A&T Lawyers Presentation_ 12 Nov 2013 (ID 174051)

Recent Actions
Announced by RF Government
for Fighting Use of Off-shores
Main Reasons for Fighting
Tightening of State Control over
Foreign Element in Economy
 Political will is aimed at tightening the regulations on the use and
benefits of offshore SPVs
 Foreign investments and re-investment of domestic capital held in
offshore vehicles are promoted
 Moscow International Financial Center Project is not forgotten,
there are measures aimed to improve investment climate
 Amendments to Russian law are aimed to make it competitive
compared to foreign laws (the major reform of Russian Civil
Code is in progress)
 Plans for moving up in the “Doing Business” rating
Discouraging of Offshore SPVs Use
 President’s Annual Speech to the Russian Parliament on December 12, 2012
implementation of which will continue in 2013-2014 years
 Goals:
 To cease capital outflows
 To make tax evasion more difficult
 To disclose beneficiaries
 Methods:
 Re-qualification of transactions and imposing tax implications
 Requirement to disclose beneficiaries in order to convey transactions
 Granting public authorities access to data constituting bank secrecy
 Introduction of Administrative liability for hard currency transactions performed
not through Russian banks in prescribed by law cases
 Wealth / sumptuary tax is introduced by Federal Law N 214-FZ dated July
23, 2013 coming into force from January 1, 2014 (tax rate on cars over RUB 3
million is increased).
Proposed CFC Legislation
Plans to Enter into Exchange
of Information Agreements
Proposed CFC Legislation
 The Russian Ministry of Finance is working on the
draft tax law which would introduce concepts of
CFC (Controlled Foreign Company) for tax
 Potentially, such new CFC rules may require
Russian companies and individuals to report and
account for profits of their CFCs even if no
distributions are made
Protocols to Double Tax Agreements (DTA)
The RF Agreements:
Protocol Status:
Russia - Latvia
DTA and Protocol came into force on
November 6, 2012
Russia - Cyprus
Came into force on April 2, 2012, applies to
tax periods after January 1, 2013, except for
some provisions
Protocol came into force on November 9, 2012
Russia - Switzerland
Russia - Luxembourg
Protocol came into force on July 30, 2013,
applies to tax periods after January 1, 2014.
Tax implications
of Protocols to Double Tax Agreements
 Sale of real estate in RF via transfer of corporate control in SPV
 Rules on thin capitalization (Ruling of the Presidium of the
Supreme Arbitration Court of the RF dated November 15, 2011 N
8654/11 in the OJSC “Ugolnaya companiya “Severniy Kuzbass”
 Withholding of tax at source
 Place of effective management
Information Exchange Provisions
in Protocols to Double Tax Agreements
 There are still no elaborated Russian rules, regulations and
established practices on applying of Protocols for provisions on
information exchange
 First practical experiences after introduction of Protocol between
the RF and Cyprus
 Protocol between the RF and Switzerland: first practice of use.
 Active Work of Department of Transfer Pricing and International
Cooperation of RF Federal Tax Service
Exchange of Information
Agreements with Offshore
Agreements with Offshore Jurisdictions
Russia has two
DTA with
“black” list
offshore zones:
Malaysian Labuan
Dutch Antilles
(DTA with Malaysia
came into force in
(DTA with the
Netherlands came into
force in 1989 )
Judicial Doctrines on
Ultimate Beneficial Owners
Removal of Corporate Veil
 The earliest known attempt by Russian Courts to apply this concept is
the dispute on injunction imposed over flat owned by Shalva Chigirinskiy’s
spouse (Ruling of Federal Arbitration Court of Moscow region dated
October 29, 2010 N KG-А40/14698-09-B-N)
 Case on recognition of Parex Bank, Citadele Bank to be actually
carrying out banking business in the RF via “conduit companies” (Ruling of
the Presidium of the Supreme Arbitration Court of the RF № 16404/11
dated April 24, 2012)
 Similar position was mentioned in dicta by the Court in OJSC
“Ugolnaya companiya “Severniy Kuzbass” case – thin capitalization via
“associated companies” (Ruling of the Presidium of the Supreme Arbitration
Court of the RF dated November 15, 2011 N 8654/11)
Conclusion: As Russian Courts equip themselves with instruments to pierce
the corporate veil, the Clients’ demand for better structuring will grow.
