Income taxation on Russian issuers’ bonds
Clarifying the procedure for the taxation of foreign nominal holders’ securities accounts when making tax disclosures within the context of jurisdictions
1. For non-resident legal entities and Russian resident legal entities making disclosures for tax purposes
On 1 January 2017, amendments to the Russian Federation Tax Code went into effect, according to which the tax rate was reduced from 20% to 15% for Russian and foreign income tax payers on income in the form of interest on Russian issuers’ ruble-denominated corporate bonds issued after 1 January 2017. According to the Letter of the Russian Ministry of Finance No. 03-08-05/64112 dated 2 November 2016, NSD, as a securities depository that is acting as a tax agent, applies the introduced tax rate for income paid on securities held in the accounts of foreign nominal holders.
To clarify which Russian issuers’ securities are eligible for the reduced 15% tax rate, starting from 1 January 2018, the Moscow Exchange website will offer a service to verify which corporate bonds are eligible for a 15% tax rate. The service will provide (as of a specified date) the list of Russian organizations’ bonds, the interest income on which is taxed at a 15% rate.
The list of Russian organizations' bonds, the interest income on which, according to the provisions of Sub-clause 1, Clause 4, Article 284 of the Russian Federation Tax Code, is taxed at a rate of 15% (hereinafter referred to as the List), is made for bonds that at the same time meet the following conditions:
- The bonds were issued by a Russian organization, including the Bank of Russia;
- The bonds are denominated in Russian rubles;
- The bonds are issued during the period from 1 January 2017 to 31 December 2021, inclusive;
- The bonds are recognized as circulating on the established securities market in accordance with Article 280 of the Russian Federation Tax Code, as of the date of drawing up the List.
In order to meet the last condition, an assumption is made on the sufficiency of one bond purchase and sales transactions concluded within 3 consecutive months preceding the date of drawing up the List (including the date of the List compilation) at bond trading sessions of the Moscow Exchange during which the weighted average price is calculated. That said, deals with bonds at their primary placement are not taken into account.
The service is available without a paid subscription. At the same time, it should be borne in mind that the List is posted on the Moscow Exchange website for information purposes only. The Moscow Exchange does not bear responsibility for any damages that may result from using this list.
2. For non-resident individuals and Russian resident individuals making disclosures for tax purposes
From 1 January 2018 on, changes introduced in the Russian Federation Tax Code by Federal Law № 58-FZ dated 3 April 2017 will come into effect. The procedure for taxing personal income (hereinafter referred to as the personal income tax) in the form of interest (coupon) on circulating Russian bonds denominated in rubles and issued after 1 January 2017 (not limited to 2021) will change.
According to the new wording of Article 214.2 of the Russian Federation Tax Code, the tax base regarding income in the form of interest (coupon) received by a taxpayer on circulating Russian organizations' bonds denominated in rubles and issued after 1 January 2017 is determined by a new scheme. A 35% tax is withheld from individuals only if the amount of the interest (coupon) payment exceeds the amount of interest calculated based on the nominal value of the bonds and the Russian Central Bank’s refinancing rate increased by five percentage points and valid for the period during which the coupon income was paid. Interest income paid within the established limit is not subject to a personal income tax.
Thus, for example, if the refinancing rate of the Russian Central Bank is 7.75% (on 20.12.2017), then interest income (coupon) to be received by individual taxpayers after 1 January 2018 on ruble-denominated circulating Russian bonds issued from 1 January 2017 will be partially subject to taxation if the bond’s yield rate exceeds 12.75%. At the same time, interest income received within the 12.75% rate is not subject to taxation, whereas excess interest calculated on the basis of the actual yield on bonds over interest calculated at a 12.75% rate is subject to a 35% taxation rate.
As of the date of publishing this message, NSD has not received an official response from the Russian Ministry of Finance that permits using these benefits for individuals when the income on securities held in the accounts of foreign nominal holders is paid. To verify the exemption right for interest income on corporate bonds for taxing individuals within the established limits, please also use the abovementioned online service of the Moscow Exchange. The service allows to receive (at a specified date) a list of Russian organizations’ bonds, interest income on which is not subject to personal income tax within established limits. Checking the interest rate on bonds and calculating the tax base from the amount that it exceeds established limits is carried out by an individual and/or a tax agent, independently.
For any questions related to this message please contact your personal manager at the following phone numbers: + 7 495 956-2790, +7 495 956-2791.