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In brief

New amendments to the Russian Tax Code1 (“Law“) will allow individuals to reduce the Russian individual income tax on profit distributions from foreign companies and unincorporated vehicles (e.g., trusts) sourced from dividends originally paid by Russian companies that are subject to Russian withholding tax (“indirect tax credit“).

The Law eliminates the existing double taxation and economically equates ownership of Russian assets via Russian and foreign companies (trusts). At the same time, the Law eliminates the 0% tax rate previously available for Russian companies on dividends received through intermediary foreign companies that are not beneficial owners of income. This will allow, for example, the application of the 15% Russian withholding tax rate on dividends paid to Cypriot and Luxembourg intermediary companies under the recently amended tax treaties. Some historic holding structures will get a deferral; for them the new rules will apply as of 2024.

Indirect tax credit

As of 1 January 2021, individuals who are Russian tax residents can use the indirect tax credit, i.e. to reduce their Russian individual income tax on dividends by the amount of the Russian withholding tax originally paid at the distribution of Russian sourced dividends up the shareholding chain via foreign companies and unincorporated vehicles (including trusts and foundations), subject to the following requirements:

  • an individual participates directly or indirectly in the foreign company receiving Russian source dividends;
  • the amount of declared income from the foreign company (structure) (i) corresponds to the participation share of the individual in such foreign company (structure) and (ii) does not exceed the amount of dividends indirectly paid by a Russian subsidiary through the shareholding chain, as adjusted by the Russian withholding tax amount;
  • an individual has received the dividends within 180 days from the date when such dividends were originally distributed by the Russian company;
  • the foreign company receiving the dividends is established in a jurisdiction that is not included in the “black list” of jurisdictions maintained by the Russian Federal Tax Service.2

The requirements imply that Russian source dividends will need to be sequentially transferred up the shareholding chain and should not be “mingled” with income from other companies. These limitations may trigger practical difficulties and dividend payments will need to be planned and documented carefully.

To apply the indirect tax credit, a Russian beneficiary would need to declare the full amount of dividends distributed by a Russian subsidiary in a 3-NDFL form for Russian individual income tax purposes and reduce it by a tax credit equal to the withholding tax amount as well as provide confirmation documents along with the tax return.

Increase of Russian withholding tax on dividends

Many Russian groups of companies use foreign holding companies to hold Russian assets for various reasons. But taking into account the limited functions of such holding companies and given the pressure from the harsh application of the Russian beneficial ownership rules, some Russian companies have switched to the so-called “look-through approach” ignoring intermediary holding companies for Russian tax purposes. The Russian “look-through approach” rules initially allowed Russian owners to apply the participation exemption as if the dividends had been distributed directly from the Russian subsidiary.

Given the recent amendments to the protocols to the Russian tax treaties with Cyprus, Malta and Luxembourg increasing the withholding tax rates up to 15% on dividends and interest as of 2021 (see our Legal alert dated 16 September 2020), Russia reconsidered the whole availability of the participation exemption for the withholding tax on dividend payments through foreign holding companies even for structures applying the “look-through approach” and transferring the dividends to the Russian ultimate shareholders. The limitations also cover foreign holding companies that voluntarily declared themselves Russian tax residents.

The Russian participation exemption under the “look-through approach” will remain in force during the transition period (from 1 January 2021 to 31 December 2023), subject to the special additional requirements:

  • Russian companies claiming beneficial ownership of the dividends should receive such dividends (or other type of passive income in a similar or higher amount) on their bank accounts within 180 days from the date when such dividends are initially distributed by the Russian subsidiary;
  • foreign companies that are Russian tax residents should be registered in jurisdictions that are not included in the “black list” of jurisdictions maintained by the Russian Ministry of Finance  and should receive the Russian source dividends on their accounts in Russian banks.

Tax benefits on sale of shares in foreign companies

Following the upcoming increase of the Russian withholding tax on dividends, many Russian groups will be looking to exclude intermediary companies from their holding structures or liquidate them and to streamline ownership of Russian assets by reducing the number of intermediaries before the end of the transition period.

The Law will allow for “tax-free” restructuring of holding structures starting from 2021 by extending application of the 0% tax rate on income from sale of shares (participation interest) to cover foreign as well as Russian companies, provided that:

  • a Russian taxpayer has owned shares in the foreign company for at least 5 years;
  • Russian real property directly or indirectly constitutes less than 50% of the assets of the foreign company;
  • the foreign company is registered in a jurisdiction that is not included in the “black list” of jurisdictions maintained by the Russian Ministry of Finance.3

Actions to consider

1. Consider using foreign companies (unincorporated vehicles, including trusts and foundations) for asset protection and succession planning purposes with no additional Russian tax costs subject to the indirect tax credit requirements;

2. Review potential options for restructuring shareholding chains (including using alternative foreign jurisdictions, Russian holding companies and new instruments, such as special administrative regions) to maintain tax efficiency;

3. Consider using the transition period under the Law when planning dividend distributions and other income payments during this period, subject to the resulting tax burden.

Click here to access the Russian version.

1 Federal Law No. 374-FZ “On Introducing Amendments into Part One and Part Two of the Russian Tax Code and Certain Laws of the Russian Federation”, dated 23 November 2020.

2 Order of the Russian Federal Tax Service No. ММВ-7-17/[email protected], dated 11 October 2019, “On Approving the List of Countries (Territories) Not Exchanging Information for Tax Purposes with Russia and on Repealing Order of the Russian Federal Tax Service No. ММВ-7-17/[email protected], dated 4 December 2018”.

3 Order of the Russian Ministry of Finance No. 108n, dated 13 November 2007, “On Approving the List of Countries and Territories Providing Beneficial Tax Treatments and (or) Not Requiring Disclosure or Filing of Information when Executing Financial Transactions (Offshore Jurisdictions)”.


Sergei Zhestkov is a partner in the Moscow office of Baker McKenzie and a licensed Russian advocate. He is experienced in advising multinational corporate and private clients on the broad scope of tax and asset protection issues, including international tax and trust planning and structuring.


Kirill Vikulov is a partner in the Tax law practice group of Baker McKenzie’s Moscow Office. He has extensive experience in advising Russian and multinational clients on a wide range of complex tax issues, including M&A deals, joint ventures, international holding and financing structures, and various financial and capital markets transactions. Prior to joining Baker McKenzie in 2007, Kirill worked as a tax consultant in the international tax structuring department of an international audit company. Kirill is also a visiting professor of international tax law at MGIMO.


Maxim Kalinin serves as managing partner of Baker & McKenzie’s St. Petersburg office and head of the Mergers & Acquisitions, Corporate, Real Estate & Construction and Employment practice groups. He was named a European legal expert in Russia by European Legal Experts 2008, and was recognized by Chambers Europe "for his expertise in M&A and real estate work". He is also cited by Legal 500, Who’s Who Legal 2009, The International Who’s Who of Real Estate Lawyers 2008 and the Private Equity Handbook 2007/2008 for his corporate and real estate work