Taxation on transactions in securities

The taxation of securities transactions within personal income tax (PIT) are often examined in the TX-RUS exam. Such questions are often not answered as well as would be expected. This article will cover these topics within items B1c), B2b),  B4h), B5a), g), i), j) and l), B6a) and b) of the Syllabus and study guide.

The financial result of transactions in securities includes sale, settlement, etc, but excludes income in which the respective PIT was withheld by a tax agent at source – eg dividends. For PIT purposes the positive result/gain is determined according to the rules applicable to transactions in securities – ie is calculated as income minus related expenses and allowable deductions.  

Expenses related to transactions in securities (supported by documents and actually incurred by the taxpayer) include expenses on purchase, sale, custody (accounting), maturity,  fulfilment and extinguishment (discharge). If securities are financed from a rouble loan, the related interest can be deducted within the limit of the Central Bank Key Rate (Refinancing Rate) multiplied by 1.1. The deductibility of loans in a foreign currency is limited to 9%.

Investment deductions

The following types of investment deductions are available in the three circumstances below:

1. The Ordinary Investment Deduction
Where a gain (positive result) is made from transactions with securities quoted on the Russian stock exchange (quoted securities) and participatory interest in open unit investment funds (the management of which is performed by Russian management companies), and these investments have been held for more than three years; then the Ordinary Investment Deduction is available.

The maximum limit of the Ordinary Investment Deduction should be calculated in the following way (provided in the tax tables of the exam, in the help function):

Investment deduction Ks*3,000,000 RR (upper limit)

tx-russ-securities-1-v2

Vi – positive result/gain from sale (redemption) of all securities in the tax period with the ownership period of i full years #

n – quantity in full years of ownership periods for securities subject to sale/redemption in the tax period

as a result of which the taxpayer becomes eligible for this deduction

#which means the amount of holding years is always rounded down. For example a holding period of three years and seven month is rounded to three years for purposes of the calculation.

The matching of sales of securities against the cost of securities held, is determined on a first in first out (FIFO) basis.

This type of investment deduction is only available for those securities held in an ordinary broker account and not those held in an individual investment account. A positive result of the transactions in securities in an ordinary broker account should be calculated on an annual basis for taxation purposes.

This deduction can be provided by a tax agent (broker) or can be claimed in the PIT return. However, if within one tax period the investment deduction was provided by more than one broker and the total amount of investment deductions provided by all tax agents (brokers) exceeds the amount of the allowable deduction calculated using the formulae above; the taxpayer should pay the personal income tax (PIT) attributable to the excess and submit the related PIT return.

2. The Fixed Investment Deduction
This applies to the money contributed into an individual investment account (rather than the positive result/gain resulting from a sale or other transaction). The deduction is limited to 400,000 RR contributed to an individual investment account within a tax period.

This investment deduction is provided in the PIT return and must be supported by documents that confirm the contribution of the taxpayer to the individual investment account (within the limit of 400,000).

The deduction is granted if the taxpayer did not have any other contracts on individual investment accounts, unless the contract was cancelled and all securities transferred to another investment account opened by the same taxpayer.

If the investment account (in which respect the investment deduction was used) is cancelled (except for case described in the previous paragraph) before the expiry of a three-year period, the amount of the deduction should be clawed back and the related PIT should be paid along with any late payment interest.

3. Investment Account Gain Deduction
This deduction is available on the amount of positive result/gain received from transactions made from (and accounted on) an individual investment account (IIA).

The deduction is granted at the end of the investment account contract provided that the period of validity of the contract exceeds three years (being the period between the date of signing and the end date).

The deduction cannot be provided if in respect of this IIA (or another IIA that has been cancelled and all shares transferred into this investment account) the Fixed Investment Deduction has been provided at any time during the validity of the IIA.

The deduction should be provided by the Tax Authority via the PIT return. Or it can be provided by a tax agent (broker) provided that the taxpayer presented to the tax agent notification from the Tax Authority that the taxpayer had not applied a Fixed Investment Deduction during the term of the investment contract.

The deduction is granted if the taxpayer did not have any other contracts in respect of investment accounts, unless the contract was cancelled and all securities were transferred to another investment account opened to the same taxpayer.

The transactions in securities within an IIA are taxed only when the account is closed ie at that point the gains/positive results will be subject to PIT.

