The taxation of capital gains derived by foreign legal entities from the sale of Russian shares or financial instruments has been clarified by Russian Federal Law No. 132-FZ , which amends Article 309(1)(5) of the Russian Tax Code establishing the Russian withholding tax regime applicable to capital gains.
Prior to the enactment of the new law, proceeds from the sale of shares in Russian companies which derived more than 50% of their value from immovable property located in Russia (commonly referred to as "property-rich companies) were subject to withholding tax in Russia. The only exception was sales on foreign stock exchanges of securities traded on those exchanges. However, the Tax Code did not provide any detailed rules what shares qualified for the exemption, resulting in significant uncertainty.
Federal Law No. 132-FZ provides that securities qualify for the exemption provided that they satisfy all the following requirements:
- they have been admitted for trading by at least one market which possesses the right to do so in accordance with its national legislation;
- information on their prices is published in the mass media (including by electronic means);
- a market quotation is calculated for the securities during the last three months preceding the transaction date, if this is provided for by the relevant national legislation.
Federal Law 132-FZ was published on 8 June 2011 and applies retrospectively from 1 January 2011.
It should be noted that under the Cyprus-Russia double tax agreement capital gains derived from sale of shares of property-rich companies are currently exempt from Russian tax and will remain so until four years after the Protocol to the Cyprus-Russia double tax agreement takes effect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
