International tax developments in Russia New Challenge and New Solutions

1. International tax developments in Russia New Challenge and New Solutions Chair: Roustam Vakhitov Panel: Denis Schekin, Pepeliaev Group, Russia Nicolas Fermaud, Allen&Overy, Luxembourg Martin Bergwerff, Hamelink Van den Tooren, The Netherlands

2. Outline of the presentation • Recent legislative and judicial developments • Affecting inbound investment • Affecting outbound investment • Comparative analysis of core provisions of Russian double tax treaties with the Netherlands, Luxembourg and Cyprus

3. 1. Recent developments: Limitation on deductible interest Deductible interest rate HoldCo Interest • for loans in Russian currency 1,8 * refinancing rate of the RF Central Bank in 2010 and 2011 • for loans in foreign currency 15% in 2010, 0,8 * refinancing rate (6,4%) in 2011 Russia OpCo

4. 8 1. Recent developments: MIRLAND CASE Thin capitalization HoldCo Direct loan from HoldCo to Russian Co would be covered by thin cap rules Loan via foreign sister co does not fall under thin cap limitations Can we re-characterize loan via Hungary FinCo into direct loan to from HoldCo to Russian Co? Court of first instance – yes Court of appeal – yes Court of cassation – no. Cyprus Loan Hungary FinCo Loan Russia Russian Co Interest Dividends

5. 3 1. Recent developments: protocol to tax treaty with Cyprus 5 Capital Gains: • Alienation of shares deriving more than 50% of their value from property situated in a contracting state may be taxed by the state where the immovable property is situated; • Grace period of 4 years following the entry into force of the Protocol (expected 2016) Article 6 (income from immovable property): • income received from real estate investment fund Holding Cyprus Russia Russian Company Russian Real estate

6. 3 1. Recent developments: protocol to tax treaty with Cyprus 6 Article V (Dividends) • definition of dividends includes payments on shares of mutual investment funds or similar collective investment vehicles and excessive interest under thin cap rules • direct investment of US 100,000 needed to trigger a 5% dividend withholding rate has now been increased to EURO 100,000 Article 27 (Assistance In Collection) Contracting states shall lend assistance to each other for the collection of revenue claims or any other tax penalties and costs of collection

7. 7 1. Beneficial ownership: risks, minimization strategies • RF President and RF Ministry of Finance seek to use this concept to combat treaty shopping • This concept targets multilayer structures • How does it work? No treaty benefits (0% or reduced withholding tax rates) apply to income received by person not qualifying as beneficial owner • Who is beneficial owner of income (Russian approach)? • - person having formal title on income AND • - person detemining «economic destiny of income» • Beneficial ownership concept does not apply to repatriation of profits from branches/ rep. offices

8. 1. BENEFICIAL OWNERSHIP: RISKS, MINIMIZATION STRATEGIES If DutchCo not considered beneficial owner of dividend income, benefits under the Netherlands – Russia DTT may be denied; If treaty benefits denied then Russian domestic tax rules should apply; The Dutch tax implications (WHT) will not be affected; May Germany – Russia DTT apply? RusCo1 Germ Co 51%/10% 49%/90% DutchCo 5% WHT 100%; EUR 100 000 RusCo 15%/ 5% WHT? 0%/ 9% WHT

9. 7 1. Beneficial ownership: risks, minimization strategies • What factors may indicate person is not beneficial owner of income? • - person has no presence in the residence state (no office, no personnel, no bank accounts, no financial reporting obligations etc); • - person has no activities other than those which treaty benefits are claimed for; • - person does not bear normal commercial risks (subsidies from parent company; no adequate margin); • - person assumes legal obligations to distribute income it receives; • - the terms of back - to - back operations are same or similar (e.g.for debt financing: principal amount, currency, interest rate, payment terms etc)

10. 7 1. Beneficial ownership: risks, minimization strategies • How could we mitigate the risks? Case by case approach • General recommendations: • - simplify structures: do not use multilevel structures until necessary; • - substance and presence in residence state: office space, personnel, bank accounts, board and shareholders meetings, bookkeeping and accounting, general overhead expenses etc; • - consolidation of business functions (group financing company; group IP holding company); • - multiple project vehicles; • - arm’s length remuneration (margin); • - sound economic reasons behind use of offshore companies (foreign markets, foreign investors and flexibility of foreign law, statutory requirements under foreign law when making outbound investments)

