Russia: Withholding tax and disclosure procedures for Russian equities

04.07.2014

Effective

7 July 2014

the withholding tax and disclosure procedures described below will apply to dividends paid on Russian equities with a Record Date1 as of 7 July 2014.

Background

Russian Law 306-FZ establishes, among other things, that the information required by the tax agent must be presented in all details, in the correct format and on a voluntary basis, before payment date and that, if this requirement is not met, income entitlements under Russian securities will be subject to a tax rate of 30%.

In addition, the Russian Tax Authorities are entitled by Russian law to request, after the payment of income, disclosure of the final beneficial owners and submission of the documents mentioned in "Ad-hoc tax disclosure" below.

Furthermore, where a DTT provides for any limitation of tax privileges, the Russian Tax Authorities may request that the taxpayer provide (at the time of filing documents certifying the taxpayer’s tax residency status) an additional certificate issued (in any form) by a competent authority to certify that the taxpayer claiming tax privileges under the DTT is eligible to make such claim.

As a consequence, Russian equities held with Clearstream Banking2 for which no disclosure has been provided will be subject to the maximum 30% tax rate.

Applicable withholding tax rates

After submission of the required information within the prescribed deadlines, the following reduced tax rates are available:

  • Double Taxation Treaty (DTT) rates: if the final beneficial owner is a resident of a country that has signed a DTT with Russia and complies with tax beneficial ownership and Certificate of Tax Residence (COTR) requirements set by the Russian Tax Code. The COTR will not be requested before distribution of income entitlements but should be in place and available at any time upon request (see "Ad-hoc tax disclosure" below).
  • 15%: if the final beneficial owner is not resident in a DTT country or is not eligible to obtain the DTT rate but discloses his tax residency and holdings (see Exception below).
  • 9%: if the final beneficial owner is a Russian tax resident.

The maximum tax rate of 30% will be applied for undisclosed positions.

Exception: For foreign investment funds (investment companies) that are legal entities that qualify as collective investment schemes under the laws of their jurisdiction, the disclosed information shall not include information on investors (or their fiduciaries).

However, based on the current interpretation obtained from the NSD, the Letter No.03-08-05/15476 delivered by the Russian Ministry of Finance clarifies the tax treatment of income from securities paid by a Russian depository to a Luxembourg collective investment fund as follows:

  • If final beneficiaries of a Luxembourg collective investment fund are not disclosed, the Luxembourg collective investment fund must be subject to the withholding tax at the rate of 30%.
  • If final beneficiaries are disclosed, they can obtain either rates defined by DTT or 15% defined by the Tax Code, depending on their residency and eligibility.

Impact on customers

Relief from withholding tax is available to eligible beneficial owners through CBL by means of relief at source and quick/standard refund procedures as described in the following sections.

Relief at source

In order to benefit from relief at source on income from Russian equities, CBL customers will need to ensure that we receive the following documents at the latest one business day after Record Date, by 10:00 CET.

One-Time Certificate for Russian Equities

The One-Time Certificate for Russian Equities must be submitted by all customers, regardless of the residency and status of the beneficial owners, before the first trade in Russian equities or at the latest before the first impacted income payment date and must state that the customer holds the securities, either:

BOX 1 – Standing instruction: Exclusively for one single beneficial owner (which may be the customer or his underlying client) eligible for reduced tax rates. By ticking the first box, a reduced tax rate is applied by default at source on all further income payments. The customer must, in order to comply with the reporting obligations, complete the beneficial owner’s data as described in the One-Time Certificate and authorise CBL to forward these details together with the total holding to the Russian authorities (through the depository and agents) for each income paid to the customer’s account.

Or

BOX 2 – Standing instruction: On behalf of several beneficial owners (including the customer, when applicable), being:

  • Eligible to obtain a reduced tax rate;
  • Exclusively either legal entities or individuals3 and either:
    • Residents of the same country, whether having a DTT with Russia or not; or
    • Russian residents.

