Fund taxes: where the relief works and where it does not

A fund's tax advantage rests on two pillars, and both are easy to lose. The first is inside the fund: the assets of a unit investment fund do not form a legal entity, so the coupons and dividends that flow into the fund do not turn into a tax bill right away but stay in the assets and keep working. The second is at the exit: when a unit is sold or redeemed, the financial result can be covered by the long-term holding relief (LDV) or by the regime of an individual investment account (IIS). The relief does not work where the fund distributes income in cash, where the unit is not traded on an organised market and its management company is not Russian, where the security is held on an IIS (which has its own deductions instead of LDV), and always if the unit is sold before the holding period set by Article 219.1 of the Russian Tax Code has run.

Why a fund offers an advantage at all

If you hold shares directly, the tax on a dividend is withheld at the moment of payment, and you can reinvest only what is left after withholding. Inside a unit investment fund this step does not exist: the income received increases the net asset value, and with it the calculated value of the unit. The tax does not disappear — it is deferred until the moment you yourself leave the fund. The effect of the deferred tax is the more visible, the longer the horizon and the higher the share of coupon and dividend flow in the result. For a bond fund, where almost the entire result is the coupon, this is a key part of the design; you can see what the payment flow itself looks like in the dividends section and in the calendar of upcoming payments: {{dividend_calendar|limit=5}}

It is important not to confuse deferral with exemption. Deferral turns into exemption only when you are entitled to a deduction by the time of the sale.

When the tax arises for the unitholder

The tax base appears when a unit is redeemed with the management company, when an exchange-traded unit is sold on the exchange, when units are swapped between funds of different management companies, and when an interim payment is received, if the fund's rules provide for it. The rate is applied to the investment tax base: 13%

A swap of units inside one management company is not treated as a disposal under Article 214.1 of the Russian Tax Code: the base is not determined until the units received are sold, and the holding period is not reset. This is a rare case in which a change of strategy costs no tax — but it works only within the perimeter of one management company.

Who withholds the tax

There may be several tax agents, and this matters more than it seems. When a unit is redeemed, the tax is withheld by the management company under Article 226.1 of the Russian Tax Code; when an exchange-traded unit is sold, by the broker. Each of them calculates the result only for its own transactions. A profit with one agent and a loss with another are not netted against each other automatically: you will have to offset them yourself by filing a tax return after the end of the year. Carrying forward a loss of previous years against future profit under Article 220.1 of the Russian Tax Code is also done only through a tax return and only for traded securities.

Acquisition costs include the price of the unit, the management company's subscription and redemption charges, and brokerage commissions. The management company's own fee is not deducted as a separate line — it is already reflected in the net asset value.

The long-term holding relief: who can use it

Article 219.1 of the Russian Tax Code extends LDV to securities traded on an organised market and to units of open-ended unit investment funds managed by Russian management companies. A practical distinction follows from this: an exchange-traded fund and an open-ended fund of a Russian management company fall under the relief, while units of closed-ended and interval funds do so only if they are themselves traded on the exchange. The maximum amount of the deduction is calculated for each full year of ownership and is set out in the same article. The mechanics of the relief are covered separately: how it is applied without applications in advance.

A fund that pays out income is a separate case. The payout itself is taxed when it is transferred, and LDV does not cover it: the deduction applies to the financial result from the disposal, not to distributed income. By choosing a distributing fund over a reinvesting one, you knowingly trade deferral for cash in hand.

The IIS and a fund: the reliefs do not add up

LDV does not apply on an individual investment account — the account's own deductions operate instead, and the tax is calculated when the account is closed. The choice between the regimes comes down to the length of the horizon and to whether you need access to the money: a comparison of the IIS-3 and an ordinary brokerage account. There is no point in holding one and the same fund under two regimes at once — you will have to calculate the result for each of them separately anyway.

Where the relief does not work

A foreign fund does not give the Russian relief automatically: part of the income is lost to withholding in the fund's own jurisdiction, the unitholder cannot recover it under a double taxation treaty, and currency revaluation adds to the base a result that did not exist in the foreign currency. The relief also fails when the unit was acquired off the exchange from a non-resident management company, and when the holding period was interrupted by a sale — even if you bought the unit back the next day.

What to check before buying

Step 1 — the type of fund and the residency of the management company: the right to LDV depends on it. Step 2 — whether the fund reinvests income or pays it out. Step 3 — where you buy the unit: from the management company or on the exchange, which determines who will be your tax agent. Step 4 — the account regime. The list of available funds is in the funds section; the structure of the debt market in which a considerable part of them operates is described in the bonds section and in the piece on OFZ. Unfamiliar concepts are worth looking up beforehand in the glossary.