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What to Expect in the Stock Market from a New Tax Code


Oleksandr Vygovskyy, Doctor of law, Attorney at law at Ilyashev & Partners
Source:  The Liga 

Oleksandr Vygovskyy, attorney at law at Ilyashev & Partners, believes that innovations can scare off potential investors

We need a new tax code. It is obvious to everybody. However, it is also obvious that changes in such a fundamental document comprise a serious and responsible process. Therefore, I will focus on just a few aspects of changes, in particular relating to the stock market and collective investment schemes (CIS).

According to the proposed amendments to the tax code, taxation of dividends is strengthened significantly. In fact, for passive incomes, which include dividends on securities, it is proposed to establish a progressive taxation scale ranging from 15% (if income for the fiscal year does not exceed UAH 150 thousand) to 25% (if income exceeds UAH 996 thousand). The previous 5% tax rate is retained for dividends on shares and corporate rights, paid by resident income tax payers, except for dividends on shares and investment certificates payable by collective investment schemes.

Changes will also affect methods for calculation of financial results of securities transactions. In particular, it is assumed that financial results of such transactions before tax “will be increased by the amount of negative financial result from sale or other disposition of securities and will be decreased by the amount of positive financial result” (such clumsy wording, in our opinion, is attributed to the shortcomings of law-making process). In this case, if as a result of such calculations negative overall financial result on securities transactions is obtained, such negative value reduces the overall financial result of such transactions in subsequent fiscal periods, but only for 730 days (this time limit was not set before).

Most likely, if the proposed changes in the tax code are approved, investors will refuse to invest in debt securities and CIS securities.

It is also important to understand how changes proposed by deputies will affect the market of collective investment schemes. The proposed changes to the tax code, if adopted, will significantly alter tax treatment of collective investment schemes In fact, a law-maker cancels existing tax exemptions for collective investment schemes, equating them to ordinary taxpayers. It is proposed to delete a provision of Art. 136.1.9 of the Code, under which now money raised from collective investment schemes and funds raised from investors, as well as income from transactions with CIS assets are not taken into account for determining item of taxation.

In addition, according to the new rules, the amount of profits earned by holders of CIS securities at their repurchase will be equal to dividends for tax purposes. If the investor-legal entity receives dividends from CIS securities, such dividends will be subject to income tax. Further, during payment of dividends on CIS securities it will be necessary to make an advance payment for income tax (which previously was not applicable).

In general, innovations are designed to strengthen tax regime to the maximum. Considering the extremely low development of the domestic stock market and negative trends observed recently in investment activity, it is easy to assume that such measures (being questionable in terms of efficiency of filling the state budget) can further scare the investors off. They are likely to refuse investing in debt securities and CIS securities.

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