The authorities will exempt from tax the income of sanctioned companies from the sale of shares

The Ministry of Finance proposed to exempt sub-sanctioned companies from income tax on income from the sale of shares in 2022. So the business will be able to save on taxes when the sale of packages was forced due to sanctions,

The Ministry of Finance has developed amendments to the Tax Code that will allow companies under sanctions not to take into account in the tax base in 2022 income from the sale of shares (stakes) in the authorized capital of other organizations. RBC got acquainted with the bill. The document was approved by the government commission on legislative activities on December 5, the government's press service reported.

As experts interviewed by RBC explain, such a rule may be designed to reduce the tax burden on sub-sanctioned companies that are forced to sell shares of subsidiaries in order to protect them from the sanctions “50% rule”. According to it, a company is automatically subject to restrictions if more than half of it belongs to an individual or legal entity included in the sanctions lists.

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What does the Ministry of Finance offer?

The amendment proposed by the Ministry of Finance for a zero income tax rate for income from the sale of shares or shares of Russian companies applies to transactions concluded during 2022.

The exemption applies to taxpayers against whom sanctions were imposed at the time of the transaction , and they should also be introduced in 2022.

For the purposes of this draft law, sanctions are understood as “prohibitive, restrictive or other similar” measures, including restrictions on settlements and / or financial transactions related to debt financing or transactions for the sale of securities and stakes in other organizations, follows from bill. This means that companies that fall not only under asset blocking in the US or the EU, but also under milder sectoral sanctions in 2022, will be able to apply for the benefit.

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Another condition for the exemption of income from income tax: the shares (shares) of the company being sold must be continuously owned by the taxpayer for more than one year.

The measure is primarily designed to ease the tax burden on companies that are forced to sell shares in their subsidiaries so that they do not fall under sanctions, including under the “50% rule”, and continue to work fully, believes a partner in the tax and law department of the Business solutions and technologies” (ex-Deloitte) Oleg Troshin. “So [former] subsidiaries will be able to attract debt financing without restrictions, to carry out certain financial transactions or operations,” he points out.

Some sanctioned companies immediately began restructuring their assets so that subsidiaries would also not be sanctioned. At the end of February, VTB transferred two shares of Post Bank PJSC to the new Chairman of the Board Alexander Pakhomov, thus reducing its share to less than 50%, Lyudmila, HEAD of the Structural and Tax Consulting Practice at Lemchik, Krupsky and Partners law firm, gives an example Kruglov.

Companies do not have to sell more than 50% of their shares: for example, as RBC wrote, VTB and Sovcombank sold their minority stakes in the St. Petersburg Exchange, which in 2022 were included in the blocking US SDN sanctions list. However, according to one of RBC's sources, the Sovcombank deal took place before the imposition of sanctions against it.

“It is difficult to estimate how much money this measure will help sub-sanctioned companies save, because information about their activities, losses, revenue, number and value of transactions for the sale of shares and shares of subsidiaries is hidden,” Kruglova notes. At the end of November, the government extended permission for Russian companies not to fully or partially disclose corporate reports until July 2023 to protect against sanctions. Initially, the norm was valid until the end of 2022.

“The Ministry of Finance of Russia, on behalf of the government of the Russian Federation, has prepared a draft amendment that proposes to establish a zero income tax rate for organizations under sanctions pressure in 2022 during their restructuring. This will limit the expansion of the sanctions impact on such companies, as well as ensure the stabilization of the financial condition of organizations that have not previously planned to sell assets, ”the press service of the Ministry of Finance confirmed to RBC. They also noted that a similar measure had previously been taken for citizens: in 2022, income from forced transactions concluded to withdraw companies from sanctions imposed on the owners of these companies will be exempted from personal income tax.

Other trade examples

In 2022, there will be many transactions for the sale of shares in the capitals of other companies by sanctioned companies. For example, in May, Sberbank (fell under US blocking sanctions) sold several services at once, including Okko, Sound, Evotor, and others. In September, VEB.RF sold the CSKA football club to Balance Asset Management (although in in this case, CSKA is also on the SDN sanctions list).

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Not always measures to alienate shares and shares can really help subsidiaries avoid problems associated with sanctions, warns Kruglova. “The very fact that companies have historically been associated with sanctioned organizations, even if there is currently no legal interdependence between them, can already become an obstacle to normal foreign economic activity,” she warns.

In general, state support makes it possible to neutralize the effects of sanctions for many companies in Russia, writes Jamilya Nigmatulina, associate professor at the University of Lausanne Business School. After analyzing 600 thousand Russian firms in 2012-2020, she claims that the production and revenue of sanctioned companies increased compared to non-sanctioned ones. However, this is not necessarily good for the economy in its purest form. “As subsidies, government contracts and loans have increased more for sanctioned firms, these resources have shifted away from other firms and citizens. In other words, the government helped the targets of sanctions at the expense of everyone else,” she writes.