By ticking the second box, the applicable reduced rate of tax is applied by default at source on all further income payments. The customer must, in order to comply with the reporting obligations, complete the beneficial owners’ data as described in the One-Time Certificate and authorise CBL to forward these details together with the total holding to the Russian authorities (through the depository and agents) for each income payment made to the customer’s account.

Or

BOX 3 – Instruction per payment: On behalf of several beneficial owners that are residents of different countries and eligible for reduced rates of tax as above but are:

  • Not willing to disclose their holdings and country of residence; or
  • Not eligible to obtain a reduced tax rate.

In addition to the One-Time Certificate, the customer is required to submit, before each income payment, a Breakdown of Holdings as explained below.

One-Time Certificates that have more than one box ticked are not valid and will be rejected.

A Breakdown of Holdings

When Box 3 was ticked in the One-Time Certificate, a Breakdown of Holdings must be provided, before each impacted income event, via SWIFT MT599 or CreationOnline free-format message indicating:

  • ISIN;
  • Payment date;
  • Customer’s CBL account number;
  • Customer’s total holding;
  • Per country of residence and legal status of eligible beneficial owner:
    • The country of residence;
    • DTT / Russian Tax Code applicability;
    • Legal Status (individual/legal entity);
    • Total holding;
    • Tax Rate to apply;
  • The total holding that remains undisclosed or not eligible to obtain reduced tax rate.

All these declared positions must be accurate on the relevant Record Date indicated in CBL’s tax notification at 19:00 CET, meaning that no further transactions are allowed after the submission of the Breakdown. If there is a discrepancy between the declared positions and the customer’s total holding visible in CBL’s books, the application for tax exemption will be rejected and, consequently, the maximum tax rate of 30% will be applied.

Furthermore, if Box 3 of the One-Time Certificate is ticked and we receive no Breakdown of Holdings by the prescribed deadline, the customer’s total holding will be considered as being undisclosed and, as a consequence, the maximum standard tax rate will be applied.

Quick refund

A quick refund of withholding tax is available for beneficial owners eligible for tax relief if the required certification has not been provided within the relief at source deadline.

The eligibility criteria and certification requirements are the same as for relief at source (see above).

In addition, if a One-Time Certificate with Box 1 or 2 ticked is submitted for a quick refund application, customers are obliged to send in addition a SWIFT MT599 or CreationOnline free-format message indicating the ISIN and payment date for which the standing instruction must be applied.

Deadline for quick refund

In order to benefit from a quick refund from Russian equities, customers must ensure that we receive the above-described documents at the latest 23 business days after the actual payment date (when dividends are paid by the NSD) by 10:00 CET.

Standard refund

No standard refund is currently offered by CBL for Russian equities. As soon as such service is available, we will inform customers accordingly.

Ad-hoc tax disclosure

When submitting the per-country of residence information to CBL, the customer must make sure that the final beneficial owner holds documents certifying his tax residency status as at the income payment date, as, pursuant to the Russian Tax Code, the tax residency status of a beneficiary of income must be specified in summary information on the basis of documents certifying such tax residency status (Certificate of Residence, see below).

Customers are responsible to comply with the obligations of articles 214.8 and 310.2 of the Russian Tax Code and provide the documentation as described below.

In accordance with article 214.8 of the Russian Tax Code, in the course of an office audit and/or field audit conducted to ensure the accuracy of tax calculation and payment by a Withholding Agent with respect to foreign nominee securities accounts in accordance with article 214.6 of the Russian Tax Code, tax authorities may request the following documents:

  • A copy of identification documents of the individual who, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation;
  • A copy of identification documents of the individual on whose behalf the trustee, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation;
  • A copy of documents and original documents certifying that the individual, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation, and documents certifying the tax residency of such individual; and
  • Other documents proving the accuracy of tax calculation and payment, including documents proving the accuracy of information disclosed by the foreign nominee.

