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VAT Changes

Recent Changes and Tax Planning Considerations in Real Estate Transactions Scott Antel, Partner AmCham Tax Seminar 23 October 2005. VAT Changes. Self Construction Current Rule: - Self assess output VAT when placed in service - Offset input VAT when paid

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VAT Changes

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  1. Recent Changes and Tax Planning Considerations in Real Estate TransactionsScott Antel, PartnerAmCham Tax Seminar23 October 2005

  2. VAT Changes • Self Construction Current Rule: -Self assess output VAT when placed in service - Offset input VAT when paid Rule for 2006: - Self asses output VAT on last day of tax period - Offset input VAT when booked in accounts • Capital Construction Current Rule: Offset VAT only when building placed in service Rule for 2006: Offset when booked in the accounts Possibility to offset prior incurred, but not offset, VAT

  3. VAT Changes. Reinstatement of VAT on Capital Projects and Real Property • Previously offset VAT reinstated in case of exempt operations(Except for: Fully depreciated properties and properties commissioned more than 15 years ago) • VAT reinstated for 10 years after the property is commissioned • VAT reinstated in the last tax period for each year • VAT reinstated annually is equal to 1/10 of the portion of the offset VAT multiplied by the ratio of exempt operations to the total sales in the respective calendar year

  4. Profit TaxChanges • Capital expenditures 10 % immediate write-off • Leasehold capital improvements depreciated by: - Lessor if lessee reimbursed - Lessee if not reimbursed • Charter contributions recorded at tax basis of contributor and valuation requirement (effective now).

  5. Land Tax • Tax base moves from local formula to cadastral value • Tax rate: maximum 1.5 % • Effective from when localities adopt Land Tax Law and enact cadastral plan

  6. Acquisition Case Study DLA MW Limited. Partner Scott Antel

  7. Asset Onshore • Issues: • Seller • Gain recognized in Russia. • Buyer • No historical entity risk. • Increased tax basis. • Recovery of VAT. • Operating concerns-licenses. • Migration of local I.P. • Preference of Buyer. Sale I.P. Intangibles Abroad Russia Russian S/H2 Assets Sale

  8. Share Acquisition from Offshore Russian S/H • Issues: • Seller • Russian S/H gain offshore. • Real property holding co. capital gain. • Buyer • Tax/other history of new OPCO. • Inherit low asset basis. • Migration of local I.P. • Operating concerns-licenses. Sale I.P. Intangibles Abroad Russia Hotel Assets Russian S/H 3) Purchase of New Co. (or Offshore Hold Co.) 1) Asset sale or contribution by Hotel OPCO to New Co. 2) Sale of new Co.

  9. Post Acquisition Structuring • Owner Issues: • Financing renovations/ improvements: • - Loans up to 15%; • - Leasing (3x depreciation); • - CIK (VAT/customs exempt); • Merger of multiple entities if any. • Buy out of land. Abroad Russia

  10. Operation and Repatriation • Owner Issues: • Tax effective repatriation: • - Loan @ 0%; • - License fees @ 0%; • - Offshore services (res. and mktg.) @ 0%; • - Dividends @ 5-15%; • Non-Russian tax planning: • - Holding company jurisdiction taxes; • - Home country CFC rules, etc.; Abroad Russia

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