Income Taxes For Foreigners Investing In Russian Stocks May Be Reduced From 30% To 13%

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By Chris Devonshire-Ellis 

Good news for foreign investors in Russia and CIS stock markets

Income Tax rates from investments in Russia’s stock market by foreign nationals can be reduced from the current 30% to 13%, according to Ivan Chebeskov, Director of the Financial Policy Department of the Ministry of Finance in comments made to Izvestia.

Chebeskov stated that in order to increase the attractiveness of Russian stocks, the simplification of access for non-residents is being considered. Brokerage companies and banks support such a move as this would provide an influx of new investors to the domestic market and increase liquidity. The plan is also being considered for Commonwealth of Independent States (CIS) nations of Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, and Uzbekistan.

Of these, Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia are also members of the Eurasian Economic Union (EAEU) free trade bloc, which has FTA in place with Iran, Serbia, Singapore, and Vietnam and is negotiating with ASEAN, China, and India.

Chebeskov said that the issue is being discussed, adding that professional market participants propose a zero-income tax rate, but this is “dangerous” and may cause discontent: why for Russians 13%, and for foreigners 0%?

The compromise is equality at 13%.

For the various stock markets, the main task is to create investment conditions and required infrastructure. The latter already exists, but there are numerous existing barriers to attracting foreign investment, including tax burdens.

Chebeskov said that foreign investors currently pay a 30% investment tax. National governments must also resolve the issue of identifying access to the Russian and other stock exchange for residents of other countries. Currently, for citizens of foreign states, even from the EAEU countries, entering the Russian market and opening a brokerage or IIS account is difficult.

The Russian stock exchange is the regions strongest and is world class in terms of technology implementation. The CIS nations understand that we need to move and develop this – with Singapore as an EAEU trade partner a primary candidate to offer advice and assistance as it houses one of Asia’s leading and most innovative stock markets.

The Russian Ministry of Finance has said that to make the Russian stock market more open and accessible to foreign citizens, the ministry, together with the Bank of Russia and market participants, is considering ways to simplify foreign nationals ID, adding that foreign investors and legal entities are quite active in trading on domestic sites. According to the Moscow Exchange, the foreign share in the turnover in the stock and derivatives markets is 48%.

The Central Bank has not yet received any draft law that would provide for a reduction in the personal income tax rate for non-residents in relation to investment income, however noted that they have a positive attitude to measures aimed at increasing the attractiveness of the Russian stock market, including for foreign investors.

There are no legal restrictions regarding the opening of IIS by foreigners, however, tax non-residents cannot take advantage of investment tax deductions, therefore, it is not advisable to issue such an account for them, the Central Bank explained.

Large brokerage companies support the initiative to reduce the tax rate and simplify access for non-residents to the Russian market. According to the chairman of the board of Finam Vladislav Kochetkov, such a step will provide an influx of new investors and liquidity to the Russian stock exchanges. The tax rate is one of the determinants of the choice of factors and encourages investment in the domestic market , says Alexey Zhogolev, director of the wealth management department of PSB.

Despite the fact that Russia has Double Tax Treaty agreements on the avoidance of double taxation with many countries where the amount of tax levied on the territory of the Russian Federation is provided, in fact everything is complicated, said Igor Pimonov, head of the department of the Internet broker BCS World of Investments. In such cases, it is necessary to determine the status of a resident and non-resident using an additional package of documents. Often, to return part of the personal income tax paid, the investor needs to independently apply to the tax office with a large set of documents, he said.

Market participants noted that they are already working with foreign citizens. Finam have said that they can open accounts only in the office upon presentation of a passport and information about the source of the funds. The PSB noted that all clients, regardless of their country of residence or their registration, can be provided with such an opportunity in 10 minutes.

Due to the more laborious identification of foreigners, opening a brokerage account for them is more difficult, BCS noted. Now such clients need to come to the office, which is especially difficult during a pandemic.  To attract investors from outside, a new, online, and simplified process of identification and verification of their passport data is needed.

Meanwhile, the CIS market is promising for the Russian stock exchange, Pimonov suggests. Reducing the tax rate will provide a level playing field for all investors and will open more opportunities for individuals from other countries to invest in securities of companies represented on domestic markets, he said.

The main stake is on the citizens of the CIS, Kochetkov stated. According to him, now they are forced to invest in Russian securities through offshore brokers but will give preference to direct schemes. The most promising markets are currently Kazakhstan and Belarus he suggested.

These measures will increase the attractiveness of the Russian stock market, says Andrey Ushakov, senior analyst for Sistema Capital. But the influx from outside will be restrained, since many citizens of the union states are already investing in the Russian market , he said. And for foreigners from developed countries, considering treaties on the avoidance of double taxation, the tax reduction in the Russian Federation is offset by higher internal taxes on profits, he added.

“There is only one minus in this situation – a decrease in tax revenues to the budget. But for Russia, these losses are insignificant.” said Ushakov.

The Moscow and St. Petersburg stock exchanges can already start competing with Western platforms for private investors from other countries, Pimonov states. According to Kochetkov, there are no infrastructure problems for servicing investors from foreign countries, only legislative and tax restrictions.

The Moscow and St. Petersburg stock exchanges already have proposals on this issue. The Moscow Stock Exchange (Moex) noted that they initiated tax exemptions on income of non-residents from countries that provide information exchange for tax purposes with the Russian Federation, on derivative financial instruments circulating on Russian stock exchanges. The St. Petersburg Stock Exchange said that they proposed reducing the tax rate on income from operations with shares for foreign investors to 0%, as well as to create an online identification system for them.

We will bring you more updates on this story as developments occur.

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