Offshore SPV claiming “bona fide purchaser”
protection may be required to reveal it’s beneficiary
• Case facts: purchase of immovable property in favour of a company,
beneficiaries of which are not known, is deemed to be suspicious (Ruling
of the Supreme Arbitration Court of the RF dated January 9, 2013 N
• The Supreme Arbitration Court position: the burden of good faith proof
lies with offshore; necessity of beneficiaries’ revealing (Ruling of the
Supreme Arbitration Court of the RF dated January 9, 2013 N ВАС14828/12)
• Supreme Arbitration Court mentioned in dicta, that offshore SPVs and
anonymity they grant are often used in bad faith for asset stripping
• Side Remarks: After bombings in Domodedovo airport the state was
unable to reveal true airport owners, stated plans for introducing of
beneficiaries’ register
PEPs and Public Officers:
Prohibitions and
Federal Law No. 79-FZ of May 7, 2013
 Came info force on May 19, 2013
 Purposes:
• Ensuring of RF national security
• Regulating of lobbying activities
• Promotion and expansion of investments in the national
• Improvement of anti-corruption effectiveness
Federal Law No. 79-FZ of May 7, 2013
 Prohibits to open and have accounts (deposits), to
keep cash and assets in foreign banks, to have
and/or use securities of foreign issuers;
 Defines persons in respect of which the prohibition
is set (“target persons”);
 Establishes procedure for verification of compliance
of target persons with this prohibition;
 Establishes penalties for its violation.
Key Persons Covered by Restrictions
State officials of the RF;
State officials of the RF sub-federal units (regions);
Officials in state legal entities, appointed and dismissed
by RF President or Government;
Members of the Board of directors of the RF Central
Officials of federal state service appointed and
dismissed by RF President, Government or Chief State
State Offices in the Russian Federation
State Offices in the RF Sub-federal Units
Decree of the RF
President N 1381
dated December 4,
2009 “On standard
state offices in the
RF sub-federal
The 1st deputy and deputy director of the supreme executive body of
the RF sub-federal unit;
Member of the supreme executive body of the RF sub-federal unit;
Chairman of the legislative body in the RF sub-federal unit and its
Deputy of the legislative body in the RF sub-federal unit;
Chairmen of the Constitutional Court in the RF sub-federal unit, its
deputy; Constitutional Court judges;
Chairman of Election Committee in the RF sub-federal unit, its deputy,
secretary, members with a deciding vote;
Chairman, deputy chairman , auditor of audit body in the RF subfederal unit;
Ombudsman in the RF sub-federal unit;
Magistrates (7461 judges)
Examples of Officers in RF State Companies
Appointed/Dismissed by RF President or Government
Fund GKH
Consequences for Non-compliance
Target persons not complying with deadline shall:
Early terminate their offices
Be released from their positions;
Be dismissed
Tax Returns on Property Abroad
Key restricted persons shall file reports listing:
Real estate located abroad owned by them, their spouses and
minor children;
Sources of funds on which such real estate was acquired;
Their obligations abroad, as well as their spouses’ and minor
children’s (mortgages, etc.).
 Their accounts (deposits), cash and assets in foreign banks
abroad as well as their spouses’ and minor children’s – only for
citizens applying for state offices in the RF
Control on Compliance of Target Persons with
Federal Law No. 79-FZ
Authorized state bodies are allowed to:
interview target persons;
review additional materials received from target persons;
receive explanations from target persons;
send enquiries to the RF prosecution agencies, federal
and sub-federal state bodies, municipal authorities, banks,
other foreign bodies, etc.;
inquire individuals and receive information upon their
Consequences of Non-compliance with
Federal Law No. 79-FZ
The key restricted person may be:
Early terminated from the office; OR
Removed/suspended from the office; OR
Dismissed from office due to loss of confidence
Consequences of Non-compliance with
Federal Law No. 79-FZ
 Under the RF legislation loss of confidence includes:
– Non-compliance with Federal Law No. 79-FZ;
– Failure to prevent or to resolve a conflict of interest;
– Failure of a target person to file a tax return on income,
expenses, property and property obligations, as well as on his
spouse and minor children, or submission of willfully false or
incomplete information;
– Participation in business entities and receiving any income;
– Conducting business activity;
– Participation in foreign non-commercial non-governmental
Case Study
State Duma:
•Vladislav Tretyak
•Alexey Chepa
• Anatoliy Lomakin
•Vladimir Pekhtin
Federal Council:
•Andrey Guriev
•Andrey Molchanov
•Vitaliy Malkin
State Duma: Gennadiy Gudkov
(case complicated by political issues)
owned and
Case Study
Mikhail Prokhorov (Onexim Group)
Reportedly considered two ways for disposing of foreign assets and
business by the beginning of Moscow mayor elections campaign
Scheme No. 1
Cyprus company into
Prokhorov being the
sole shareholder
the Russian company
under PoA.
Scheme No. 2
not to
run for
making agreement with
Prokhorov’s trustees on
buying of foreign assets
with a deferred payment
for a year.
 in case after 1 year
become Mayor, the money
is not paid and all assets
return to Prokhorov.
