The choice of jurisdiction for registering a company is greatly influenced by the friendliness of tax legislation and the presence of double tax treaties. After all, it is logical that every business person, when planning his business, is interested in obtaining maximum benefits. Dividend tax is one of the main factors that has a direct impact on the desire to register a company in a particular jurisdiction. Let's look at the amount of dividend taxation in the most popular countries among Ukrainian and Russian businessmen.
Regulations
The main document that should be followed when paying income to participants in an enterprise is the Tax Code of the Russian Federation, and specifically.
When it comes to foreign founders, it should be taken into account that the Russian Federation has treaties on the elimination of double taxation with a number of countries, and if the owner of part of the business is a resident of one of these countries, then taxes are calculated in accordance with these treaties. The list of countries is extensive and is definitely worth checking out.
So, Russia has treaties on the elimination of double taxation with the following countries:
| Europe | Austria, Albania, Belarus, Belgium, Bulgaria, Great Britain, Hungary, Germany, Greece, Denmark, Ireland, Spain, Italy, Iceland, Cyprus, Lithuania, Latvia, Luxembourg, Macedonia, Malta, Moldova, the Netherlands, Norway, Poland, Portugal, Romania, Slovenia, Slovakia, Ukraine, Finland, France, Croatia, Czech Republic, Sweden, Switzerland, Yugoslavia |
| Asia | Azerbaijan, Armenia, Vietnam, Israel, Iran, India, Kazakhstan, Qatar, Kyrgyzstan, China, special administrative region of China - Hong Kong, North Korea, Korea, Kuwait, Lebanon, Mongolia, United Arab Emirates, Saudi Arabia, Syria, Singapore, Tajikistan, Turkmenistan, Turkey, Uzbekistan, Sri Lanka, Japan |
| America | Canada, Cuba, Mexico, USA, Chile |
| Africa | Algeria, Botswana, Mali, Morocco, Namibia, South Africa |
| Oceania | Australia, Indonesia, Malaysia, New Zealand, Philippines. |
Dividends to a non-resident legal entity are paid after determining the size of the enterprise's profit.
The procedure for determining net profit
Net profit is one of the main performance indicators of an enterprise. There are several formulas for calculating it. But the general essence is that this is the total revenue of the enterprise excluding all its expenses and taxes paid.
Net profit should be calculated according to the accounting rules set out in letters of the Ministry of Finance No. 03-11-06/2/147 (dated September 20, 2010) and No. 03-11-06/2/134 (dated August 20, 2010) .
It must be taken into account that the distribution of net profit as dividends is not always allowed. Cases when such distribution is prohibited for legal entities of various forms of ownership are set out in the relevant acts:
- for LLCs they are contained in Article 29 No. 14-FZ dated 02/08/1998;
- for JSC - in No. 208-FZ dated December 26, 1995.
To prevent misunderstandings with the tax authorities, it is recommended to create a certificate on the day of making a decision on the distribution of dividends stating that there are no grounds not to allow such a decision.
Who is recognized as a non-resident
Clause 2 art. 207 of the Tax Code of the Russian Federation equates to non-residents citizens who stay within Russia for less than 183 days over 12 consecutive months. Taking into account this situation, not only a foreigner, but also a citizen of Russia who leaves its borders for a long time or periodically may turn out to be a non-resident.
The fact of residence affects the personal income tax rate on dividends received from Russian companies: for residents it is set at 13%, for non-residents - 15% (clause 3 of article 224 of the Tax Code of the Russian Federation).
How are dividend payments processed?
Enterprises can decide to distribute dividends once a quarter, once every six months or once a year. However, a full calculation of net profit is made only at the end of the financial year.
All financial results of the company for the year are determined at the general meeting of shareholders or participants. The period for holding such meetings for LLCs is set from March 1 to April 30. Joint stock companies must hold meetings from March 1 to June 30.
The general meeting of participants/shareholders must decide:
- what part of the net profit will be used to pay dividends;
- in what order this amount will be distributed among shareholders or participants.
