On the New Tax Benefits for Capital Gains
In 2010, a number of suggestions were made as to the introduction of tax exemptions for the capital gains derived from long-term investment projects1. At the end of the year, the RF Tax Code was amended to include a number of provisions which introduced tax exemptions on the gains in the capital value of shares and participations in Russian companies, provided they were continually owned by the taxpayer for a period of more than 5 years2.
The benefit is concerned with quoted shares in companies belonging to the hi-tech (innovation) sector of the Russian economy, and with unquoted shares and participations in Russian companies. The procedure for assigning securities in circulation to the hi-tech (innovation) sector of the economy should be established by the RF Government.
The benefit applies to those participations and shares in Russian companies that are to be purchased from 1 January 2011. Thus, it will be possible to take advantage of that benefit, in an event of selling such assets, from 1 January 2016.
The benefit can be regarded as one being compatible with the goal of promoting an inflow of investments into the innovation sector of the economy. However, it has created certain significant risks for the tax system, some of which are worth mentioning here. Thus, tax exemptions on income derived from the sale of shares and participations in Russian companies, especially if they are extended to the sale of big blocks of shares, will create opportunities for tax avoidance also with regard to those capital gains that are not entitled to tax exemption. Such incomes will avoid taxation if the object of sale is not the assets proper whose value has increased (a building, a land plot, or a property complex) but only shares or participations in the organization that keeps those assets on its balance sheet. In order to check the implementation of such schemes, it will be necessary, in particular, to introduce some strict and efficient mechanisms for re-qualifying transactions for the purposes of taxation and the filing of appeals against relevant decisions, and to establish an efficient judicial system. Otherwise, the granting of the benefit under consideration will create certain risks for a general deterioration of the investment climate as a result of selective law enforcement.
T.A. Malinina, Head of Tax Policy Department
1 See, e.g.: Kapitalu ukazhut put’ [Capital will be Shown Which Way to Go] // Vedomosti. 2010. No 46 (2564); Modernizatsiia: Osvobozhdenie predprinimatelia [Modernization: The Emancipation of an Entrepreneur] // Vedomosti. 2010. No 115 (2633).
2 Federal Law, of 28 December 2010, No 395-FZ.