Russia’s Ministry of Finance has issued guidance Letter No. 03-07-11/121626 on the corporate income tax and VAT implications of dividends distributed in the form of property.

The letter confirms that transferring ownership of assets to shareholders as dividends is treated as a sale. For corporate income tax purposes, the taxable base includes income from such transactions, with taxpayers permitted to offset this income by the value of the assets transferred.

In connection with the mentioned letter, the Department of Tax Policy has reviewed the appeal from the Joint Stock Company dated 25 July 2024 and provides the following information regarding the application of corporate profit tax and value-added tax (VAT) on the transfer of assets in lieu of dividend payments.

According to Article 249, Chapter 25 “Corporate Profit Tax” of the Tax Code of the Russian Federation (hereinafter – the Code), revenue from sales includes the proceeds from the sale of goods (works, services), both of own production and previously acquired, as well as revenue from the sale of property rights.

Revenue from sales is determined based on all proceeds related to payments for sold goods (works, services) or property rights, expressed in monetary and/or natural form.

In accordance with Paragraph 1 of Article 39 of the Code, the sale of goods by an organization or individual entrepreneur is defined as the transfer of ownership rights to goods on a paid basis (including goods exchange), and in cases stipulated by the Code, the transfer of ownership of goods on a gratuitous basis.

Moreover, according to Paragraph 3 of Article 38 of the Code, a good is recognized as any property that is sold or intended for sale.

Given that, upon the payment of dividends, ownership rights to assets previously owned by the organization are transferred to its participants, such a transfer is recognized as a sale, including for the purposes of calculating corporate profit tax.

Revenue from the sale of such assets must be included in the income considered when determining the tax base for this tax.

At the same time, the taxpayer may reduce the income received by the value of the sold assets in accordance with the provisions of Article 268 of the Code.

Paragraph 1 of Article 146, Chapter 21 “Value-Added Tax” of the Code establishes that the object of taxation under VAT includes transactions involving the sale of goods within the Russian Federation. In this context, for VAT purposes, the transfer of ownership of goods on a gratuitous basis is also recognized as a sale of goods.

Considering that, when paying dividends, ownership rights to assets previously owned by the organization are transferred to its participants, the transfer of assets by the organization in exchange for dividend payments to the founders is subject to VAT taxation.