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, e.g. dividends. For PIT purposes the positive result/gain is determined according to the rules applicable to transactions in securitie – ie is calculated as income minus related expenses.  

Expenses related to transactions with 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%.

The financial results from transactions in securities, held on individual Investment Accounts (IIA) and those not held on IIA; form two separate tax bases according to sub item 3 and 7 of item 2.1 of article 210 of Russian Tax Code (RTC) in which respect standard, social, property or professional deductions are not applicable (item 3 of article 210 of RTC). However, some deductions can be applied, which will be described in details below. Dividends like other incomes from equity participation form separate tax base.

These separate tax bases are different from the main tax base. Income from employment like salary is an example of income included in the main tax base.

The separate tax bases related to transactions in securities are included in the total sum of tax bases (aggregated tax base). The total sum of tax bases (aggregated tax base) includes main tax base and other separate specific tax bases (listed in item 2.1 of article 210 of RTC), taxed at the rate of 13% PIT if the total sum does not exceed 5,000,000 RR, and at the 15% PIT rate in respect of the excess over 5,000,000 RR.

For example, in 2022 the financial result from transactions with securities accounted on an ordinary broker account was 3,000,000 RR (5,000,000 RR of income minus 2,000,000 RR of expenses) and the accumulated financial result for two years on an IIA closed in the year 2022 was 4,000,000 RR (10,000,000 RR of income minus 6,000,000 RR of expenses). So, the amount of 7,000,000 RR (4,000,000 + 3,000,000) would be included in the total sum of tax bases. The total sum of tax bases would be taxed with PIT of 950,000 RR (5,000,000 x 13% + (7,000,000-5,000,000) x 15%) assuming that the taxpayer does not have any other income.

Investment deductions

The following types of investment deductions, applicable to different tax bases, are available in the three circumstances below:

1. The Ordinary Investment Deduction
Where a gain (positive result) is made from transactions in securities quoted on the Russian stock exchange (quoted securities) and participatory interest in open unit investment funds PIFs (the management of which is performed by Russian management companies), and these securities have been held for more than three years, in that case the Ordinary Investment Deduction is available. The Ordinary Investment Deduction applies only to the separate tax base on the financial result from transactions in securities held outside of an IIA (paragraph 2 of item 2.3 of article 210 of RTC).

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 IIA. A positive result of the transactions in securities in an ordinary broker account should be calculated on an annual basis for the separate tax base calculation 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 Ordinary Investment Deduction was provided by more than one broker and the total amount of the Ordinary Investment Deduction provided by all tax agents (brokers) exceeds the amount of the allowable Ordinary Investment 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 type of deduction is applicable to the main tax base (like income from employment).

This deduction applies to the money contributed into an IIA (and is quite independent of any further transactions which occur as a result of this contribution into the IIA). The deduction is limited to 400,000 RR contributed to an IIA within a tax period.

This investment deduction can be provided in two ways:

(i) in the PIT return to which a taxpayer should attach documents that confirm the contribution to the individual investment account (within the limit of 400,000 RR).

(ii) in the simplified way according to article 221.1 of RTC. After year end when a taxpayer (individual) contributed an amount of money to an IIA and is entitled to the fixed investment deduction, the taxpayer should submit an e-claim to the tax authority via the tax account (account of the individual in tax authority). The claim can be submitted in respect of the investment deductions for three years prior to the year of the submission of the claim. The e-claim is based on information, gathered from tax agents (eg employers etc.) and banks.

The claim should consist of bank details of the individual to which PIT attributable to the investment deduction should be refunded. 

The claim is audited by tax authority according to rules applicable for desk tax audits.

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 IIA (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 deductions received for the IIA validity period should be clawed back and the related PIT should be paid along with the appropriate 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 IIA.

The deduction is granted at the end of the IIA 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 assets transferred into this investment account) the Fixed Investment Deduction has been provided at any time during the validity of the IIA contract.

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

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

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

The above mentioned rules can be so illustrated:

transactions-on-sec-1

*provided that the taxpayer has taxable income in the main tax base in the same tax period in an amount at least equal to the investment deduction.

** all those tax bases after application of those deductions are taxed with PIT at standard scale rates of 13% if a tax base does not exceed 5,000,000 RR and 15% in respect of excess over 5,000,000 RR.

