Impact For Swiss Corporations

A law published 16 May 2007 introduces a European-style participation exemption regime in Russia. Under the new regime, which comes into effect on 1 January 2008, dividends received by Russian parent companies from qualifying participations will be exempt from tax. On 18 July 2007 the Russian Finance Ministry published (on its internet site www.minfin.ru) a draft "black list" of non-qualifying countries, which influences the ability to benefit of the Russian participation exemption. Almost all known offshore jurisdictions have been included into the list along with some taxing jurisdictions like Cyprus, Luxembourg, Belgium, the United States (Delaware, Wyoming, US Virgin Islands) and ex-UKdependent territories (Jersey, Guernsey, Sark, Alderney) are on this list. The canton of Zug is mentioned on the "black list" as well, whereas all other Swiss cantons remain unaffected according to this published draft. Dividends from companies located in other cantons may therefore benefit from a full dividend exception in Russia.

Currently, dividends received by Russian parents from foreign sources are subject to a 15% income tax rate (9% starting 1 January 2008). Dividend recipients can offset withholding tax levied by the source country if there is a tax treaty in effect between Russia and the jurisdiction of the payor. As such the 5% Swiss withholding tax levied on qualifying investments (minimum of 20% capital investment and in excess of nominal value CHF 200’000) is creditable against Russian income tax according to article 23 of the double tax treaty.

Under the new regime, the following conditions must be simultaneously satisfied for foreign dividends to qualify for the Russian participation exemption:

  • The recipient holds at least 50% of the equity of the distributing entity and the participation confers the right to receive at least 50% of the dividends distributed;
  • The recipient has held the participation for at least 365 days at the time the decision is made to distribute the dividends;
  • The cost of the acquisition of shares in the foreign subsidiary is at least RUR 500 million (approximately USD 19 million); and
  • The distributing entity must not be a resident in a country included on the "black list" issued by the Russian Ministry of Finance.

In general, due to the absence of special legislation for holding companies in Russia, the introduction of a participation exemption should be considered an important step towards reducing the tax burden on existing holding structures with a Russian parent company.

The draft "black list" – if enacted – would leave the canton of Zug with a competitive disadvantage over other Swiss cantons that offer similar or in some cases even better income tax treatment. The incremental tax cost on repatriation out could be substantial depending on figures involved. The obvious tax planning opportunity is to consider a move of the companies’ domicile to another canton while possible retaining branch operation in the current location or to fully migrate to another location in Switzerland.

While still at the draft stage, the development needs to be watched carefully.

Please contact us, should you have questions or if you wish preliminary discussion on tax planning.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.