In February 13, 2013 there was introduced an
administrative responsibility in the form of a fine from 75%
to 100% of the transaction amount.
for receiving
by tax
exchange of
between tax
services in
OECD countries
and Russia
All settlements/
transactions in
currency shall be
carried out via an
account of an
individual in the RF
authorized bank.
Protocols to the Agreement on
Avoidance of Double Taxation:
Russia-Cyprus (came into force)
Russia – Latvia (came into force)
Russia – Switzerland (came into
Russia - Luxembourg (came info
Other Countries’ Experience
No prohibition for public officers to have foreign bank accounts and foreign
financial instruments. Obligation to file tax returns. Breach entails criminal
liability for tax fraud and money laundering with aggravating circumstances.
Colombia No restrictions similar to Russian ones.
/ Kuwait
Notice of the General Office of the CPC Central Committee and the General
Office of the State Council on Issuing the Provisions on Reporting Personal and
Related Matters of Leading Cadres (May, 2010)
Obligations of relevant officers to report their assets, as well as spouses and
No restrictions on opening accounts and keeping assets in foreign banks situated
Egyptian Illicit Gain Law No. 62 of 1975 and its executive regulation No. 1112
of 1975.
Obligations of state officials to prepare regular financial disclosures on all assets
owned by them, their spouses or minors, in Egypt or abroad. Breach entails
imprisonment and/or fine.
Anti-money Laundering
Federal Law No. 134-FZ as of June 26, 2013 on
Fighting of Illegal Financial Operations
 Beneficial Owner (UBO) is defined: “beneficial owner - an
individual who directly or indirectly (through third parties) owns
(has prevailing ownership of 25% in charter capital) the entityclient or who has a possibility to determine actions (decisions) of
the client”;
 Banks and Financial institutions are now required to establish and
update information on UBO: practical experience on Russian
 The Law increased powers of the RF tax authorities authorized to
receive banking data on individuals;
 Other important changes to company, tax and bankruptcy laws
Recent/pending changes to Russian legislation on
fighting use of off-shores
 New Withholding Tax Rules on Distributions to Foreign
Investors introduced to RF Tax Code (published on 3rd
November, 2013)
• Apply further to regulate recently allowed “cascade” payments of
dividend (bond) income arising from organized securities markets;
• Apply to dividend (bond) income to be credited to custody
accounts, foreign nominee holder, foreign authorized holder or
depositary programs accounts;
• Foreign nominee holders, etc. are required to supply Russian Tax
Agents (Depositaries, Brokers, Issuers, etc.) with information on
tax jurisdiction of ultimate owners of securities and any claimed
DDT benefits;
Recent/pending changes to Russian legislation on
fighting use of off-shores
 New Withholding Tax Rules on Distributions to Foreign
• If required supporting documentation (in full detail and correct
format) is not supplied, Tax Agent is required to withhold tax on
dividend (bond) income at the rate of 30%;
• Information Disclosure is voluntary;
• Tax Liability of Tax Agents can be limited in cases when foreign
counterparties provided wrong or incomplete information;
• Direct application of DDT benefits is limited to situations when no
specials conditions are imposed under DDT (Examples of special
conditions: investment over EUR 100,000 or equity stake over
Recent/proposed changes to Russian legislation on
fighting use of off-shores
 Proposed Changes to Russian Criminal Procedure Code
(brought to the State Duma on 11th October, 2013)
• Initiative of the Presidential Administration to reinstate previously
applied rules (existed before 2011) on powers to open tax criminal
• Investigating officers shall be allowed to open criminal cases on
alleged tax crimes without preceding tax audit confirming event of
tax offence/crime;
• Apparently the intent is to tighten control over capital flow by
“efficient” criminal procedure controls.
Recent/proposed changes to Russian legislation on
fighting use of off-shores
 Proposed changes To Russian Tax Code (Investigating
Committee of Russia is working on draft bill)
The Bill proposes definitions of “sham” and “fictitious”
transactions for tax purposes:
• “sham” transactions shall mean transactions which are aimed to
disguise real transactions with the aim of obtaining unlawful tax
benefits and tax minimization;
• “fictitious” transactions are defined as transactions which were not
really executed.
If this bill is passed and the tax bodies begin to use these
definitions to prevent tax minimization, business will have to
review its usual financing schemes.
Anticorruption and Anti-Laundering Aspects
 There is a demand in society for fighting corruption and state
authorities make attempts to respond to it
 Russia joined OECD Anti-Bribery Convention in international
business transactions.
 OECD recommendations are partly fulfilled (including
prohibition to reduce the tax profit on the amounts of bribes paid).
 Most independent research works, however, show that in reality
corruption level is still a serious problem
Thank You For Attention!

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