High dividends, and a further increase thereof as a result of the government’s policy towards state-owned companies, is one of the key attractive features of the Russian equity market, in our view, and so any tangible changes to taxation might adversely affect it.
We estimate that the direct ownership of Russian equities by individuals is relatively low, at about 5%. A larger part is structured via offshore holdings, which makes it possible to minimise the effective tax on dividends under double taxation treaties. Thus, implementing the de-offshorisation measures prioritised by President Vladimir Putin would have a more significant effect on the Russian equities market. This might result in the tax on dividends increasing to the statutory rate for non-residents of 15%. In that case, private companies, which have historically paid more dividends, would increasingly consider share buybacks as an alternative way of distributing income, similar to the US practice, we think.