Treaty between Russia and US – Russian MoF clarifies application of tax treaty to a sole proprietorship

May 2, 2013

Recently, the Ministry of Finance issued Letter No. N 03-08-05/9437 to clarify the withholding tax rate applicable to dividends distributed by a Russian entity to a sole proprietorship registered in the United States.

The Ministry of Finance stated that, according to article 10 of the Russia–United States Income and Capital Tax Treaty (1992), dividends paid by a company resident in Russia and received by a beneficial owner resident of the United States may be taxed in the United States. However, the dividends may also be taxed in Russia, but the tax charged shall not exceed:

  • 5% of the gross amount of the dividends if the beneficial owner is a company that owns at least 10% of the voting stock or, if there is no voting stock, at least 10% of the statutory capital of the company paying the dividend
  • 10% of the gross amount of the dividends in all other cases

The Ministry of Finance further stated that, according to the tax treaty, the reduced withholding tax rate of 5% may apply if the beneficial owner is a company.

Considering that, based on article 3 of the tax treaty, the term “company” means any entity that is treated as a corporate body for tax purposes, the inclusion of sole proprietorship in the scope of the above definition needs clarification.

In this respect, the Ministry of Finance advised that this status should be confirmed by the competent authorities of the US, which, according to the tax treaty, is the delegated Assistant Commissioner within the US Internal Revenue Service. The confirmation should be issued based on Form 6166.

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