The above mentioned rules can be so illustrated:

tx-russ-securities-2

*provided that the taxpayer has taxable income (taxed at the same tax rate(s)) in the same tax period in an amount at least equal to the investment deduction.

Individual Investment Account

The following features of an Individual Investment Account (IIA) are described in article 10.2-1 of Federal Law dated 22.11.1996 N39-FZ 'On Securities':

  • IIA contract can be concluded by an individual only with a licensed broker/trust manager
  • Individual is allowed to have only one IIA
  • Withdrawal of money, precious metals or security is allowable only in case of closure of the IIA (unless those money, precious metals or security are transferred upon the closure of the account into another IIA opened for the same individual)
  • Money contributed into an IIA can be invested into any securities, precious metals quoted by Russian Trade Institution and cannot be used for transactions through a Forex (Foreign Exchange) dealer
  • Maximum amount of contribution into IIA is limited to 1,000,000 RR per year.

Features of taxation in respect of transactions accounted on IIA described in art. 214.9 of Russian Tax Code.

tx-russ-securities-3

Calculation of the PIT base in respect of the above separate types of transaction accounted in an IIA should be separated from other financial results of taxpayers which are not accounted on an IIA.

Any losses, resulting from transactions within the IIA, remaining at the date of the IIA contract cancellation cannot be further deducted for PIT purposes.

EXAMPLE 1
Pavel works as factoring analyst in a Russian bank, his annual salary is 3,100,000 RR. Pavel purchased the following securities (shares) quoted on the Russian stock exchange from cash placed in an ordinary broker account:

 

Date of purchase

Number of securities

Price per security RR

21 February 2017

1,600

250

25 March 2018

1,400

268

23 June 2019

1,400

285


All these securities were sold on 29 July 2021 at 520 RR per each.

Also in the year 2021 Pavel contributed 600,000 RR into an Individual Investment Account (IIA) and submitted the related supporting documents along with his PIT return.

Pavel performed several transactions within the IIA with shares quoted on the Russian stock exchange which resulted in a gain (positive result) of 90,000 RR. Pavel does not close the IIA and does not transfer the gain from IIA.

Required:
Calculate the personal income tax (PIT) liability of Pavel for 2021 applying all possible deductions available.

Answer:

  RR
Salary 3,100,000
Sale of the securities (1,600+1,400+1,400)*5202,288,000 
Cost of sale  
Purchased in 2017 1,600*250(400,000) 
Purchased in 2018 1,400*268(375,200) 
Purchased in 2019 1,400*285(399,000) 
Positive result/gain 1,113,800

Ordinary Investment Deduction is applicable for securities held for more than three full years, hence applicable only to securities purchased in 2017 and 2018 years. Securities purchased in 2019 held for less than three years and, hence, will not be included into the calculation.

   RR
Positive result in respect of securities purchased in 2017 and held for four full years 1600*(520-250) 432,000 
Positive result in respect of securities purchased in 2018 and held for three full years 1,400*(520-268) 352,800 
Total positive result to which Ordinary Investment Deduction will be applied 784,800 

Ordinary Investment Deduction:

   

Maximum deduction will be
Ks*3,000,000=(4*432,000+3*352,800)/(432,000+352,000)* 3,000,000=10,662,245

   
The deduction should not exceed positive result of the securities held for more than three years  

(784,800)

Fixed Investment Deduction (max = 400,000 RR) given against the 600,000 RR contributed to IIA

  

(400,000)

As the gain of 90,000 RR is not transferred outside of the IIA and IIA is valid at the end of 2021, the gain should be carried forward

             0
    

Tax base

  3,029,000

PIT at 13%

  393,770

PIT withheld by employer at source 3,100,000*0.13

  (403,000)

PIT to be refunded according to the PIT return for 2021

  

(9,230)

EXAMPLE 2
Modifying previous example let’s assume that all the above transactions were performed in an Individual Investment account and Pavel did not claim the Fixed Investment Deductions against the 600,000 RR contributed during the period that the IIA was held and he did not  have any another IIA.

Pavel opened the IIA in January 2017 and closed it on 31 December 2021.

Required:
Calculate Personal Income Tax of Pavel for 2021 applying all possible deductions available.

