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Minfin to Collect Tax for MIFC

06.05.2013 21:14 / vedomosti.ru

Since 2014, Russian Eurobond profits will be taxed, according to Tax Policy 2014-2016 draft by Minfin.

Today, Eurobond beneficiaries are exempt from tax. The entire securities issue was tax-free if the issuing SPV was located in a country that has signed a double tax treaty with Russia, such as Luxembourg. The Minfin did not like the situation: the SPV is a mere middleman, while bond buyers can be residents of an offshore not bound by a double tax treaty with Russia. The Ministry’s plans to ban the tax benefit caused a backlash among major Russian borrowers: they are the tax agents required to pay a 20% tax.

Last year, State Duma joined the debate, proposing to lift all Eurobond taxes, which postponed the final decision until 2014.

However, new things have come to light in the meantime, and Minfin was dealt the winning hand — foreign clearing houses Euroclear and Clearstream got access to Russian bonds. Foreign owners’ profit tax for these securities can not exceed the same for Eurobonds, states Minfin: a much-needed incentive for the development of an international financial center in Russia.

Russian bonds really lose to Eurobonds from a tax perspective: profit is tax-free, only if the foreign beneficiary is entitled to this benefit by the double tax treaty, agrees PwC’s Ekaterina Lazorina. Market participants have proposed tax exemption for foreign profit on Eurobonds as well as Russian bonds, she recalls.

Yet Minfin has decided to choose a different path to bond holders’ equality. The draft contains two scenarios. One is offering tax exemption to actual bond holders who are offshore non-residents. The other scenario is tax exemption for residents of countries bound by a double tax treaty with Russia; this option exists for local bond holders today.

Experts place early estimates of tax collection on issued securities at some USD 600mn, Deputy Finance Minister Sergey Shatalov has stated earlier. During the past 18 months, the Russian Eurobonds market grew at a rapid pace: its Q1 2013 volume surpassed the pre-crisis levels of 2008 on a year-over-year basis.

The measure will hit banks (most frequent foreign market borrowers) and major state companies, expects Lazorina. “We hope for a sensible decision — the new tax will raise the cost of borrowing, and we will be the ones to take the burden”, fears one top manager of a Russian major. Tax administration will be expensive, explains Deutsche Bank MD Sophia Sool: end beneficiaries will have to be disclosed, however Euroclear and Clearstream do not list this data.

Issuers are unlikely to switch to the Russian market, says AFK Sistema VP Igor Busarov: “The tax aspect is immaterial”. Sool says that the budget will hardly benefit from the new tax: “Most of the Russian bond byers are major investment funds in London and Europe, they do not use offshore schemes”. Their clients are predominantly small funds — and these are the investors that our borrowers could lose, she adds.

Margarita Papchenkova

Taxation of financial transactionsProject Group №3