If a seller, who is a Russian legal entity, obtains a
capital gain from the sale of its shares or participation
interest in a Russian company, then that capital gain may be
subject to a zero percent tax rate. However, this is only if
certain criteria are met. One important criteria is that the
shares or participation interest should have been acquired
after January 1 2011. Another is that it should have been held
for at least five years. At first glance, these requirements
may look straightforward, yet their application in practice
raises various questions.
Interpretation of the term "acquired"
In the view of some officials, the term "acquired" is not
that simple. Let us explore how interpretation of the term
"acquired" has evolved in the authorities’
letters. In 2011 and 2013, the Finance Ministry issued two
letters of interest. In letters on February 1 2011 (No.
03-04-05/0-48) and December 2 2013 (No. 03-03-06/1/52260), the
Ministry stated that the term "acquired", for the purpose of
the participation exemption, means a purchase. No other means
of receiving or obtaining shares or participation interest are
considered, such as a receipt of shares or participation
interest because of increasing the charter capital.
Then in 2016, one of the authors of the
Ministry’s aforementioned letters issued another
letter (after they had left the Ministry) stating that the term
"acquired" should be understood more broadly. According to this
new interpretation, the meaning should include not only
purchase, but also other grounds by which ownership over shares
or participation interest is gained.
Furthermore, in a more recent letter on July 9 2018 (No.
03-04-05/47619) related to exemptions from personal income tax
(PIT), the Ministry stated that for the purpose of this
exemption, it is irrelevant whether the interest was purchased
under a share purchase agreement (SPA) or was obtained as a
result of company formation.
The aforementioned letters suggest there is no unified
approach regarding how the term "acquired" should be
understood. This can lead to different interpretations, and as
a consequence, to disputes with authorities.
Five-year holding period
The authorities’ position towards the
application of a zero percent tax rate (if nominal value of the
seller’s stake changed) may not be characterized
as sustainable or consistent. The Ministry of
Finance’s letter of June 28 2017 (No.
03-03-06/1/40916) states that the zero percent tax rate is
applicable if the characteristics of the seller’s
interests (such as size and nominal value) have remained
unchanged for the required five-year holding period.
Otherwise, the sale of the interest does not qualify for the
zero percent tax rate. A year later, the Ministry of Finance
(Letter No. 03-03-06/1/43480 of June 25 2018) expressed a
slightly different view: the zero percent tax rate remains
valid if the change in the size and/or nominal value of the
participation interest was caused by the purchase of additional
participation interest from other participants in a company. In
the letters of September 20 2018 (No. 03-03-06/1/67389) and
October 23 2018 (03-03-06/1/76034), the Ministry supported its
earlier conclusions, but added that the zero percent rate
applies only after expiration of the five-year holding period
from the date when the additional participation interest was
Interestingly, at almost exactly the same time as the
aforementioned letter, another department within the Finance
Ministry issued a letter with a different view. The letter
addressed PIT consequences in a situation where an individual
had owned a 100% stake since 1997 and then increased the
nominal value of the stake in 2012. Although the question
explored was not cited in the response, it seemed to be whether
the increase in 2012 allowed the individual to claim the PIT
exemption. One could have expected that based on the
Ministry’s view above (the change in nominal value
affects the stake’s characteristics and restarts
calculation of the five-year holding period), the answer would
be that the exemption applies after the five-year holding
period has expired (since the increase of the
stake’s nominal value).
However, the Ministry replied differently, stating that the
change in the stake’s nominal value does not
affect the terms of exemption. This position suggests that
either the interest’s nominal value is not a
characteristic of the interest, or that change to the nominal
value of interest should not affect its characteristics.
The above demonstrates that although participation exemption
rules may look straightforward, in practice, they can be
interpreted in various different ways. This creates uncertainty
and may lead to disputes with the authorities.
This article was written by Dmitry Garaev
(firstname.lastname@example.org) and Denis Gamiy (email@example.com) of KPMG
Russia and CIS.