NAUFOR asks to soften tax changes for the collective investment industry

The revision of the taxation of the collective investment industry should be more limited in order to soften its impact on the markets, follows from a letter signed by the President of the National Association of Stock Market Participants (NAUFOR) Alexei Timofeev, sent to the head of the Ministry of Finance Anton Siluanov and the Chairman of the Bank of Russia Elvira Nabiullina. Vedomosti journalists who have read the document write about the brokers’ message.

In September, the Russian Ministry of Finance proposed revising the rates for so-called passive income, namely income from dividends and other equity participation, interest on deposits over a million rubles, transactions with securities and digital rights, from the sale of property and sale of participation shares, under insurance and gift agreements, which are now taxed at a reduced rate of 13-15 percent. Now it is planned that they will be included in the main tax base at a rate of 13-22 percent.

The bill submitted to the State Duma on September 30, among other things, proposes to introduce a 15 percent tax on profits from dividends, interest, royalties and rental payments for qualified investors for closed and interval mutual investment funds (closed-end mutual investment funds and individual mutual investment funds).

Currently, mutual funds do not pay income tax, and taxation arises at the time of payment of income to shareholders, which can be postponed for a long time and creates preconditions for tax optimization by structuring asset ownership using funds, the Ministry of Finance indicated.

At the same time, according to Timofeev’s arguments, in their current form, the proposed changes do not sufficiently take into account the peculiarities of the mutual fund industry, since the property of the mutual fund belongs to the shareholders on the right of common shared ownership, who bear the tax burden on the fund’s passive income, and the offset of taxes paid is provided for by the bill only when paying periodic income on shares, and therefore their sale or redemption will lead to cases of double taxation.

The head of NAUFOR noted that many “qualified” closed-end mutual funds and individual mutual funds unite a significant number of shareholders, mainly citizens, and therefore it would be correct to apply to them the same approach as to retail (open-ended and exchange-traded) funds. He also pointed out that closed-end mutual funds and individual mutual funds often regularly distribute profits, which is an independent and significant tax base, and taxation of income on derivative financial instruments and repurchase agreements in which mutual funds invest, without taking into account the relationship with income/loss on other financial instruments, will significantly limit the ability of funds to hedge market risks and manage other risks of shareholders.

In connection with all of the above, Russian brokers and managers asked Siluanov and Nabiullina to maintain the current tax regime for closed-end mutual funds and individual mutual funds that have a significant number of shareholders with a slight concentration of ownership, or those in which a significant share of the profits is regularly distributed.

The association also called for determining taxable income minus economically justified and documented expenses, including taking into account the specifics of individual passive income, for example, bond coupons and not extending taxation to income from derivatives and repo. Among the proposals set out in the letter is also an initiative on the possibility of switching from monthly tax calculation to quarterly, which, according to NAUFOR, will reduce the increasing operational burden on management companies as tax agents.