Baker & McKenzie: New Individual Taxation Rules on Securities and Derivatives Transactions

The following document is the summary of important changes to Russian tax legislation in relation to transactions with securities. Should you have any questions, please do not hesitate to contact Alexander Chmelev on +7 495 787 2700, or Sergei Zhestkov on +7 495 787 2700, partners at the Baker & McKenzie Moscow Representative Office.

Tax Benefits on Sale of Shares in Russian Companies

Federal Law No. 395-FZ dated December 28, 2010 has introduced important changes to the Russian Tax Code aimed at promoting Russia as an international financial centre. In particular, the new rules exempt individuals (parallel rules were introduced for legal entities) from taxation upon the sale or redemption of their shares in Russian companies provided that:

  1. such individuals have continuously held those shares for more than five years (the "holding period"); and
  2. the income has been derived from the sale or redemption of participation interests or shares in Russian companies, provided that (a) the interests or shares have not been publicly traded on a securities market throughout the holding period, or (b) the interests or shares are of Russian companies operating in the high-tech (innovative) sector of the economy throughout the holding period.

The new rules apply to participation interests and shares in Russian companies acquired by Russian taxpayers starting from 1 January 2011. Upon introduction of the above rules the direct long-term holding of shares in Russian companies may become preferable over their indirect holding through foreign companies.

Rules for Determining Market Prices of Securities and Derivatives

The Federal Service for Financial Markets (the "FSFM") issued a number of orders at the end of 2010 which establish rules for determining the market prices and calculated prices of both Russian and foreign securities and nonpublicly traded derivatives (including stock options), and set a maximum limit on fluctuations in the market price. The new rules apply for tax purposes from 1 January 2011.

Previously, the Russian Tax Code made it possible to determine market prices only for securities publicly traded on an exchange and financial instruments. In the other cases, an independent appraiser had to be retained for such valuations, and this made it difficult or altogether impossible in practice to value securities that were not publicly traded. The new rules clarify the procedures for determining market prices of publicly traded and non-publicly traded securities and derivatives, a more detailed analysis of which we will be happy to provide.


The procedure for determining the market prices of publicly traded securities has been established for applying Articles 212 and 214.1 of the Russian Tax Code.

Under the new rules, the market price of securities publicly traded on a Russian exchange is the securities’ weighted-average price calculated by one of the Russian stock exchanges based on all or some of the securities' transactions made over one or 90 trading days, depending on the number and amount of executed transactions. The procedure for securities publicly traded on foreign exchanges is based on the day’s closing price. In both cases, a taxpayer may use the permitted maximum limit on the fluctuation of the securities' market prices.

The new rules for determining the value of non-publicly traded securities establish a method for identifying the calculated price existing in the market, in particular based on:

  • the weighted-average prices of the securities, as quoted by Russian or foreign credit institutions, brokers, dealers, and/or fiduciary managers; or
  • the prices calculated on the basis of quotes reported in information systems; or
  • the Thomson Reuters Composite bids; or
  • the Bloomberg generic Mid/Last prices.

The calculated price may also be determined on the bid quotes made to either an indefinite range of sellers or to specific parties, for example, to a particular taxpayer upon request.

As an alternative, the FSFM offers rules for determining prices using certain formulas. The market price of non-publicly traded shares, for example, can be computed based on the company's net asset value, as determined in accordance with the procedure set forth by the Russian Ministry of Finance and the FSFM. If the company prepares its accounts in accordance with IFRS, the calculated price may be found by dividing its capital by the amount of the respective shares. The maximum limit on fluctuations in the market prices for non-publicly traded securities is 20% either way of the calculated price.

It is still possible for the market prices of securities to be determined by independent appraisers.


The calculated price of non-publicly traded derivatives (financial instruments of forward transactions or “FIFTs”) may be determined on the basis of any of the following:

  • the prevalent market prices for the same derivatives; or
  • calculations based on the formulas expressly set out by the FSFM; or
  • the price determinations made by an independent appraiser.

The market prices of non-publicly traded FIFTs can be determined using similar sources of information as is the case with non-publicly traded securities.

The market price of a non-publicly traded FIFT may be calculated, for example, based on the average-weighted price of an identical financial instrument publicly traded on a Russian stock-exchange or using the instrument’s closing price on a foreign stock-exchange. The FIFT is deemed to be identical if the compared financial instruments are of the same type, share the same underlying asset, are based on the same amount of the underlying asset, and have the same exercise date and exercise price (in the case of options). A number of formulas can be used to calculate FIFT prices, including a modified Black-Scholes pricing module formula.

Taxation in Stock Incentive Programs

The FSFM does not limit the scope of methods for calculating FIFT prices, but they have obviously been designed for general over-the-counter FIFTs and fail to take into account the specific features of financial instruments received and exercised under various long-term employee stock incentive programs (“Incentive Programs”).

The formulas disregard, in particular, the restrictions imposed on the transfer of such instruments during the term of Incentive Programs and the possible forfeiture of such financial incentives upon an employee's termination, although such constraints do have substantial effects on valuations.

Interpretation of the foregoing FSFM orders and Articles 212 and 214.1 of the Russian Tax Code suggests that the formulas intended for determining the calculated prices of options may be used to compute market prices at the time of the grant of rights for many financial instruments granted under Incentive Programs (such as stock purchase rights, and stock appreciation rights payable in cash). The granting of such financial instruments to employees gives rise to their receiving a taxable material benefit. When rights to shares are transferred, including restricted stocks and restricted stock units, a corresponding tax liability may arise upon the vesting and/or transfer of the underlying assets to the employees.

The introduction of a new mechanism for calculating the prices of financial instruments does not directly exclude taxation upon their exercise (for example, the purchase of shares under option contracts at below-market prices). The new rules may create tax risks both for the companies granting their employees stock awards and for the participants of Incentive Programs if they receive such rights either for free or for only a nominal fee. We recommend reviewing all existing or planned Incentive Programs from the standpoint of these new tax rules. We are prepared to advise on your stock incentive programs or develop a new program for your organization.