shareholder’s share or part of share;
- If upon adoption of a profit distribution decision, the company shows signs of insolvency (bankruptcy), or if the adoption of such decision gives rise to such signs;
- If, upon adoption of such decision, the company’s net asset value is smaller than its share capital and reserve fund or will be become smaller as a result of the adoption of such decision.
Payment of dividends by OOO11 January, 2018
By Maria Batina, Lawyer of Internal Audit, Expertise and Methodology Department
Below we will describe how limited liability companies should pay dividends as well as address related tax issues and required reporting.
In case of profits, limited liability companies (OOO) are entitled under Article 28(1) of Federal Law No. 14-FZ On Limited Liability Companies dated February 08, 1998 (further “LLC Law”) to send part of their net profits to their shareholders.
From a corporate law standpoint, the term “dividends” is more often used to refer to a shareholder’s income.
From a tax law standpoint, dividends refer to any income received by a shareholder from an organization upon distribution of profits after taxation.
Income is distributed in proportion to the shares owned by shareholders in the share capital of a particular company.
Article 43(1) of the Russian Tax Code provides that dividends refer to any income received from a company upon distribution of profits, including income received by a shareholder.
Decision for payment of dividends
Companies are entitled under Article 28 of LLC Law to adopt a decision for distribution of their net profit among their shareholders. Such decision may be adopted by shareholders at the general meeting every quarter, six months or year. When companies have only one shareholder, such decision is adopted by the sole shareholder.
Companies adopt decisions for net profit distribution on the basis of their financial results.
Dividends are paid to shareholders from net profits, i.e. profits after tax, but LLC Law provides no rules regulating how net profit should be determined.
However, Article 42(2) of Federal Law No. 208-FZ On Joint Stock Companies dated December 26, 1995 provides that the net profit of joint stock companies is determined based on accounting data (as specified in financial statements). This rule is also applied to determine the profit payable to shareholders of OOO based on the principle of analogy set out in Article 6 of the Russian Civil Code.
The financial result from a company’s activity is recorded on account 99 Profits and Losses. At the end of the year, the financial result (balance) recorded on account 99 is transferred to account 84 Retained Profit (Retained Loss) so that account 84 provides information on the company’s amount of retained profit or loss.
So, if a positive figure is recorded on account 84, the company will be entitled to adopt a decision for distribution of its net profit although Article 29 of LLC Law provides for a number of restrictions on this rule.
A company will not be entitled to adopt a decision for profit distribution:
As a general rule, profits are distributed among shareholders in proportion to the shares they own, but LLC Law allows paying dividends to shareholders not in proportion to the shares owned in share capital. To do so, company charters must, however, provide for such possibility by specifying the amounts of profit distribution among shareholders.
To sum up, to distribute profit among shareholders, companies must:
- Determine their financial result;
- Adopt a decision for profit distribution (provided none of the abovementioned restrictions apply);
- The decision for profit distribution must specify the dividend amount payable to shareholders, as well as the date for their payment. If no date of payment is specified in the decision, dividends will be paid within 60 days of the date of adoption of the decision for profit distribution among shareholders.
Non-observance of dividend payment terms
When companies fail to meet the deadline for dividend payment, shareholders are entitled to request payment of the appropriate part of profit within three years of the deadline. This statute of limitations may be extended but should not exceed 5 years.
Shareholders are also entitled to request unpaid dividends in court together with interest as set out in Article 395 of the Russian Civil Code. Such request must be made within the statute of limitations.
Shareholders may request payment of dividends only if a decision for dividend payment has been adopted and provided no restrictions apply upon decision adoption and dividend payment (Article 29 LLC Law).
Personal income tax
Companies act as tax agent when dividends are paid to their shareholders, and when dividends are paid to an individual, such payment is subject to 13% personal income tax (Article 226(1, 2, 4, and 6) Russian Tax Code; Federal Tax Service Letter No.ОА-3-17/2829@ dated June 23, 2016).
If a shareholder of ООО is a foreign national, then dividends paid to such shareholder will be taxed at 15% (Article 224(3) Russian Tax Code).
Taxation rules other than those set out in the Russian Tax Code may be provided in international treaties signed by the Russian Federation and must be applied in accordance with tax regulations. In such case, the rules and regulations provided in international treaties apply as prescribed in Article 7(1) of the Russian Tax Code.
It follows that, if an international treaty signed by the Russian Federation provides for partial or full tax exemption in the Russian Federation for any types of income received by individuals who are residents of a foreign country, the tax agent will be entitled not to withhold personal income tax or withhold it at a rate lower than that provided by Russian law (Article 232(5) Russian Tax Code).
However, in such case, the tax agent must submit a special report to tax authorities. Reports on foreign nationals and income paid to them from which tax was not withheld are submitted to the tax authority at the place of registration within thirty days of the date of income payment.
The information submitted should allow identifying the taxpayer, the type of paid income, the amount of paid income and the date of payment. Information allowing taxpayer identification includes, among others, passport details, citizenship, etc.
Since the Russian Tax Code provides for no approved form and method to submit such information, tax agents are entitled to submit the required information in no particular form (Federal Tax Service Letter No. BS-4-11/6417@ dated April 13, 2016). In addition, income not subject to taxation does not need to be declared in personal income tax return form (6-NDFL).
Standard, social and property tax deductions are not applied upon calculation of personal income tax on dividends (Federal Tax Service Letter No. ОА-3-17/2829@ dated June 23, 2016). Even if dividends are paid several times per year, tax is calculated for each payment separately, i.e. not on an accrual basis (Russian Ministry of Finance Letter No. 03-04-06/20834 dated April 12, 2016).
Dividends paid to Russian legal entities are subject to 13% profit tax (Article 284(3(2)) Russian Tax Code).
0% profit tax rate may apply to Russian companies if, on the date of adoption of the decision to pay dividends, the company to which dividends are paid owns a stake of at least 50% for at least 365 consecutive days (Article 284(3(1)) Russian Tax Code; Russian Ministry of Finance Letter No. 03-03-06/1/79221 dated December 29, 2016 and Letter No. 03-03- 06/1/19746 dated April 07, 2016).
The dividends received by foreign legal entities from Russian companies are subject to 15% profit tax (Article 284(3(3)) Russian Tax Code) unless otherwise provided in double taxation treaties.
Reporting upon payment of dividends
Upon payment of dividends to individuals, the following reports are submitted:
- Personal income tax return form 2-NDFL— to be submitted to the Federal Tax Service before April 01 of the year following the reporting year (Article 230(2) Russian Tax Code; Russian Ministry of Finance Letter No. 03-03-06/1/59890 dated October 19, 2015);
- Personal income tax return form 6-NDFL— to be submitted to the Federal Tax Service quarterly no later than the last day of the month following the reporting quarter, and if annually, before April 01 of the year following the reporting year.
Dividends paid to legal entities and tax withheld from such payment are to be declared in profit tax returns. This rule also applies to companies operating under the simplified tax system (Article 275(3) and (7(1, 3)), Article 286(5(1)), Article 289(1), Article 346.11(5) Russian Tax Code; Item 1.7 Guidelines for Filling out Profit Tax Returns).
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