Individual Investment Account

The following features of an IIA are described in article 10.2-1 of Federal Law dated 22.04.1996 N39-FZ 'On Securities market':

  • 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 on the Russian Stock exchange 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.

transactions-on-sec-2

* for example if interest related to quoted bonds held on an IIA is paid on an account other than an IIA, in that case the interest will be taxable. At the same time if the interest is paid on an IIA, it will be taxed within financial result at the IIA contract cancellation.

Calculation of the PIT base in respect of the above separate types of transactions 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 gross salary is 5,100,000 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 2018

1,600

250

25 March 2019

1,400

268

23 June 2020

1,400

285

All these securities were sold on 29 July 2022 at 520 RR per each.

Also in the year 2022 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 out of the IIA.

Required:
Calculate the personal income tax (PIT) liability of Pavel for 2022 applying all possible deductions available.

Answer:

Main tax base

 

RR

Salary

 

5,100,000

Total main tax base

 

5,100,000

PIT withheld at source by employer at 13% and 15% rates 5,000,000 x 13% + (5,100,000 - 5,000,000) x 15%

 

665,000

The tax agent (employer of Pavel) should pay PIT at 13% and 15% rates separately according to item 7 of article 226 of RTC

 

 

     

PIT return of Pavel for 2022 year

   

Main tax base

 

RR

Income from employment

 

5,100,000

Fixed Investment Deduction (max = 400,000 RR)

 

(400,000)

Total main tax base

 

4,700,000

     

Tax base in respect of securities

 

RR

Sale of the securities (1,600+1,400+1,400)*520

2,288,000

 

Cost of sale

   

Purchased in 2018 1,600*250

(400,000)

 

Purchased in 2019 1,400*268

(375,200)

 

Purchased in 2020 1,400*285

(399,000)

 

Positive result

 

1,113,800

Ordinary Investment Deduction is applicable for securities held for more than three year, hence applicable only to securities purchased in 2018 and 2019 years.

   

Positive result in respect of securities purchased in 2018 and held for four full years 1600 x (520-250)

432,000

 

Positive result in respect of securities purchased in 2019 and held for three full years 1,400 x (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 x 3,000,000 = (4 x 432,000 + 3 x 352,800) / (432,000 + 352,000) x 3,000,000 = 10,662,245

   

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

 

(784,800)

Total tax base in respect of securities calculated by broker as tax agent

 

329,000

PIT at 13% rate (as the base is less than 5m RR) withheld by broker and remitted into the Budget

 

42,770

     

Tax base in respect of IIA:

   

As the gain is not transferred outside of the IIA and IIA is valid at the end of 2022, the gain should be carried forward and not taxed in this year.

 

           0

Total tax base in respect of IIA:

 

0

     

Total sum of tax bases 4,700,000 + 329,000 + 0

 

5,029,000

PIT at 13% and 15% rates 5,000,000 x 13% + (5,029,000 - 5,000,000) x 15%

 

654,350

PIT withheld by employer at source 5,100,000 X 13%

 

(665,000)

PIT withheld by the broker at source 329,000 X 13%

 

(42,770)

PIT to be paid (+) / refunded (-) according to the PIT return for 2022

 

(53,420)

 

EXAMPLE 2
Modifying previous example let’s assume that all the above transactions were performed in an IIA and Pavel did not claim the Fixed Investment Deductions in respect of the 600,000 RR contributed during the IIA validity period and he did not  have any another IIA. Pavel submitted to the broker a claim in respect of getting the Investment Account Gain Deduction and the broker confirmed with tax authority the possibility to use the deduction.

Pavel opened the IIA in January 2017 and closed it on 31 December 2022.

Required:
Calculate Personal Income Tax of Pavel for 2022 applying all possible deductions available.