- when should payments be made?
The decision is formalized by the minutes of the general meeting or by order or decision of the sole founder on the payment of dividends.
Payment distribution procedure
After determining net profit and deciding on its distribution as dividends, it must be divided among all shareholders or participants. Most often, division is carried out in accordance with the share of each of them. For example, if the founder has 50% of the authorized capital, then his share in dividends is equal to 50%.
Another option: when the procedure for profit distribution is stipulated in the organization’s statutory documents.
Controversial tax issues related to the payment of dividends
Companies, as a rule, distribute part of the profit among participants in proportion to their shares in the authorized capital. However, by decision of the general meeting of company participants, this distribution procedure may be changed. Thus, the amount of dividends to be paid can be distributed in equal shares among the participants of the company (clause 2 of article 28 of Law No. 14-FZ).
For example
, the total amount of dividends distributed by the company between two participants is 1 million rubles. The share of one of the participants is 30%. The company's charter establishes that the amount of dividends due for payment is distributed disproportionately to the shares of participants in the authorized capital. Thus, participants distribute dividends in equal shares, i.e. in the amount of 500 thousand rubles for each participant.
From the point of view of civil legislation, such a distribution procedure is acceptable, but, as we noted above, the concept of “dividends” in tax legislation implies a proportional distribution of shares in the authorized capital. It is the keyword “proportional” that becomes a stumbling block in the qualification of such payments for the purposes of calculating income tax and personal income tax. Despite the direct possibility of disproportionate distribution of dividends, regulatory authorities believe that the part of profit distributed in this way is not recognized as dividends for tax purposes.
In what forms are dividends paid?
Payment of dividends to a non-resident legal entity can be made in several forms. These can be direct cash payments, or some property transferred into his ownership. In the latter case, the possibility of settlements in this way must be indicated in the constituent documents of the organization.
Quite popular is the payment of dividends in the form of shares of the enterprise itself. In the 1990s, this practice was carried out widely in Russia, however, with amendments to paragraph 5 of Art. 25 of the Federal Law “On Joint-Stock Companies” in 2001 it lost its expediency and is now rarely used.
Procedure and timing of payments
The timing and order in which payments will be made depends on the legal form of the company. Limited liability companies are required to make settlements no later than 60 days after the decision is made. However, other temporary norms may also be included in the charter documents of an LLC.
In joint stock companies, the timing is determined by the status of the shareholder and the time of decision making. Specific deadlines are established in Article 42 of the Federal Law “On Joint-Stock Companies”. In both cases, payments must be made in cashless form. It is possible for a foreign parent company to receive dividends by proxy.
Dividend tax in different jurisdictions
Dividends are precisely the income that a joint stock company or LLC distributes among its participants, depending on their contributions. But, as you know, you have to pay tax on the above income.
