Buyers of businesses hit by tax due to ‘controversial innovation’

Changes in taxation of business share transactions

New tax rules for transactions involving business shares came into effect on 1 January 2025. The changes affect both sellers and buyers, many entrepreneurs are still unaware of them.

Changes for sellers

As before, the seller is responsible for paying personal income tax (PIT) on the sale price of the share. There is an exemption from tax payment. However, whereas previously it applied to all sellers who held their shares for more than five years, it now only applies to those with Russian tax residency status (Russian citizens who have spent at least 183 days a year in the country). Non-residents are required to pay PIT regardless.

In addition, tax exemption now only applies to businesspeople whose annual income from sales does not exceed 50 million rubles. If the value of one or several transactions exceeds this amount, such sellers must also pay personal income tax.

The previous provision regarding tax relief remains unchanged. If the seller’s number of shares in the company’s authorised capital changed, tax exemption applied only to income from the sale of the portion held for more than five years. For example, if a businessman owned 10% of the company’s shares in 2018 and increased his stake to 25% in 2022, the relief applies only to the original 10%.

Changes for buyers

Until 2025, business buyers were exempt from the obligation to pay personal income tax. Purchasing a company share below market value did not constitute income in the form of material benefit, which was only taxable in the case of gifts.

However, this year the situation has changed dramatically. Now, in addition to gifts, the purchase of a business share below market price is considered a material benefit subject to tax. The buyer must pay personal income tax on the difference between the market and the actual purchase price.

This is where the main difficulties arise for entrepreneurs acquiring shares in companies. Many are questioning how the Federal Tax Service (FTS) will determine the market value of the transaction.

“Many buyers are unaware of this new rule”

This year, a new five-tier progressive PIT scale has been introduced nationwide. Instead of the previous two rates of 13% and 15%, there are now five: 13%, 15%, 18%, 20%, and 22%, depending on income level. However, tax rates on income from business share purchases will depend on the buyer’s status. For Russian tax residents, the rate ranges from 13% to 15%. For non-residents, it is 30%.

“If the difference between the market value of a company share and the actual purchase price is less than 2.4 million rubles, the buyer will pay 13%. If it exceeds 2.4 million, the rate will be 15%. The fact that a buyer of a business share must now pay PIT is a new development. And the problem is that many buyers are simply unaware of this change. That’s why notaries are now required, when certifying share purchase agreements, to provide an explanation of these rules, — explained Viktor Timokhin.

“As always, those who act in good faith are the ones who suffer”

These tax changes have become a pressing issue raising many questions among the Tatarstan business community, said Ildar Khabibullin, managing partner at the law firm A2K Legal: “Unfortunately, changes here are introduced without any public discussion. As a result, businesses were unaware of these innovations, and even at the end of December — right before the New Year — there were many urgent requests to close deals that entrepreneurs had originally planned to carry out on their own timeline. But because this change came into effect, they had to rush. Some transactions were finalised with a notary on the very last working day.”

Several tax specialists point out that the Federal Tax Service (FTS) will calculate the market value of a share based on the net asset value of the company as of the last reporting date — 31 December of the year preceding the transaction. Net asset value is determined as the difference between assets and liabilities. As explained earlier, the tax rate will depend on the buyer’s status. It is also important to note that tax deductions on income in the form of material benefit do not apply.

In cases where taxation depends on cadastral value, no problems arise, noted Ildar Khabibullin. “This is a fixed, clear price; it can be challenged, but all consequences take effect only from the moment it is changed. But here, which value should we base calculations on? There are many questions.” Moreover, the speaker considers the taxation procedure itself unfair in this case. For example, if a businessman buys 100% of a company’s shares for 80 million rubles, while its market value is 100 million, he will have to pay tax on the 20 million difference — amounting to 3 million rubles to the budget, he noted:

“And I still don’t know the prospects of this business, what will happen to it next. It might operate for a year and, unfortunately, go bankrupt. Maybe it won’t even depend on me — the dollar rate might jump or Covid could start. You only count your chickens in the fall; a year from now, the business might be worth not 100 million, but 60 million. So it turns out I’ve overpaid the budget, which means there’s no fairness in this matter — and that’s the main point! It was always understood that income from such transactions would be accounted for when I actually received the money. But here, I haven’t received anything yet — only the dream of becoming a successful businessman, not the money. And yet I have to pay taxes now.”

What should business buyers do?

Some entrepreneurs rushed to complete share acquisition or disposal deals before the end of last year, before the new tax changes came into effect. For those who have to buy or sell business shares this year, experts offer several recommendations:

• Buyers should consider the option of purchasing shares through a legal entity, as the changes affect only individuals;
• Sellers need to calculate the company’s net asset value as of 31 December of the previous year before selling, and keep in mind that the transaction price cannot be below the market value;
• Buyers should not conceal the purchase from the Federal Tax Service — income is calculated as the difference between the market value of the share and the purchase price based on the company’s financial statements.

“It’s actually very difficult to give advice here. If the purchase price is below the asset’s value, income already arises, and how can this be minimised? It can’t. However, in this context, investment unit trusts (ZPIFs) have come back into focus, because if you buy a share through them, there won’t be a problem. A ZPIF does not pay profit tax, and the share price does not matter: you could buy a share worth 100 million rubles for just 10,000 rubles, and no tax would arise. But ZPIFs are not accessible to everyone, and their maintenance costs are high. You might avoid paying taxes, but over two years you could end up paying the same amounts in fund maintenance fees,” warns Ildar Khabibullin.

“Before concluding a transaction, it is necessary to pay attention to the net asset value for the year preceding the year of the deal and compare it with the planned transaction price. This measure will allow for the correct calculation of the value of the share planned for sale and minimise tax risks,” added Ilona Yarko. “In addition, it is possible to acquire a share through a legal entity, since the changes affect only individual buyers. We regularly advise clients on corporate transactions, including the purchase and sale of shares in companies. As we specialise in supporting IT projects, our clients are often founders of IT companies or investors making investments in IT products. However, these issues are relevant for any business, which is why representatives of the real economy also seek our advice.”

Thus, before concluding deals, businesses should remember that sellers may now face additional tax burdens in the form of personal income tax payments, even if they have owned the shares for more than five years. The same applies to buyers if the purchased share or entire company is worth more on the market than the purchase price. The difference between the nominal and market value is now considered material benefit for the buyer — an individual — and therefore they will have to pay tax on it.