Russian Parliament Passes Temporary Withholding Tax Exemption for Eurobonds

by Morgan Lewis

[author: Carter Brod, Roman A. Dashko, and Vasilisa Strizh]

Amendments are more favorable to borrowers than those recently proposed by the Ministry of Finance, but they provide an exemption only for bonds issued before 1 January 2014.

On 6 June 2012, the Russian parliament (the Duma) passed amendments to the Russian federal Tax Code (the Tax Code) that provide an exemption from withholding tax for Eurobond offerings from Russia that are made prior to 1 January 2014. It is currently unclear to what extent, if at all, future changes to the Tax Code will be made that address the withholding tax treatment for offerings made on or after 1 January 2014.


Currently, the most commonly used structures for Eurobond offerings by Russian companies are (i) loan participation notes issued by non-Russian special purpose vehicles (SPVs) and (ii) note offerings by subsidiary SPV issuers with guarantees by Russian parent companies. In both of these structures, the actual issuers of the Eurobonds are located outside of Russia, and the proceeds of the offering are transferred to the Russian companies, typically in the form of a loan. These structures benefit from double tax treaties between Russia and the jurisdiction of the relevant SPV issuer (typically Luxembourg or Ireland), which enable interest payments to be made by the Russian company to the SPV issuer free of Russian withholding tax. Similar offering structures have been used in the Russian market and other markets in emerging Europe for many years. Historically, market participants in Russian offerings have generally acknowledged and accepted that the Russian withholding tax treatment of these structures is subject to uncertainty and a corresponding risk that the Russian tax authorities could challenge the structures and impose Russian withholding tax on interest payments.

Ministry of Finance's Letter and Proposal

In December 2011, the Ministry of Finance of Russia (the Ministry of Finance) issued a letter to the Russian Federal Tax Service stating that interest payments to non-Russian SPVs, such as those made in the context of Eurobond structures, should not be eligible for double tax treaty relief, and confirmed its position in a 27 January 2012 press release. The issuance of the letter and press release raised the possibility of a 20% withholding tax being applicable to Russian Eurobonds, potential penalties being imposed on borrowers for past failure to withhold, and possible early redemptions of Eurobonds for taxation reasons. Understandably, these developments caused significant concern among market participants. According to press reports, following the issuance of the letter and press release, a number of major Russian banks and corporations engaged in lobbying efforts with the Ministry of Finance in an attempt to persuade it to retreat from its position.

Following consultations with Eurobond borrowers and investors and with the working group on the formation of the Moscow International Financial Center (MIFC), the Ministry of Finance published on 20 February 2012 a proposal, including draft amendments to the Tax Code, with respect to withholding tax on Russian Eurobonds. The proposal provided that, for bonds issued on or after 1 January 2013, a Russian borrower would not be required to withhold tax on interest payments made to a foreign SPV provided that (i) the SPV is incorporated in a jurisdiction that has a double tax treaty with Russia providing for no withholding tax on interest payments, (ii) the bonds are listed on an approved foreign stock exchange or clear through an approved international clearing system, and (iii) the relevant "first level" holders of the bonds in respect of which the interest payments are being made reside in jurisdictions that have double tax treaties with Russia providing for no withholding tax on interest payments. According to the proposal, "first level" holders means the relevant accountholders in the clearing systems rather than the ultimate beneficial owners of the Eurobonds.

While the Ministry of Finance's proposal represented a retreat from the positions it expressed in its letter and press release, there continued to be a degree of uncertainty and cause for concern in the market following the proposal. First, it was unclear how the provision of accountholder information by the clearing systems would work in practice, as arrangements would need to be made with the clearing systems to ensure that accountholder information could be provided in a timely manner prior to an interest payment being made on a Russian Eurobond. Second, even if Russian borrowers were able to obtain the necessary "first level" holder information from the clearing systems, to the extent that such holders resided in jurisdictions that did not have double tax treaties with Russia providing for no withholding tax on interest payments, Russian borrowers would have needed to withhold a certain amount of tax from interest payments and would have been required to "gross up" the relevant interest payments.

Tax Code Amendments Passed by the Duma

In May 2012, the Budget and Tax Committee of the Duma (the Committee) approved amendments to the Tax Code that would have effectively exempted Eurobonds from withholding tax indefinitely. These amendments did not include a requirement that the relevant "first level" holders of the bonds reside in jurisdictions that have applicable double tax treaties with Russia, which reflected a rejection of this central element of the Ministry of Finance's proposal.

However, as a result of political confrontations over this issue that took place in May and early June, the amendments that had been approved by the Committee in May were revised to provide that the exemption would apply only in respect of bonds issued before 1 January 2014, rather than indefinitely. The amendments were passed in this form by the Duma on 6 June 2012.

The amendments provide that, for offerings that close prior to 1 January 2014, there is no requirement for withholding of income tax in a Russian Eurobond structure if the following two conditions are met:

  • The SPV issuer is incorporated in a jurisdiction that has a double tax treaty with Russia (providing for no withholding tax on interest payments).
  • The bonds are listed on an approved foreign stock exchange and clear through an approved international clearing system.

The exemption is applicable to both loan participation notes structures and guarantee structures involving SPV issuers, and applies retroactively to interest payments in connection with Eurobonds made on or after 1 January 2007.

A list of approved stock exchanges and clearing systems for this purpose is to be adopted by the Ministry of Finance and the Russian Federal Service for the Financial Markets (FSFM). Until this list has been approved, listing on any foreign stock exchange and clearance through any foreign clearing system will be acceptable for purposes of this exemption.

In order to become effective, the amendments to the Tax Code that were passed by the Duma need to be approved by the Federation Council of Russia and signed by the President of Russia. According to Russian law, the Federation Council has two weeks in which to approve the amendment into law and the President has two weeks in which to sign the amendments into law.


The Eurobond market has been, and likely will continue to be, an important source of financing for Russian corporations. However, for the time being, the question of the withholding tax treatment of Eurobonds from Russia remains unsettled. If they become effective, the amendments to the Tax Code will temporarily resolve the confusion and anxiety in the market that began in December 2011 with the Ministry of Finance's letter. On one hand, market participants will be relieved by the amendments, as the new regime proposed by the Ministry of Finance in February would likely have been cumbersome and may have increased borrowing costs and, as a result, could have adversely affected the Russian Eurobond market. On the other hand, as the exemption only applies until 1 January 2014, the amendments provide only a temporary solution, and there will continue to be uncertainty in the market regarding what the position will be after that date.

The Ministry of Finance's positions expressed in its December 2011 letter and January press release were based on a view that, in order for interest payments under a Eurobond structure to benefit from a double tax treaty, the actual owner of the interest (rather than the SPV issuer) should be resident in a qualifying jurisdiction. This position was significantly watered down in the February proposal, which required looking to "first level" holders in the clearing systems rather than actual owners, as the latter approach would have been impracticable. The recently passed Tax Code amendments temporarily reverse the Ministry of Finance's positions entirely by indicating that only the SPV's jurisdiction of incorporation is relevant to the withholding tax treatment.

The manner in which—within a period of approximately six months—the Ministry of Finance took a sudden and dramatic position on the Russian Eurobond withholding tax issue, then largely retreated from its position and subsequently had its position temporarily reversed by the Duma is an indication of the unpredictability that exists in the general Russian legislative and tax system. The recently passed amendments will provide clarity regarding the withholding tax treatment of Eurobonds—but only on a temporary basis. While there will be a lower level of withholding tax risk associated with Russian Eurobond transactions that close before 1 January 2014, there continues to be uncertainty about the future beyond that date.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.