Starting from January 01, 2021, by contrast to other companies located in the said jurisdictions that will be subject to 15% withholding tax rate with respect to dividends and interest, public companies shall have the right to benefit from the reduced withholding tax rate of 5%, provided that: (i) at least 15% of the recipient company's voting shares are in free float; and (ii) its share in the paying company exceeds 15%.
However, based on the Letter of the Ministry of Finance of Russia N03-08-05/102406 dated November 18, 2020, this benefit may turn out to be inoperative for payments of dividends and interest from Russia - that is, under the most commonly used cross-border scheme – in case not the recipient company's shares but depositary receipts are traded on the registered stock exchange.
In response to the taxpayer’s request, the Ministry indicated that the benefit is restricted to cases when the shares of the Cypriot companies are traded on the stock exchange. However, public companies in Cyprus usually operate through depositary receipts, since the shares of Cypriot companies are not allowed directly to trade on the stock exchange. The case would be similar in other jurisdictions in question.
Professional community and business associations are extremely worried about such an approach and await a possible correction of the Ministry’s position. Indeed, the above clarifications are based on a narrow interpretation of the DTT provisions and are not compliant with the OECD comments and basically Russian legislation, which attributes identical rights to the shares and depositary receipts. Respective letters to the Ministry of Finance are being prepared at the moment.
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NAZALI TAX & LEGAL |