* Levy plans on bonds issued by Jan. 1, 2013 scrapped
* Bonds placed after 2013 taxed only on interest to SPVs in
* Initial plans to collect levy caused furore among issuers
(Adds analyst and investor comments, market reaction)
By Jason Bush and Lidia Kelly
MOSCOW, Feb 21 Russia is scrapping plans
to collect tax on corporate Eurobonds placed before Jan. 1,
2013, following a storm of protest from major Russian companies
and banks who warned that the move threatened seriously to dent
fragile investor confidence.
Russia's finance ministry said late on Monday that it is
dropping the idea and may apply only a partial levy to papers
issued from next January onward.
The ministry's statement provides reassurance to
international bondholders of Russian companies, who faced the
prospect of significant losses if issuers had redeemed their
bonds at par in response to the ministry's earlier proposal to
withhold 20 percent profit tax on interest payments at source.
"The ministry of finance is treating investors in the right
way - it's an investor-friendly decision - and in this respect
it's a positive outcome," said Elena Kolchina, fund manager of
the Renaissance Russian Debt Fund in Moscow.
"The immediate source of investor concern appears to have
been removed," said Mikhail Galkin, a fixed income analyst at
"From an investor standpoint that was the only risk: There
was no risk of suffering from the tax - there was a risk of high
cash price bonds being redeemed early at par."
Some of Russia's biggest corporate borrowers, including top
gas producer Gazprom and its second largest state bank
VTB, had been facing large bills in relation to
existing bond programmes.
Oil pipeline monopoly Transneft had threatened
to redeem over $4 billion bonds at par in response to the
proposals outlined by officials in recent months.
"First, as regards interest income paid on Eurobonds issued
prior to Jan. 1, 2013, we propose to fully release Russian
borrowers from any obligations to withhold tax, i.e. from
obligations to act as tax agents (including interest income that
has already been paid to investors)," the ministry said in a
Corporate Eurobonds issued after Jan. 1 of next year will be
taxed only on interest income received by an intermediary
located in an offshore jurisdiction which has no double-tax
treaty with Russia, the ministry said.
Russian corporate Eurobonds saw only a small positive
reaction after the finance ministry's announcement, with the
yield on 2018 bonds of Gazprom, the largest
corporate issuer, tightening by just 3 basis points on Monday
Analysts said that the reaction was muted because of
previous indications that the ministry was retreating from its
original position, following the strongly negative reaction from
issuers and investors.
"When these rumours first appeared people were a bit scared,
but then everyone calmed down. It's just official confirmation
that nothing bad will happen," said Kolchina.
The yield on Gazprom's 2018 bond has tightened by around 45
basis points since peaking on Feb. 8, having previously risen by
around 50 basis points in the two weeks after the finance
ministry's initial proposal was publicised in late January.
Deputy Finance Minister Sergei Shatalov had recommended, in
a letter to tax officials at the end of last year, that by
Russian law companies issuing Eurobonds were obliged to pay 20
percent profits tax on interest at source.
The finance ministry had also insisted that payments to
foreign debt holders through offshore units called special
purpose vehicles (SPV) are taxable under the existing Russian
law, but this tax has not been collected in the past.
Russian corporates, which have over $100 billion in
Eurobonds outstanding, could face a back-tax bill for $600
million, Shatalov said earlier this month.
While the finance ministry has ditched its previous plan to
impose the tax retroactively, the introduction of withholding
tax from next year may potentially raise the cost of issuing
Eurobonds in future.
"Higher borrowing costs could keep Russian borrowers from
frequent Eurobond issuance starting in 2013, and it would likely
push issuers to use alternative sources of funding, including
the local bond market," VTB Capital said in a research note on
However, analysts said that the impact of the tax should in
practice be limited because of further changes to the finance
ministry's position, which would enable the majority of issuers
to avoid paying the tax.
"The issuers will be able to prove easily to the tax
authorities that they don't need to pay the tax," said Dmitry
Dolgin, a fixed income analyst at Alfa Bank.
"There is one condition for issuers to be exempt, which is
that they provide the identification not of final bondholders,
as was the case under the previous proposal - which is
impossible - but only first-tier bondholders, who are tax
residents of countries with which Russia has double taxation
Such first-tier bondholders are usually easily identifiable
structures such as depositories, located in countries with
double tax treaties with Russia, he said.
Despite the resolution of the Eurobond taxation issue,
analysts said that the spat has been negative for Russia's
investment climate, as it comes as a reminder of the pitfalls in
Russia's often complex laws, and of the often poor co-ordination
"We never know where other taxation traps may be hidden in
the legislation," Dolgin said.
(Writing by Jason Bush and Lidia Kelly; editing by Stephen