Answer:

Personal Income Tax base RR
Salary 

3,100,000

As Pavel's IIA validity period is more than three years and he did not claim any Fixed Investment Deductions in respect of the IIA, Pavel is allowed to use Investment Account Gain Deduction against the positive result/gains from those transactions in quoted securities.

The positive result on IIA (1,600+1,400+1,400)*520-(1,600*250+1,400*268+1,400*285)+90,000

1,203,800

Investment Account Gain Deduction (given in respect of total gain/positive result irrespective of the securities holding period)

(1,203,800)

No fixed investment deduction claimed in respect of contribution into IIA

           0
Tax base3,100,000
PIT at 13%403,000

PIT withheld by employer at source 3,100,000*0.13

(403,000)

PIT to be paid according to the PIT return for 20210

Securities held on ordinary broker account

In this part we will consider quoted and unquoted securities (other types of financial instruments are outside of the scope of the syllabus).

Quoted securities include securities traded on the Russian and foreign stock markets (stock exchange) and participatory interest in open unit investment funds, which are managed by Russian management companies.

Income from transactions in quoted and unquoted securities are calculated separately.

Income from the sale of shares and participatory interest in Unit investment funds (PIF) is determined by the market price according to the quotation on the stock market within extremum of the market quotation; even if the deal is made outside of the stock exchange.

Income from the sale of any unquoted shares (equity interest) in Russian legal entities is exempt from PIT if held for five years (the rule is applicable for shares (equity interest) acquired since 2011).

Deductible expenses on the purchase of securities were listed in the beginning of the article. Cost of expenses for taxation purposes should be calculated on FIFO basis.

If an expense cannot be directly attributed to a specific type of security (quoted or unquoted), it should be allocated on a pro rata basis according to the income received.

The financial result of transactions in securities for PIT purposes is calculated as income minus related expenses.

Losses from transactions in quoted securities incurred in previous periods can be respectively deducted for PIT base calculated in respect of transactions with quoted securities. The losses can be carried forward for 10 years and should be deducted on FIFO basis. The taxpayer should keep documents which confirm the losses until the last period in which the loss is deducted.

Losses from transactions in unquoted securities cannot be carried forward.

EXAMPLE 3
Anna has ordinary broker account.

Anna purchased shares in a Russian company A quoted on the Russian stock exchange:
 

Date of purchase

 

Number of shares

Price per share RR

21 February 2019

 

415

78

25 March 2019

 

314

81

23 June 2019

 

518

83


Anna sold 700 shares in company A on 18 June 2021 at 92 RR per share.

Broker commission in respect of the above transactions was paid of 560 RR.

In 2017 Anna incurred loss from transactions with quoted securities of 103,000 RR not deducted in previous years.

In 2015 Anna had purchased 200 shares (participatory interest) in a Russian unquoted company B at 55 RR per each. Those shares were sold by Anna in 2021 at 102 RR per each. Anna has never been affiliated with the company B.

Anna purchased an unquoted participatory interest in open Unit Investment Fund (PIF) managed by a Russian company on 02 January 2021 – 15 units at 25,000 RR per each. On 31 March 2021 Anna sold those 15 units for 32,000 RR each (the price is calculated by the management company according to current legislation).

The managing company of the Unit Investment Fund (PIF) withheld 0.5% discount on the sale.

To finance the purchase of the participatory interest Anna has taken a loan of 375,000 RR at 10% pa. The interest should be accrued on monthly basis and paid by the quarter end. In Q1 2021 CB RR was 5%.

In the previous year Anna incurred a loss from the sale of unquoted participatory interest in closed Unit Investment Funds of 50,000 RR.

All above-mentioned transactions are supported with appropriate documents.

Required:
Calculate Personal Income Tax of Anna for the year 2021 in respect of the abovementioned transactions applying all possible deductions available.