11. 7 1. Recent developments: bloomberg CASE Head office:preparing integrated product, management, sales Decision of Moscow commercial court Of 08.12.2010 in case № А40-94391/2010 (not appealed): 1. Rep. office of a US company gathered information and prepared news. Considering main office’s functions, this was core activity and not preparatory or ancillary activity. 2. Revenue was defined as all sales in Russia US Russia Rep.office in Russia: Collection and preparation of news, VAT returns

12. 7 1. Recent developments: bloomberg CASE Head office:preparing integrated product, management, sales Possible reasons for negative outcome: • lack of proper description of functions of personnel and rep. office • lack of proper allocation of revenues and expenses, attributable to Russian and Head office US Russia Rep.office in Russia: Collection and preparation of news, VAT returns

13. 1. Recent developments: new participation exemption Participation exemption in 2010 Participation exemption in 2011 Russia Russia HoldCo HoldCo Dividends Dividends SubHoldCo Foreign Jurisdiction SubHoldCo Foreign Jurisdiction • 50% participation • 365 days • Dividends should come from non-blacklisted jurisdictions • Investment of at least RUR 500 million • 50% participation • 365 days • Dividends should come from non-blacklisted jurisdictions • Investment of at least RUR 500 million • Extended to qualifying capital gains

14. 2: Cyprus: taxation of dividends, interest, royalties and capital gains 10 Low tax jurisdiction Top oldCo Taxation of dividends and capital gains • Dividends: 5%/10% • Capital gains: 0% Taxation of interest and royalties • Exempt from tax in Russia, • No explicit BO test • No special provision on full deductibility of interest FinCo Cyprus HoldCo Cyprus Russian OpCo Russia Dividends Interest, royalties

15. 2: Luxembourg: taxation of dividends, interest, royalties and capital gains 10 Taxation of dividends and capital gains • Dividends: 10%/15% • Capital gains: 0% Taxation of interest and royalties • Exempt from tax in Russia, • No explicit BO test • No special provision on full deductibility of interest Low tax jurisdiction Top HoldCo FinCoLux HoldCo Luxembourg Russian OpCo Russia Dividends Interest, royalties

16. 2: Luxembourg: Investment vehicles Distribute profits with low or no dividend withholding tax Low tax jurisdiction/ Russian HoldCo Lux Holding Company Tax free after-tax profits by a PE distribution WHT on dividends: 10%/15% Zero WHT due to non-discrimination claues? Russian Branch EU Company Russian Company

17. 2: the Netherlands:taxation of dividends, interest, royalties and capital gains 10 Taxation of dividends and capital gains • Dividends: 5%/15% • Capital gains: 0% Taxation of interest and royalties • Exempt from tax in Russia, • Explicit BO test for zero WHT on interest and royalties • Special provision on full deductibility of interest Low tax jurisdiction TopHoldCo FinCoNL HoldCo The Netherlands Russian OpCo Russia Dividends Interest, royalties

18. 2: the Netherlands: Dutch holding company Distribute profits with low or no dividend withholding tax Low tax jurisdiction (Re)invest international profits or provide financing Dutch Holding Company Participation exemption on profit distributions and capital gains at the level of the Dutch Holding Russian Branch Russian Company Russian Real Estate Company Russian Real Estate Branch

19. Businesses Potentially interested in Dutch and Luxembourg solutions 10 • Real estate investment projects • Mutual funds • Russian groups with outbound investments (Lux) • Russian subsidiaries with loans in foreign currency with interest rate exceeding 6,4% (NL) Cyprus NL/LUX Holding Russia Russian Company /Fund Russian Real estate

20. RoustamVakhitov 12 RoustamVakhitov Head of International Section of the Scientific and Expert Council of the Russian Chamber of Tax Advisers T:+79060598008 E-mail: vakhitov@palata-nk.ru Roustam Vakhitov specialises in international taxation. Roustam has experience of working in law firms and consulting companies in Russia, the Netherlands and Luxembourg. He is focusing on international tax issues since 2002. Roustam’s main practice area is advice on Russian international tax structuring involving Benelux countries and tax support of transactions involving financial instruments and capital market projects, including Islamic finance. His clients include large Russian banks and enterprises, as well as investment companies. Roustam is the Deputy Head of the Russian Branch of the International Fiscal Association and Head of the International Taxation Section of the Research and Expert Council within the Russian Chamber of Tax Advisors and the member of Coordination Council of the Russian Association of Experts in Islamic Finance. Roustam speaks English and Dutch languages. He is an author/co-author of Russian national IFA branch reports to National Congresses of 2003, 2006, 2008 and 2010. Roustam has authored many publications on international taxation and tax structuring.