The Bondholders Association called on the authorities to eliminate the tax on exchange rate income from replacement bonds

The Bond Holders Association (ABO) sent an appeal to the head of the RF Ministry of Finance Anton Siluanov and the head of the State Duma Committee on the financial market Anatoly Aksakov with a request to cancel the tax on income arising during the exchange of Eurobonds for substitute papers due to currency revaluation.

“I believe that there is a topic for discussion, and it is quite possible that this issue will need to be adjusted further,” said RBC Mr Aksakov. The Ministry of Finance has not yet commented on the AVO proposal.

Due to the fact that Eurobonds were purchased at a higher exchange rate of the ruble, and after the issuance of replacement bonds, the exchange rate fell, investors received additional income in rubles (at the same time, the nominal value of the securities in foreign currency did not change). In this regard, investors were charged with personal income tax on all income received.

The ABO believes that it is necessary to change this procedure, since the exchange of Eurobonds for replacement papers is not a classic purchase and sale transaction, so investors should not be taxed.

The problem of payments to local investors on Eurobonds arose in March 2022 after the imposition of sanctions against the Russian Federation and is due to the fact that the majority of Russian Eurobond holders use NSD as a depository, to which Euroclear or Clearstream must transfer funds from issuers of foreign debt securities. However, foreign infrastructure organizations stopped such operations, and, as a result, payments on Eurobonds did not reach Russian bondholders, even if the issuers made regular payments.

The solution of this problem for the majority of issuers dragged on for many months. On March 5, 2022, Presidential Decree No. 95 was published, which gave the Ministry of Finance and the Central Bank the authority to issue permits for payments in the same order in foreign currency. Substitute bonds are also issued in the Russian Federation. These are debt securities circulating within the Russian Federation, which the holder receives in exchange for Eurobonds. Their par value, maturity dates and coupon sizes are completely similar to the corresponding parameters of the securities to be replaced. At the same time, payments are made not in foreign currency, but in rubles at the exchange rate of the Central Bank of Russia on the date of payment. Issuers that issued replacement bonds include Gazprom, LUKOIL, Sovcomflot, MMK, Metalloinvest and PIK.

Read more about this in the publication “Kommersant” “Just a substitute solution”.

Alexander Kislov