Where a DTT provides for any limitation of tax privilege, the Russian Tax Authorities may request that the taxpayer provide (at the time of filing documents certifying the taxpayer’s tax residency status) an additional certificate issued (in any form) by a competent authority to certify that the taxpayer claiming tax privilege under the DTT is eligible to make such claim.

In accordance with article 310.2 of the Russian Tax Code, in the course of an office audit and/or field audit conducted to ensure the accuracy of tax calculation and payment by a Withholding Agent with respect to foreign nominee securities accounts in accordance with article 310.1 of the Russian Tax Code, the tax authorities may request the following documents in the manner stipulated by the Russian Tax Code:

  • A copy of documents evidencing the state registration and full name of the organisation that, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation;
  • A copy of documents evidencing the state registration and full name of the organisation on whose behalf the trustee, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation;
  • A copy of documents and original documents certifying that the organisation, as at the date determined by the Russian organisation’s decision to pay income on the securities, was authorised to exercise the rights attached to the securities issued by such Russian organisation, and documents certifying the tax residency of such organisation; and
  • Other documents proving the accuracy of tax calculation and payment, including documents proving the accuracy of information disclosed by the foreign organisation acting on behalf of third parties.

Certificate of Tax Residence (COTR) requirements

The format of the COTR is not explicitly defined by the Russian Tax Code and specific wording and format may therefore vary subject to jurisdiction. In these circumstances, format interpretation, validity confirmation and overall reliability of such document for withholding tax purposes may give rise to uncertainties. However, the Russian Tax Authorities have detailed a list of the standard requirements for the COTR format and standardised wording for reference purposes, as follows:

  • COTR must be issued by the competent authority (indicated in the relevant DTT).
  • COTR must be issued before the income payment date.
  • COTR must indicate beneficial owner of income, full name and tax identification number.
  • COTR is valid for a tax period in which income payments are made (calendar year) and should be renewed each new period. One COTR is valid for all payments made in the relevant tax period.
  • It is strongly recommended that the COTR has a reference to the DTT; for example, "[Beneficial Owner of Income] is a tax resident of [Country] in the meaning of double tax convention between [Country] and Russian Federation".
  • COTR must be signed by the authorised competent body officer and stamped.
  • COTR requires consular legalisation or apostil (for countries joined to Hague convention dated 5 October 1961) unless the certificate is issued by the country with which Russia has mutually agreed to accept documents without their legalisation or apostil (currently, Latvia, Luxembourg and Switzerland).
  • Apostil must be made on the original COTR and all sections must be filled in.
  • Apostil must verify the signature of the competent body officer.
  • Apostil of the COTR's notary copy is not valid.

Where a DTT provides for any limitation of tax privileges, the Russian Tax Authorities may request that the taxpayer provide (at the time of filing documents certifying the taxpayer’s tax residency status) an additional certificate issued (in any form) by a competent authority to certify that the taxpayer claiming tax privilege under the DTT is eligible to make such claim.

Deadline for ad-hoc tax disclosure

The deadline within which the Russian Tax Authorities may request additional information through NSD is three years following the end of the year in which the income was paid. CBL will immediately inform customers after receipt of the official letter. The deadline within which the documentation must be received back from customers is at the latest eight (8) weeks after the date included in the letter.

Capital gains tax

There is no capital gains tax withheld through Clearstream Banking on Russian equities held in Clearstream Banking. Capital gains tax may however be payable on specific gains. Clearstream Banking does not assist in this regard. Please consult your tax advisor for further information.

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1. Record Date must be set between 10 and 20 calendar days after the Annual General Meeting and payment date must be set within 25 local business days after Record Date.
2. Clearstream Banking refers to Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Register of Commerce and Companies under number B-9248 (CBL).
3. Articles 310 and 214 of the Russian Tax Code validate two statuses of eligible beneficial owner: legal entity and individual. Any other status included on the One-Time Certificate or Breakdown of Holdings is considered as invalid and will be rejected.