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LETTER OF THE MAIN STATE TAX AUTHORITIES OF UKRAINE

of September 4, 1996 No. 14-311/10-5888

About the taxation of profit on implementation of transactions with bonds of internal state and local loans

The main state tax authorities of Ukraine in connection with numerous requests of the state tax authorities and taxpayers concerning taxation of profit on implementation of transactions with bonds of internal state and local loans explain the following.

This Law, in particular, determines the taxation of profit (loss) from the securities trading, including trade in debt requirements and obligations, and also profits on ownership (management) of debt requirements.

The bond of the state and local loans (further - bonds) debt obligations of the Government and local councils of People's Deputies concerning compensation to bondholders of nominal cost of these securities in the provided time with payment of the fixed percent (if another is not provided by release conditions).

For this time in Ukraine interest (coupon) and interest-free (discount) government and local bonds are in circulation.

Interest (coupon) bearing bonds - debt obligations about compensation to bondholders of nominal cost of these securities in the time provided in them with payment of the fixed percent.

Interest-free (discount) bonds - debt obligations about compensation to bondholders of nominal cost of these securities in the time provided in them. Bonds are implemented to physical persons and legal entities on a voluntary basis at the price which is lower than their nominal cost. The difference between the price of acquisition and nominal bond value which is compensated to the owner during repayment constitutes the income from the bond.

Thus, the amount of the percent added on the bond of internal state and local loans, but not above than the amount of the got profit on ownership (management) of bonds is not taxed.

Term "percent" in the Law is used in the value given in item 1.12 to article 1 of the Law.

Percent - income gained by taxpayers from transactions with debt requirements and obligations, in particular bills of exchange, bonds, checks and other payment documents including transactions with the state valuable obligations, and also any income gained by the taxpayer from provision of money and material values on credit (I will jam) and added in the form of awards or prizes or percent from outstanding amount.

The income which is gained by the taxpayer from ownership (management) of interest bearing bonds of the internal state loan is:

the amount of interests which are paid to the bondholder:

- according to short-term bonds (repayment period - 28, 63, 91 days) - during repayment;

- according to long-term bonds (repayment period - 182, 273 days and one year) - quarterly;

and also difference between nominal value and the price of acquisition.

The amount of percent is not the taxation object both on primary, and in the secondary market, but there shall be no more amount of the got profit on ownership (management) of the government and local bonds.

The income from ownership (management) of interest-free (discount) government bonds are difference between the price of acquisition and nominal value which is compensated to the owner during repayment (item 4 of the Main conditions of release and procedure for placement of the interest-free (discount) domestic government bonds of 1996 approved by the resolution of the Cabinet of Ministers of Ukraine of April 29, 1996 N 469. The difference between the price of acquisition and nominal value of the government bond (discount) is not the taxation object in the primary market in the amount of, it is no more than amount of the got profit on ownership (management) of bonds, and in the secondary market - in the amount of difference between nominal value and weighted average price of acquisition which developed in the primary market regarding non-competitive requests, but it is no more than amount of the got profit on ownership (management) of bonds.

The difference between the acquisition value and selling price reduced by expense amount, connected with these transactions (subitem 3.4.1 of Item 3.4 of article 3 of the Law) is profit (loss) from the securities trading, including trade in debt requirements and obligations.

Thus, profit (loss) from trade in the government and local bonds in the secondary market are difference between the acquisition value and selling price reduced by expense amount, connected with these transactions.

Treat the expenses connected with implementation of transactions with the government and local bonds: the state fee paid for transactions with securities; fee of commercial banks and financial institutions; losses from excess of acquisition value of the bond over its nominal value.

Fee of commercial banks and financial institutions concerning accounting of debt requirements and obligations, belongs on product cost (works, services) according to subitem 9.5.6 of Item 9.5 of article 9 of the Law.

Losses from excess of acquisition value of the bond over its nominal value do not belong on account part of transactions with bonds, and are written off on financial results on these transactions.

Examples of the taxation of profit on implementation of transactions with the government and local bonds are given in appendices to this letter 1 and 2.

Accounting of transactions with the government and local bonds is performed by the companies, associations, organizations, the organizations (except banks) according to Item 38 of the Regulations on the organization of the financial accounting and the reporting in Ukraine approved by the resolution of the Cabinet of Ministers of Ukraine of April 3, 1993 N 250 with the made changes and additions, and also Item 11 of the Instructions on the organization of financial accounting in Ukraine approved by the order of the Ministry of Finance of Ukraine of May 7, 1993 N 25 with the made changes and additions.

Bank institutions record government bonds according to the Regulations on procedure for accounting and depositary accounting of placement, the address, interest payment and bond redemption of internal state loan in bank institutions approved by the resolution of Board of the National Bank of Ukraine of January 26, 1996 N 15.

There is no difference in the taxation of profit of residents and nonresidents on implementation of transactions with the government and local bonds.

Thus, profits of nonresidents on implementation of transactions with the government and local bonds are assessed with tax at the rate of 15 percent as passive profits of nonresidents which are repatriated for borders of Ukraine if another is not established by the international treaty of Ukraine on tax questions.

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