Amendments to the Russian Tax Code to support investment activity and innovation

Pepeliaev Group informs that 30 December 2010 saw the publication of Federal Law No. 395-FZ dated 28 December 2010 “On amending the second part of the Tax Code of the Russian Federation and specific laws of the Russian Federation”. These amendments touch on different tax issues, among the most interesting of which are a company being able not to pay profit tax (or individual being able not to pay income tax) on transactions involving securities or participation interests the taxpayer has owned in Russian companies for a protracted time; taxpayers having wider possibilities in terms of determining the service life of non-tangible assets; and eliminating the uncertainty in converting advance payments received in foreign currency when calculating profit tax.

Main changes

Law No. 395-FZ has introduced a special tax regime for transactions with securities or participation interests in the issued capital of Russian companies when such securities or interests are acquired by taxpayers from 1 January 2011 onwards. For individuals, the special tax regime allows them to declare income from the sale of securities and participation interests as non-taxable for income tax purposes. Legal entities are entitled to apply a zero rate for profit tax in relation to amounts of income received in transactions involving a sale or other disposal of participation interests in the issued capital of or securities in Russian companies. The main condition for receiving such tax benefits is that the taxpayer must have owned the participation interest or securities for an uninterrupted period of five years or more. A further condition for securities of Russian companies which are traded on an organised securities market is that the securities must be classed as being securities in the high-tech or innovation sector of the economy under a procedure to be established by the Russian Government.

Another measure intended to stimulate the innovation sector of the economy is giving taxpayers the right independently to determine the service life of certain non-tangible assets. Moreover, the service life must be at least two years. The relevant rule contained in article 258 of the Tax Code (as amended by Law No. 395-FZ) is applicable from 1 January 2011.

Also in force since 1 January 2011 have been the rules of Law No. 395-FZ, which establish a zero profit tax rate for companies carrying out educational or medical activity. These benefits will remain in force until 1 January 2020 and, for them to be applied, companies must comply with various conditions established by the legislation.

Other amendments and the time at which they are in force

Some of the amendments to the Tax Code dealt with in Law No. 395-FZ will come into force according to the usual procedure – no earlier than a month after the day on which the Law was officially published and no earlier than the first day of the next tax period for the tax in question. In particular, this will apply to the provisions which exempt transactions from value added tax when they involve the sale of state or municipal property which constitutes public assets of the state, of a regional constituent entity of the Russian Federation or of a municipality. This only applies in instances when such property is purchased within the scope of Federal Law No. 159-FZ dated 22 July 2008.
This same procedure will also apply to the entry into force of the rule which exempts from VAT transactions involving coins made of precious metals which represent a lawful means of cash payment in Russia or a foreign state (or group of states). This exemption does not currently apply to collection coins (those minted using the proof process, in particular, with a view to being collected), but this restriction will no longer be in place once the provisions of Law No. 395-FZ are in force.

It should be noted that some of the amendments introduced by Law No. 395-FZ are intended have retroactive effect, since they extend to relationships which have arisen since 1 January 2010. This retroactive regime applies, in particular, to the entry into force of the provisions for converting income and expenses expressed in a foreign currency when such income is received or expenses paid, wholly or partially in advance. In such situations, legislators have decided, the income or expenses will, to the extent that the advance payment was made in foreign currency, be converted into roubles at the official rate established for the foreign currency in question on the date of payment. Retroactive effect from 1 January 2010 is also stipulated for those provisions of Law No. 395-FZ which amend article 214.1 of the Tax Code. These amendments concern the calculation and payment by individuals of their personal income tax for transactions involving securities and fixed-term financial instruments.

Pepeliaev Group comments: It needs to be borne in mind that if, in specific circumstances, these or other amendments to tax legislation are detrimental to a taxpayer, the rules of clause 2, article 5 of the Tax Code should be applied. These rules provide that items of tax legislation do not have retroactive effect if they are detrimental to taxpayers.

For further information, please contact:

in Moscow – Andrey Nikonov, Senior Partner, at: (495) 967-0007 or by e-mail; Vladimir Voinov, Lead Associate, at: (495) 967-0007 or by v.voinov@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail