New law comes into effect setting out legal framework in respect of unclaimed dividends and establishing tax benefit in relation to property received by a company for the purposes of increasing its net assets
On 31 December 2010, Federal Law No. 409-FZ On Making Amendments to Certain Legislative Acts of the Russian Federation in Respect of Regulation of Dividend Payouts (Profit Distribution) (the "Law") was promulgated. The Law sets out the legal framework in respect of unclaimed dividends and exempts from taxation income in the form of property, and property and non-property rights, contributed to a company by its shareholders in order to increase the company's net assets.
Amendments to corporate legislation
In particular, the Law has made adjustments to the statutory basis for the procedure and term according to which joint-stock companies and limited liability companies pay dividends (distributed profit).
The Law states that the term for paying dividends must not exceed 60 days from the day when the decision to pay the dividend was adopted. (Previously, the Federal Law On Joint-Stock Companies allowed a company to specify a longer term for paying dividends in its charter.) If no term is specified in the company charter or in a resolution of a general shareholders' meeting, it will be 60 days from the date when the resolution to pay the dividends was adopted.
In addition, the Law states that a company may not grant to individual shareholders rights to receive a dividend in advance of other shareholders of the same class of share. Dividends on shares of any one class must be paid out simultaneously to all owners of shares of that class.
The Law sets out a general limitation period for a shareholder to claim a dividend which has been announced by the company, being three years from the date when the term for paying out the dividend (set out in the Law) has elapsed. The charter of a joint-stock company can provide for a longer limitation period for claiming announced dividends, however this cannot exceed five years from the date when the term for paying out the dividend has elapsed. If the limitation period is missed the shareholder cannot claim the dividend unless its failure to claim was due to pressure of violence or threats.
The Law states that upon the expiry of the limitation period, unclaimed dividends are to be recorded as undistributed profit of the company. This provision seeks to eliminate the risk that the retained dividends are recorded as the company's non-operating income which would mean they would again become subject to taxation.
Necessary amendments relating to the above have been made to the Federal Law On Limited Liability Companies.
The Law also prohibits decreasing the charter capital of a joint-stock company until the term for paying the dividend has elapsed, and if the dividend is not paid in full during this term, until the limitation period for claiming the dividend has elapsed. No such prohibition is imposed in respect of a limited liability company.
Amendments to tax legislation
The Law amends Article 251 of the RF Tax Code which sets out a list of income not recorded for corporate income tax purposes. The Law also has provided a new exemption from taxation of income, being property, and property or non-property rights, in the amount of their monetary value, which are contributed to an economic entity or partnership with a view to increasing its net assets, including by means of establishing additional capital and/or funds, by the company's shareholders or participants.
This creates opportunities for providing tax-free financing to Russian organisations not only by majority shareholders owning over 50% of the share capital (who already enjoy a somewhat similar tax exemption under paragraph 11 of Article 251.1 of the RF Tax Code), but by all shareholders, regardless of the size of their shareholding in the organisation to which financing is provided. The only legal criterion of the new tax exemption is that the purpose of financing must be to increase the organisation's net assets which, it appears from a literal construction of the Law, do not need to be negative prior to the financing. Furthermore, in accordance with the new tax benefit, the exemption applies not only to income in the form of property but also to property and non-property rights. This makes it more appealing than the tax exemption provided by paragraph 11 of Article 251.1 of the RF Tax Code which only extends to property received from a shareholder who owns over 50% of the shares or from a subsidiary.
In addition, the new tax benefit set by the Law does not specify any time constraint in respect of disposing income received in non-monetary form. This is unlike the exemption in paragraph 11 of Article 251.1 of the RF Tax Code which only applies if the property received (not being monetary funds) is not transferred to third parties within a year.
Alongside the above, the new tax benefit also applies when:
- net assets are increased concurrently with a reduction or termination of an obligation of the company to its shareholders or participants, if the net assets are increased in accordance with the provisions of Russian legislation or the constitutional documents of the organisation, or at the discretion of a shareholder (participant) of a company or partnership; and
- dividends unclaimed by shareholders are recorded as retained profit of the company.
Therefore, the Law sets out exemption from taxation not only when a company records unclaimed dividends as retained profit, but also when dividends due to shareholders are allocated in full or in part to increase the company's net assets when a shareholder declines to receive them or when unclaimed dividends in respect of which the limitation period under the Law has elapsed are used for this purpose.
Entry into force and application
The Law came into effect on 31 December 2010.
The tax benefit provided by the Law extends to legal relationships established on or after 1 January 2007.
The provisions on the limitation period for claiming announced dividends apply to claims in relation to which the limitation period would not have elapsed by 31 December 2010 (the date the Law came into effect).
Special provisions apply to persons with claims in relation to which the limitation period for claiming announced dividends or part of distributed income of a company or partnership had elapsed before the law came into effect.