Answer:

Main tax base at source

 

RR

Salary

 

5,100,000

Total main tax base

 

5,100,000

PIT withheld at source by employer at 13% and 15% rates 5,000,000 x 13% + (5,100,000 - 5,000,000) x 15%

 

(665,000)

The tax agent (employer of Pavel) should pay the PIT at 13% and 15% rates separately according to item 7 of article 226 of RTC

 

 

     

Tax base in respect of IIA:

 

RR

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

 

(1,203,800)

No fixed investment deduction allowed

 

0

Tax base

 

               0

PIT withheld at source by the broker at 13% rate

 

0

     

PIT return of Pavel for 2022 year

 

RR

Total sum of tax bases 5,100,000 + 0

 

5,100,000

PIT at 13% and 15% rates 5,000,000 x 13%+(5,100,000 - 5,000,000) x 15%

 

665,000

PIT withheld by employer at source 5,000,000 x 13%+(5,100,000 - 5,000,000) x 15%

 

(665,000)

PIT withheld by the broker at source

 

               0

PIT to be paid (+) / refunded (-) according to the PIT return for 2022

 

0

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 for taxation purposes include securities traded on the Russian and foreign stock markets (stock exchange) and participatory interest in open unit investment funds (PIFs), which are managed by Russian management companies, provided that market quotation is calculated in respect of the securities.

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 (redemption) of any equity interest in charter capital (equity) of Russian legal entities is exempt from PIT if held for more than five years.

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

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 and forms a separate tax base, which is included in the sum of tax bases,  to which 13 % PIT rate applied if the tax base does not exceed 5m RR and 15% rate in respect of excess of the sum of tax bases over 5m RR.

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 2020

 

415

78

25 March 2020

 

314

81

23 June 2020

 

518

83


Anna sold 700 shares in company A on 18 June 2022 at 92 RR per share.

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

In 2018 Anna incurred loss from transactions with quoted securities of 103,000 RR not deducted in previous years.

In 2016 Anna had purchased 200 participatory interest in a Russian unquoted company B at 55 RR per each. Those participatory interest were sold by Anna in 2022 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 2022 - 15 units at 25,000 RR per each. On 31 March 2022 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 2022 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 2022 in respect of the abovementioned transactions applying all possible deductions available.

Answer:

Tax base in respect of securities

 

RR

Quoted securities of company A

   

Sale of shares 700 x 92

64,400

 

Cost of shares using First In First Out method:

   

purchased on 21 Feb 2020  415 x 78

(32,370)

 

purchased on 25 Mar 2020 700-415>314, ie deducted partly (700 - 415) x 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 of previous years from transactions with quoted securities

8,385 out of 103,000 RR

 

(8,385)

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

   

Tax base in respect of securities

 

0

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% x 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 x 1.1 for rouble loans (at 5.5%)
375,000 x 5% x 1.1 x (30+28+31) / 365

 

(5,029)

Interest above the limit 375,000 x 10% x (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

     

Total tax base in respect of securities

 

97,571

PIT at 13% as the base does not exceed 5m RR

 

12,684

* A taxpayer is allowed not to include into PIT return any exempt incomes (item 4 of article 229 of RTC).

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 (or members of a family), according to the Family Code, a received gift of shares or participatory(equity) interest (shares in OOO, PIFs) being valued at market price, represents taxable income within PIT. The taxable income included into separate tax base related to sale of property taxed at flat 13% PIT rate. The rate is applied to the tax base irrespective of its amount.

Gifts of securities other than shares or participatory (equity) interest (shares in OOO, PIFs), received from an individual are exempt from PIT.

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

In respect of the sale (redemption)of inherited or gifted unquoted equity interests/shares in Russian legal entities, if held by the recipient for five years, the exemption from PIT is applicable.

If the recipient pays a PIT liability from gifted securities (as well as those received free of charge in another way, e.g. 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.

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 2022 Ivan inherited from his full-blood (biological) grandfather 2,500 shares in a Russian quoted company (purchased for 700 RR each).

During 2022 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 (quoted) 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 for 2022 of Ivan in respect of the above-mentioned transactions applying all available deductions.

Answer:

PIT return of Ivan for 2022

RR

Shares inherited from full-blood(biological) grandfather*

0

Separate tax base in respect of property sale and gifts

RR

   

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 not shares or participatory(equity) interests, which receipt in turn as a gift taxable with PIT) and therefore the gift receipt is 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 in respect of property sale and gifts

674,500

PIT at 13%

87,685

* A taxpayer is allowed not to include into PIT return any exempt incomes (item 4 of article 229 of RTC).

** Receipt of the participatory interest and its sale are two different transactions, which can occur in different tax periods. This is why those both transactions are shown separately.

Written by a member of the TX-RUS examining team