Global Tax Alert | 15 January 2014
Russia adopts tax initiatives to improve the taxation regime of financial transactions
On 28 December 2013, the President signed Russia's the Law No. 420-FZ (the Law). The Law was prepared by the Group of the International Financial Center in Russia. It made substantial amendments to the taxation of financial transactions and is intended to increase investment attractiveness. Most of the provisions will enter into force on 1 January 2015, except for certain provisions that should come into effect in 2014 and 2016; transitional rules are also provided by the Law.
Taxation of interest on debt obligations
Interest income/expense should be calculated based on the actual interest rate for a debt obligation for profits tax purposes.
For the debt obligations which are treated as controlled, the actual rates would need to be justified or adjusted under the transfer pricing (TP) rules.
The TP rules should not be applied to loans where one party is a bank, and the interest rate is within the range established for certain currencies.
That rule should come into force on 1 January 2015. In addition, inter-bank loans up to seven days inclusively will not be considered as controlled transactions. This rule should come into force on 1 January 2014.
Doubtful debt reserves
It is proposed to extend the definition of “doubtful debt” for tax purposes for all types of overdue interest incurred after 1 January 2015 regardless of whether it is secured by pledge, surety or bank guarantees.
The Law introduces amendments which clarify the calculation procedure for VAT, personal income tax and the profits tax base for transactions involving depositary receipts.
In this respect, the redemption of depositary receipts and the receipt of the underlying securities as well as the transfer of such securities upon issuance of depositary receipts should not be subject to profits tax.
This rule will also cover investors who are individuals.
The basic cost of securities received upon the redemption of depositary receipts will be calculated based on the acquisition price (including related expenses) of depositary receipts and the costs of their sale.
The Law introduces rules for the tax accounting of income and expenses of Russian issuers of depositary receipts.
Loss on loan assignment
The Law introduces changes to the recognition of loss on assignment.
The Law proposes that the amount of tax loss should not exceed the amount of interest expenses calculated based on the interest rate determined in accordance with TP rules.
Reducing the number of tax bases for securities transactions
The Law states that the income/expense on traded and OTC securities and derivatives should be included in the general tax base of a professional market participant, the trade organizers/ exchanges, asset management companies and clearing organizations acting as a central counterparty.
Also, the Law proposes to reduce the number of tax bases for ordinary companies:
- • The general tax base is merged with a tax base on traded securities transactions; the tax base on OTC securities transactions is merged with a tax base on OTC derivatives.
- • The general tax base and the tax base on transactions involving derivatives with a central counterparty (subject to certain requirements) are also combined.
Changes to TP rules on securities and derivatives
The Law provides for the liberalization of TP rules for OTC transactions in traded securities:
- • The possibility to consider the transaction circumstances while determining the securities' market price in certain cases envisaged by the Law (transaction volume, pricing by the state authorities, repurchase of securities under an offer) in 2015;
- • The determination of income/expense based on market prices, regardless of the actual transaction circumstances, should relate to transactions with related parties and other controlled transactions in securities and derivatives starting from 2016.
Changes regarding deduction of losses on securities for investors
The Law proposes to recognize for tax purposes the loss in the amount of the actual costs incurred on the acquisition of securities, where issuers thereof are liquidated (including those undergoing bankruptcy proceedings).
The Law also introduces changes in the deductibility of losses on securities for investors, e.g., upon the issuer's default.
The Law has transitional provisions which limit the losses on the transactions closed before 31 December 2014 and for which the losses have not been recognized before but may be recognized for tax purposes starting from 1 January 2015 in the amount not exceeding 20% of the original amount of such losses.
Losses on derivative transactions
According to the Law, the loss on a derivative can be recognized for tax purposes if transactions concluded with foreign companies are enforceable under the foreign governing law.
The Law also envisages the possibility for claiming a deduction on derivatives with underlying assets referred to statistical data and information about the environment.
Recognition of interest income/expense charged on the amounts the lender claims under bankruptcy
The Law clarifies the procedure for recognizing interest income/expense due on the amount the lender claims under bankruptcy proceedings: the taxable income/deductible expense results upon receipt/payment in cash.
VAT on financial transactions
The Law envisages the VAT exemption for the following financial services:
- • Asset management services for pension savings;
- • Transactions under the clearing activity;
- • Assignment of claims on a derivative transaction, provided that the derivative transaction is VAT exempt.
Moreover, the Law provides that the taxpayer should not issue VAT-invoices for certain transactions which are VAT exempt (sale of securities). The above exemption also applies to certain types of taxpayers (insurance companies, banks, private pension funds).
Furthermore, the Law clarifies the rules for calculating the VAT proportion and the relative profits tax deduction.
Investment tax deduction
The Law introduces changes which are designed to attract investments in securities by both investors - individuals - tax residents of the Russian Federation and nonresidents. The Draft introduces new Article 219.1 “Investment tax deductions.” It is worth mentioning that being part of the section of articles regulating the provision of tax deductions for Russian tax residents, Article 219.1 explicitly covers the determination of the tax base in accordance with Article 214.1, providing thereby the possibility to claim an investment tax deduction for nonresidents. The following cases of claiming tax deductions are regulated by the Article:
- • A deduction may be claimed with respect to the income (positive financial result) received by the taxpayer from transactions with tradable securities, provided that they were acquired starting from 1 January 2014 and held by the taxpayer for more than three years. The amount of deduction may not exceed 3,000,000 rubles per tax period (calendar year);
- • As regards the transactions performed within the taxpayer's personal investment account (PIA), the deduction may be claimed according to one of the following scenarios:
Scenario 1. A taxpayer may claim a tax deduction with respect to the funds transferred to the PIA within the limit of 400,000 rubles per tax period (calendar year). Tax payment obligations for the investor will arise upon the end (termination, in certain cases) of the contract term.
Scenario 2. Where a taxpayer does not claim the deduction with respect to the funds transferred for investment to the PIA, he claims a deduction in respect of the income (positive financial result) received from transactions in securities performed within the PIA, provided that he receives such income upon the end of the contract term and not earlier than three years from the date on which the contract was signed. No limit is established for a tax deduction claimed under Scenario 2. However, the amount of the annual contribution to the PIA is still limited to 400,000 rubles per annum.
The taxpayer may apply to a tax agent or to the tax authorities for tax deductions with respect to the income received from securities transactions. Tax deductions with respect to the funds transferred for investment into PIA may be claimed by submitting a tax return to the tax authorities only.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (CIS) B.V., Moscow
- • Alexei Kuznetsov
+7 495 755 9687
- • Irina Bykhovskaya
+7 495 755 9886
- • Maria Frolova
+7 495 641 2997
- • Ivan Sychev
+7 495 755 9795
- • Anton Ionov
+7 495 755 9747
Ernst & Young LLP, Russian Tax Desk, New York
- • Julia Samoletova
+1 212 773 8088
EYG no. CM4102