Answer:

Personal Income Tax base

 

RR

Quoted securities

   

Sale of shares 700*92

64,400

 

Cost of shares using First In First Out method:

   

purchased on 21 Feb 2019  415*78

(32,370)

 

purchased on 25 Mar 2019 700-415>314, ie deducted partly (700-415)*81

(23,085)

 

Broker commission

     (560)

 

As the shares are held for less than three years, Ordinary investment account deductions is not applicable

          0

 

Financial result from transactions with the quoted securities

 

 8,385

Loss from transactions with quoted securities
8,925 out of 103,000 RR
 

(8,385)

Loss of 103,000-8,385 = 94,615 to be carried forward

   

As Anna has held the shares in the unquoted Russian company for more than five year, income from the sale is exempt from PIT

 

0

     

Unquoted securities

   

Sale of the participatory interest 15*32,000

 

480,000

Discount upon sale  0.5%*480,000

 

  (2,400)

Cost of the participatory interest purchase 15*25,000

 

(375,000)

Loan interest related to the purchase of the participatory interest

should be limited by CB RR*1.1 for rouble loans (at 5.5%)
375,000*5%*1.1*(30+28+31)/365

 

(5,029)

Interest above the limit 375,000*10%*(30+28+31)/365 – 5,029 = 4,115 RR will not be deductible

 

0

Loss related to transactions with unquoted securities cannot be carried forward

 

0

     

Tax base

 

97,571

PIT at 13%

 

12,684

Inheritance

Any securities inherited by individuals (heirs) are exempt from PIT.

Gifts between individuals

The rules in respect of taxation of gifted property are similar to the rules in respect of inheritance with the following exception.

Any gifts received from family members and/or close relatives are exempt from PIT. Family members are spouses, parents and children, adopted children and adopters. Close relatives are relatives in the direct ascending and descending lines, namely parents, grandfathers and grandmothers, grandchildren full- and half-blood brothers and sisters (who have a common father or mother).

However, if the donor and donee are not close relatives, according to the Family Code, a gift of shares or participatory (equity) interest represents taxable income within PIT. Gifts of securities other than shares or participatory (equity) interest, received from an individual who is not a close relative are exempt from PIT.

Also heirs and receivers (of gifts) are allowed to deduct expenses related to the inherited/gifted securities, which were incurred by the legator, to acquire the securities, provided that those expenses were not previously deducted by the legator for PIT purposes. 

In respect of the sale of inherited or gifted unquoted equity interests/shares in Russian legal entities, if held for five years the exemption is applicable.

If the recipient pays a PIT liability from gifted or inherited securities (as well as those received in another way – eg received as salary in kind), the PIT base of any subsequent sale of the security should be decreased by the value of the security from which PIT has already been paid on receipt of the securities. This is to avoid taxation of the same income on a subsequent sale of securities gifted or inherited.

In addition, the base can be decreased by expenses or taxes paid upon receipt of a gift or inheritance (for example if the taxes are paid in a foreign jurisdiction).

EXAMPLE 4
In 2021 Ivan inherited from his full-blood (biological) grandfather 2,500 shares in a Russian quoted company (purchased for 700 RR each).

During 2021 Ivan received the following birthday gifts:

  • 250 shares in a Russian quoted company from his father
  • 100 quoted corporate bonds from his mother-in-law (mother of his wife)
  • 50 items of quoted participatory interest in a Russian Unit Investment Fund (PIF) from his aunt (purchased by her for 500 RR each and with a market value at the time of the gift of 600 RR each)
  • Ivan sold all the inherited shares at the market price of 950 RR each and sold all of the participatory interest received from his aunt at the market price of 990 RR per each.

All above-mentioned transactions are supported with appropriate documents.

Required:
Calculate personal income tax (PIT) liability of Ivan in respect of the above-mentioned transactions applying all available deductions.

Answer:
 

PIT return of Ivan for 2021

RR

Shares inherited from full-blood (biological) grandfather

0

Shares received as gift from father (family member – gift exempt from PIT)

0

Quoted corporate bonds received from mother-in-law (mother of his wife), she is not a close relative, however corporate bonds are securities other than shares or participatory(equity) interests and are therefore exempt from PIT

0

Quoted participatory interest in Russian PIF received from his aunt. Aunt is not close relative and participatory interests are not exempt from PIT, so the gift is taxable at the market value 50*600

30,000

Sale of inherited shares 2,500*950

2,375,000

Deduction of expenses incurred by ancestor (grandfather) confirmed with documents (2,500*700)

(1,750,000)

Sale of participatory interest in PIF 50*990

49,500

Deduction of value of participatory interest on which PIT has already been calculated upon receipt

(30,000)

   

Tax base

674,500

PIT at 13%

87,685

Written by a member of the TX-RUS examining team