Bloomberg News

Russia Said Preparing Tax Exemptions for Eurobond Payments

February 15, 2012

(Adds finance minister comment from third paragraph.)

Feb. 9 (Bloomberg) -- Russia’s government is discussing a law that may save companies from retroactive tax claims on interest payments for existing Eurobonds, said a Kremlin official familiar with the plans.

The government is discussing a law to exempt companies from paying a 20 percent withholding tax on Eurobond coupon payments to non-residents via offshore entities, known as SPVs, the person said, declining to be identified before a draft is ready, which may be in two to three weeks.

Russia will find a mutually acceptable system for tax payments on Eurobonds, Finance Minister Anton Siluanov said today, after businesses and investors expressed concern that a levy may increase corporate borrowing costs and discourage issuance. Moody’s Investors Service estimates the existing 20 percent withholding tax, if enforced, may cost Russian companies $1.5 billion.

“We’re ready to meet halfway with the business community and create the most comfortable regime for Eurobond sales,” Siluanov said today in Moscow at a meeting of the nation’s big- business lobby, the Russian Union of Industrialists and Entrepreneurs, known as the RSPP.

Bond-Coupon Levy

The Finance Ministry is preparing legislation clarifying the existing bond-coupon levy, which hasn’t often been imposed on issuers. The plan would exempt debt holders from countries that have a double taxation agreement with Russia, while Eurobonds sold before Jan. 1, 2012 may get a tax break, according to a Jan. 27 statement from the ministry.

Economy Minister Elvira Nabiullina said Feb. 3 that she had “big doubts” about applying the tax.

The authorities are planning a meeting this week with investors and consultants to seek a “solution that satisfies all sides,” Siluanov said.

OAO Transneft, the state-controlled oil pipeline operator, said last month it might buy back about $4 billion of outstanding Eurobond after receiving a preliminary bill from the Federal Tax Service for more than 2 billion rubles ($66 million).

The government may back away from the tax once it considers the possible increase in borrowing costs for Russian companies, Kathleen Middlemiss, head of Europe, Middle East and Africa corporate credit research at UBS in London.

“The Russian corporates who are the most frequent issuers are the quasi-sovereigns, so it doesn’t make sense for the government,” Middlemiss said by phone yesterday. “They’d be cutting off their nose to spite their face.”

--With assistance from Brad Cook and Anton Doroshev in Moscow. Editors: Torrey Clark, Zoe Schneeweiss

To contact the reporters on this story: Ilya Arkhipov in Moscow at iarkhipov@bloomberg.net; Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Gavin Serkin at gserkin@bloomberg.net


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