For ADR Holders

Holders of the depositary receipts (DRs) representing shares of the Russian companies are required to disclose their beneficial owners in order to have tax benefits in the payment of dividends and to vote at the shareholders' meetings

In 2014, two critical legal documents were applied, each affecting payment of dividends to the holders of depositary receipts of the Russian companies - paragraph 8 of Article 2 and paragraph 5 of Article 3 of the Federal Law 282-FZ ("282-FZ"), and the Federal Law 306-FZ amending the Tax Code of the Russian Federation ("306-FZ").

282-FZ establishes changes in the rules for payment of dividends and cancels the requirement of the Federal Law 415-FZ ("415-FZ") on disclosure of the beneficial owners as a condition to receive dividends.

306-FZ[1], however, requires disclosure of the beneficial owners as a condition to obtain tax benefits. In respect of payments to the beneficiaries not disclosing information about itself, tax rate of 30% will apply.

Both federal laws apply to the payment of dividends in 2014 and subsequent years.

The amount of tax withheld from the beneficial owner depends on the following:

  • fulfillment of disclosure requirements, and
  • double taxation agreement (DTA) between the country of residence of the beneficial owner and the Russian Federation.

The above considered, there are three possible tax scenarios:

IF THE BENEFICIAL OWNER:

THEN THE BENEFICIAL OWNER:

1) Complied with the requirement to disclose information, and its country of residence has the applicable double taxation agreement,

becomes eligible for the tax benefits established by the double taxation agreement.

2) Complied with the requirement to disclose information, and its country of residence has no applicable double taxation agreement,

becomes eligible for tax benefits at the mandatory maximum rate of 15%.

3) Failed to comply with the requirement to disclose information,

pays tax at the rate of 30%

According to the 306-FZ, the record date shall be established at the shareholders' annual general meeting (AGM) of each of the issuers, and it shall be set within 10-20 days after the date of the AGM, and the date of payment shall be set within 10 days after the record date. This change will allow the depositary bank to combine the record dates for the local securities and DR, and will also allow concurrent announcement of the record date and the dividend rate.

To comply with the 306-FZ, the international custodian banks, brokers and other intermediaries ("banks and brokers") acting on behalf of the beneficial owners registered as of the record date for dividend payments on the DRs shall provide to the depositary bank the specified disclosures, including the number of the DRs, the country of residence for tax purposes, the rate under the double taxation agreement, and shall also state whether they are legal or natural persons.

THERE ARE THREE METHODS FOR THE DR INVESTORS TO OBTAIN TAX BENEFITS

Tax Benefits at Source

Requirements for the banks and brokers, and their actions as part of obtaining tax benefits at the source of payment of dividends will be determined by the type of the DRs held by the beneficial owner. If the beneficial owner holds the ADRs or DRs of 144A type, then the banks and brokers are able to make their choice electronically through the Elective Dividend System of the central US depository, Depository Trust Company, and specify for each tax rate stipulated by the agreements those in the beneficial owners group to whom it applies. The banks and brokers will also be required to send the disclosures to BNY Mellon, as a depositary, and to the bank's agent Globetax through its Electronic Submission Portal ("ESP") within three business days of the record date. The depositary bank will send the summary results of the voting to the local Russian custodian within seven business days of the record date for the local securities. Euroclear and Clearstream will present through the ESP system the disclosures on the beneficial owners who hold the GDR falling under Regulation S.

Quick Refund of Overpaid Taxes

The DR holders not involved in the procedure for obtaining tax benefits at source may be quickly refunded the overpaid taxes, within 25 business days after the date of payment of dividends on the local securities. The method of quick refund of the overpaid taxes allows the holders to have the same tax benefits as the method for obtaining tax benefits at source. The requirements and procedures are the same for the banks and brokers who are the clients of DTC, Euroclear or Clearstream.

Long-Term Refund of Overpaid Taxes

The procedure for a long-term refund of the overpaid taxes may be used by the DR investors who did not participate in the procedures for obtaining tax benefits at source or by quick refund of the overpaid taxes, or when they did not obtain the benefits by these methods but believe that they are entitled to these benefits or hold that they have been unreasonably denied receiving these benefits at source or by quick refund of the overpaid taxes. This alternative procedure may be used within three years from the date of payment of dividends. This method requires presenting substantial additional documentation, and typically the action procedure in this case is more complicated. BNY Mellon therefore recommends the investors wishing to obtain tax benefits to consult their bank or broker with respect to participation in the procedures for obtaining tax benefits at source or by quick refund of the overpaid taxes.

