Important tax amendments on operations with securities and derivatives, limitations on interest deductibility and other major issues

Legal Update No. 445, 16 January 2014

Goltsblat BLP advises that, on 30 December 2013, the Russian President signed the Federal Law “On Amending Article 275-3 of the Federal Law “On the Securities Market” and Parts One and Two of the Tax Code of the Russian Federation”, introducing a number of important changes in taxation of both legal entities and individuals.

The amendments are generally positive in character. Worthy of special mention is the positive trend towards narrowing the sphere of application of special restrictions on the prices of securities and derivatives, as well as on interest costs and losses from assignment of receivables to transactions subject to the transfer pricing rules (Section V.1 of the Russian Federation Tax Code). Even so, these rules only come into full effect from 2016, until which time the current pricing rules will remain in effect.

• Limitations on interest deductibility under clauses 1 and 1.1, article 269 of the RF Tax Code

From 2015 onwards, interest on debt liabilities arising from uncontrolled transactions may be deducted in full based on the actual rates, without the current limitations being applied. For controlled transactions, interest will be deductible in the amount of the actual rates but with adjustment based on the transfer pricing rules.

Moreover, if one of the parties to a controlled transaction is a bank, interest will be deductible within the scope of set market price ranges: for rouble loans from 75% to 180% (from 75% to 125% from 2016) of the Bank of Russia refinancing rate; for currency loans from LIBOR, EURIBOR or SHIBOR plus 2-4 percentage points to LIBOR, EURIBOR or SHIBOR plus 5-7 percentage points (the percentages depending on the currency). If the rate applied does not fit within these limits, the interest will be deductible at the actual rates but with adjustment based on the transfer pricing rules.

In fact, the new rules mean that, for intra-group loans from related Cypriot financial and holding companies, the “safe harbour” rate of 14.85% on rouble loans, which serves as a reference for everyone and which is used on a mass scale by companies (since the changed limits remain only for bank loans) will be abolished. For intra-group loans, the existing transfer pricing rules requiring disclosure of such loans and benchmarking substantiation of the interest on them now come to the fore.

• Monthly accounting of interest income and costs specified

The amendments applicable to the timing of tax base calculation specify, among other things, that debt liability income and costs are to be taken monthly, irrespective of when payment is made. This constitutes a legislative answer to the question raised in Resolution of the Supreme Commercial Court of the RF No. 11200/09 of 24 November 2009 on the SaNiVa case concerning restrictions on deducting, during current tax periods, interest for which actual payment has been deferred.

• Changed rules for determining the tax value of securities and derivatives

The rules for determining prices under transactions with securities and derivatives have been reformulated. First, sale on a stock exchange of traded securities and derivatives is to be booked at the actual price (provided the transactions go through a Russian or foreign trading organiser). In other cases involving transactions made, in particular, with over-the-counter traded securities, market/estimated price ranges are calculated for adjustment purposes. Moreover, in the event of a divergence from the market price range, security and non-traded derivative prices are only adjusted when this benefits the treasury (when the sales price is below the minimum market price range level and the purchase price is above the maximum), which might entail double taxation. A positive new development is that, given certain factors (such as acquisition of a more than 5% stake in a company or price setting by a state authority), the taxpayer may use transfer pricing methods to prove that the price of traded securities complies with the market price (Section V.1 of the RF Tax Code), without linkage to the stock market price range.

It is anticipated that, in 2015, the given rules will apply to all taxpayers and, from 2016, only to controlled transactions under the rules of Section V.1.

• New procedure for determining the separate tax base and deducting losses on securities and derivatives

Worth noting among the amendments relating to taxation of securities and derivatives is that aspects of “mixing” the profits and losses on such operations and the general tax base are to be regulated in more detail. In particular, the general tax base will include income and costs on operations with traded securities and derivatives, whereas the tax base for non-traded financial instruments is determined separately. Losses from operations with non-traded securities and derivatives may not be deducted from the general tax base (with the exception of hedging operations, swop and option contracts with clearing institutions). At the same time, the overall tax loss on ordinary operations may be deducted from the profit on the above operations. Special interim provisions are introduced to cover deduction of losses arising before the end of 2014 and not already deducted. Separate, more preferential provisions are envisaged for professional securities market participants.

• Changes to the list of non-VAT-able operations (article 149 of the RF Tax Code) and the proportion calculation rules (article 170 of the RF Tax Code)

The RF Tax Code has been amended to expand and specify the list of non-VAT-able operations and detail the procedure for calculation of proportions for a series of financial operations.

• New personal income tax investment benefit

In order to encourage individuals to invest on the stock market, tax exemption is reinstated for sales revenues from securities held for over three years (investment tax benefit), as well as in the amount of the funds deposited in a special individual investment account and of incomes received on operations performed on such an investment account (up to a certain cap).

Let us recall that the RF Tax Code used to include a rule on three-year exemption for securities but it was difficult to apply, so it was subsequently scrapped. The new expanded regime is to act as an additional incentive to individuals to invest on the Russian stock market.

• New regulation of operations with depository receipts

The current personal income and profit taxation applies, with certain specifics, to operations with depository receipts, be they Russian or foreign, in relation to paper of Russian or foreign issuers.

• Other amendments

Exemption for incomes in the event of a reduction in authorised capital in accordance with the legislation of the Russian Federation (subclause 4, clause 1, article 251 of the RF Tax Code) is specifically prescribed. There is also a series of amendments designed, in particular, to specify the taxation procedure relating to (partial) redemption of securities, the specifics of non-fulfilment of a repo closing leg, in the sphere of trust management profit tax and others.

• Effective dates

Most of the new law’s provisions come into effect in 2015 but it stipulates other effective dates or interim provisions (in particular, in relation to deduction of losses from operations with securities and derivatives and investment tax benefits).

If no special enactment procedure is specified for the provisions of the Federal Law, the general rules apply: they come into effect no earlier than one month from their official publication and no earlier than the 1st day of the regular tax period for the relevant tax (apart from rules beneficial to taxpayers, which, in accordance with part 1, article 6 of the Federal Law, come into effect on 1 January 2014).