Cyprus et. al: Tax Look from Russia

1. Cyprus et. al: Tax Look from Russia Evgeny Timofeev Partner, Head of Russian/CIS Tax Practice Berwin Leighton Paisner (Goltsblat BLP) 25 September 2013

2. Then and Now • Before November 2011 (Severny Kouzbass case): • Double tax treaties deeply respected by courts • Rather formal approach in application • Anti-abuse doctrine in place but rarely applied to international issues • Since then: • Halo gone • Substance questioned • Business purpose questioned • Beneficial ownership questioned

3. Trade Transactions - Transfer Pricing • Transfer pricing rules in place • Cyprus left out of the “black list” as of 2013 (transactions of 2012 still subject to pricing control irrespective of value) • With price too high: • Not just a correction as to expenses but also • VAT recovery (in “excessive” part) arguably may be disallowed • With price too low: • VAT due not withheld • Per the latest SCC ruling tax not withheld can be claimed by tax authorities from tax agents

4. Interest • Transfer pricing rules arguably still apply • Should be wrong: special rules apply • Either within statutory safe harbors (0.8 CBR rate on foreign currency, 1.1 CBR rate on ruble loans), or • within 20% deviation from rates applied by Russian lenders • (so far it seems that as of 2014 the thresholds will be back to 15% and 1.1 CBR respectively with “market” measurement based on any, not just Russian lenders’ rates) • Thin cap rules – do apply under the Cyprus treaty (Severny Kuzbass SCC case) • Massive attacks on SCC to consider arm’s length criterion as to the structure of capital • “Sister” company loans loophole – still working but you need tons of documents to prove substance and separate business purpose • Ensure substance and avoid back-to-backs: disregard and beneficial owner concerns – tax not withheld can be claimed

5. Thin Cap – the Bad structure Shareholder Loan Financial company Abroad Russia Loan 100% Operational company

6. Thin Cap – the Good Structure Shareholder Loans Financial company Ownership Loans Holding company Operational company Ownership Abroad Russia Operational company Operational company Operational company

7. Royalties • Transfer pricing rules apply – check your level • Take care of the way the IP assets were received abroad • Ensure substance – sham companies can be disregarded • Avoid back to back arrangements – beneficial owner concerns • Tax not withheld can be claimed

8. Dividends • Ensure substance – sham companies can be disregarded • Avoid back to back arrangements – beneficial owner concerns • Tax not withheld can be claimed • Under thin cap rules treaty rates apply at source

9. Using Russian Branches • Arguably the way to avoid thin cap rules • However, arguably subject to transfer pricing as if a foreign company • The way to avoid dividend withholding tax • Arguably (under the non-discrimination clause) the way to ensure applicability of: • Dividend flow-through rules (dividends taxed in Russia only once) • 0% dividend rate

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