Note that within three years from the date of payment of dividends on the local securities, the Russian state regulatory authorities retain the right to audit the information disclosed by the beneficial owners to obtain tax benefits. This provision applies to all methods of obtaining tax benefits. Such audit may require additional information in order to prove the country of residence for tax purposes, and the Russian tax authorities decide on the necessity to provide this information at their discretion. According to the 306-FZ, the custodians are appointed the tax agents, and by law they are not responsible for improper withholding of taxes on the basis of false or misleading information. The banks and brokers, as well as the DR holders, seeking to obtain tax benefits and obtaining them by any method will have to obtain and maintain the supporting documentation and to release the agents from liability or damages. Before adoption of the 306-FZ, the issuers were appointed the tax agents.

SURVIVAL OF THE 415-FZ REQUIREMENTS

Regulation of the 415-FZ on the disclosures for participation in the voting requires from the beneficial owners to disclose information so that their votes could be counted and cast at the general shareholders' meetings.

RECOMMENDATIONS OF BNY MELLON REGARDING CHANGES IN THE RUSSIAN REGULATORY DOCUMENTS

BNY Mellon maintains its leading position in the DRs sector in the implementation of the requirements resulting from changes in the Russian regulations and, in particular, in the development of the technical solutions that will allow investors to vote and obtain tax benefits on dividends. In addition, BNY Mellon informs in advance the investors, banks, brokers and consultants of the new regulations and their potential consequences.

DATES FOR REFUND OF TAXES WITH DUE ACCOUNT FOR TAX BENEFITS AT SOURCE AND QUICK REFUND METHODS[2]

T

Record date for dividend payments (T)[3]

From T+1 to T+3

The period within which DTC allows the banks and brokers to make choice on behalf of the beneficial owners on the basis of DTT

 

Euroclear / Clearstream, banks and brokers provide a summary of the disclosures to GT through the Electronic Submission Portal

 

The period allowed by DTC to make a decision ends

T+4

DTC provides to BNYM / GT the report with a breakdown of the voting results by the brokers, number of shares and tax rates

 

T+5

BNYM / GT audit and verify the DTC report and the summary of the disclosures received from the clients of DTC, Euroclear and Clearstream.

 

T+6

BNYM sends the final breakdown to the custodian by MT599 SWIFT message

 

T+7

The custodian receives the final breakdown from BNYM

 

T+10 (FPD)

Regular payments date - BNYM receives dividends from the custodian

 

FPD + 5

ADR payments date - BNYM pays dividends on ADRs based on the applicable benefits for the tax payment at source

From FPD+6 to FPD+20

Quick refund commences - EDS reopens the period for quick selection

 

Euroclear / Clearstream, banks and brokers provide a summary of the disclosures to GT through the Electronic Submission Portal

 

The period allowed by EDS to make a decision ends

FPD + 21

DTC provides to BNYM / GT the report with a breakdown of the voting results by the brokers, number of shares and tax rates

FPD + 23

BNYM / GT audit and verify the DTC report and the summary of the disclosures received from the clients of DTC, Euroclear and Clearstream.

FPD + 24

BNYM sends the final breakdown to the custodian by MT599 SWIFT message

FPD + 25

The custodian receives the final breakdown from BNYM

FPD + 30

BNYM receives the form for quick refund of taxes from the custodian

FPD + 35

BNYM makes the quick refund payments to the ADR holders duly entitled to the same through DTC / Euroclear / Clearstream.

 

AUTHORIZED ABBREVIATIONS

ADRs

American Depositary Receipts

BNYM

BNY Mellon

DTC

Depository Trust Company

DTT

Double Taxation Treaty

EDS

Elective Dividend System (system for electronic payments of dividends)

FPD

Foreign Payment Date (date of payment to foreign persons)

GT

GlobeTax

SWIFT

Society for Worldwide Interbank Financial Telecommunication


For more information on disclosure of information to have tax benefits, please contact:

Edris Royer
Vice President
Transactions Structuring and Conducting Department
Telephone: +1 212 815 2135
edris.royer@bnymellon.com

 

For more information on DRs voting please contact:

Mira Daskal
Chief Expert
Vote Group
Telephone: +1 212 815 5021
mira.daskal@bnymellon.com


[1] Russia - changes in taxation procedure, November 25, 2013; available at: http://www.clearstream.com/ci/dispatch/en/cic/CIC/Annnouncements/LuxCSD/Tax/2013/ L13156.html

[2] Dates associated with the dividends of the Russian companies are stated in business days.

[3] Record date for the dividend calculation should be appointed 10-20 calendar days prior to the date of the general meeting of shareholders