The Supreme Commercial Court of the Russian Federation (the “SCC”) invalidated the letter of the Ministry of Finance of the Russian Federation (the “Ministry”), which prohibited the application of the zero rate of profit tax in respect of dividends paid from undistributed profit in previous years. We commented on this letter in our August 2012 issue of the Legal Digest.
Pursuant to this letter if, for example, in the absence of net profit in 2010 company paid to its shareholder dividends in 2011 from undistributed profit of previous years then such company has no right to apply the zero rate of profit tax in regard to such dividends, but must apply the generally established rate of 20 percent. The Ministry based its position on the argument that Law No. 368-FZ dated 27 December 2009 established that Article 284 Subarticle 3 of the Tax Code of the Russian Federation (the “Tax Code”) applies from 1 January 2011 only in respect of dividends accrued due to the results of a company's activity for 2010 and the periods following that year.
However, the SCC stated that according to Article 5 Subarticle 2 of the Law No. 368-FZ does not contain additional restrictions in the form of prohibitions on applying the zero rate to dividends paid from undistributed profits of previous years.
The SCC noted that net profit and undistributed profit of previous years are identical in their economic nature and this excludes the different tax treatment of dividends based on the reporting period in respect of which the company decided to apply part of the profit to pay dividends. Consequently, the SCC came to the conclusion that the letter of the Ministry contradicts the Tax Code and therefore held it to be invalid.
Taking into account the fact that the letter was forwarded to tax authorities for use as guidance in their practical activities, taxpayers challenging the position of the tax authorities have a real possibility of succeeding in court.
[Decision No. VAS-13840/12 of the Supreme Commercial Court of the Russian Federation "On Recognizing Letter No. 03-03-10/34 of the Ministry of Finance of Russia dated 4 April 2012 as Contradicting the Tax Code of the Russian Federation", dated 29 November 2012]