| A country | General provisions | Tax on dividends in accordance with the double tax treaty with Russia | Tax on dividends in accordance with the double tax treaty with Ukraine |
| Cyprus | does not withhold tax on dividends paid to non-residents. However, a defense tax of 17% is withheld from dividends of residents of the Republic and persons with permanent residence. | until 2021: 5% if the founder invested at least 100,000 EUR in the capital of a legal entity, in other cases - 10%; from 2021 it is planned to increase the tax on dividends in other cases to 15%, and leave 5% if the conditions are met: dividends are received by a company whose shares are listed on a registered stock exchange and at least 15% of the voting shares are in free float + 15% of the company's capital are in the possession of the dividend recipient for 365 days | 5% if the shareholder owns at least 20% of the company’s capital or his contribution to the capital is at least 100,000 EUR; 15% in other cases. |
| Malta | In Malta, the payment of dividends by resident corporations is exempt from taxation, with 15% withheld from resident individuals (including non-residents with permanent residence). | 5% if the person owns at least 25% of the company's capital or his contribution to the capital is at least EUR 100,000; 10% in other cases. As in the case of Cyprus, the Russian government has agreed to increase the tax rate from 2021 to 15%. | 5% if the shareholder owns at least 20% of the company's capital; 15% in other cases. |
| Austria | Dividend tax in Austria is 25% for corporations and 27.5% for other recipients. The tax is withheld directly by the Austrian company and transferred to the tax office. However, in Austria, under certain conditions, dividends are not subject to tax. | 5% if the shareholder directly owns at least 10% of the capital of the company paying the dividends; 15% in other cases. | 5% if the shareholder directly owns at least 10% of the capital of the company paying the dividends; 10% in other cases. |
| Great Britain | Dividend income up to £2,000 is not taxed, then the following rules apply: basic rate 7.5% - from £2,001 to £37,500; increased rate of 32.5% - from £37,501 to £150,000; additional rate 38.5% - from £150,001. | 10% | 5% if the shareholder owns at least 20% of the company’s capital; 10% in other cases (planned to increase to 15% from 2021). |
| Czech | Dividend tax in the Czech Republic is 15%. Companies and non-resident individuals with whom there is no valid agreement on the avoidance of double taxation pay respectively: 15% and 35%. | 10% | no more than 5% if the recipient of the dividends is a company that owns more than 25% of the legal entity of the dividend payer; in other cases 15%. |
| Hungary | Tax on dividends from individuals is not withheld | 10% | no more than 5% if the recipient of the dividends is a company that owns more than 25% of the legal entity of the dividend payer; in other cases 15%. |
| Poland | In Poland, the standard tax on dividends is 19%. However, payments to residents of EU and EEA countries are not subject to tax if certain conditions are met. In particular, the foreign beneficiary is required to own at least 10% of the shares of the Polish company for at least 2 years. | 10% | no more than 5% if the recipient of the dividends is a company that owns more than 25% of the legal entity of the dividend payer; in other cases 15%. |
| Estonia | no tax is withheld on dividends. As an exception, 7% is applied to dividends paid to resident and non-resident individuals if a reduced income tax rate was applied at the time of distribution | — | no more than 5% if the recipient of the dividends is a company that owns more than 25% of the legal entity of the dividend payer; in other cases 15%. |
| Georgia | The tax on dividends in Georgia is 5%, however, the country has special preferential regimes. In particular, registration of a company in the Free Industrial Zone exempts a legal entity from tax, provided that it receives all income from exports. | — | no more than 5% if the recipient of the dividends is a company that owns at least 25% of the legal entity of the dividend payer; in other cases 10%. |
| Canada | Dividend tax in Canada is withheld at 25% when paid by a resident to a non-resident. | no more than 10% if the recipient of the dividends is a company that owns at least 10% of the legal entity of the dividend payer; in other cases 15%. | no more than 5% if the recipient of the dividends is a company that directly or indirectly controls 20% of the legal entity of the dividend payer; in other cases 15%. |
| Hong Kong | Tax on dividends is not withheld | 5% if the recipient of the dividends is a company that directly owns at least 15% of the legal entity of the dividend payer; in other cases 10%. | — |
| Singapore | Tax on dividends is not withheld | 5% if the recipient of the dividends is a company that directly owns at least 15% of the legal entity of the dividend payer; in other cases 10%. | no more than 5% if the recipient of the dividends is a company that directly or indirectly controls 20% of the legal entity of the dividend payer; in other cases 15%. |
| UAE | No tax on dividends | 0% | no more than 5%, provided that the company owns at least 10% of the capital of the legal entity paying dividends |
| Oman | Foreign companies that do not have a permanent establishment and that receive income in Oman pay a tax on dividends of 10%. Dividend tax applies only to dividends paid by JSCs, not LLCs | — | The government has approved a draft agreement providing for: no more than 5%, if the recipient of the dividends is a company that directly or indirectly controls 20% of the legal entity of the dividend payer; in other cases, 10%. |
| Uruguay | Dividend tax in Uruguay is 7% (in some cases, retained earnings are subject to a 7% tax after 3 years of receipt). | — | — |
