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Vladimir Vinogradov_eng_asset management.ppt

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  • 1. Asset management: tax aspects* 31 October 2006 Vladimir Vinogradov Tax Director *connectedthinking
  • 2. Contents
      • Introductory comments / Trends
      • General comments on taxation principles and concepts
      • Onshore or offshore
      • Transfer pricing
      • Conclusions
  • 3. Introductory comments / Trends
      • We see quick development of asset management industry in Russia. As asset management become larger, pressure is increasing for asset managers to evolve into more mature, better infrastructured organizations, less dependent on its original founders.
      • Asset managers are looking for new clients and new markets. At more competitive market asset managers:
        • set up offices and obtain licenses/permissions to carry out asset management business outside Russia, particularly in EU countries;
        • sep up funds in more sophisticated jurisdictions than Cayman Islands and/or British Virgin Islands. New funds are aimed to attract investors who are restricted to invest in funds set up in low/zero tax jurisdictions.
      • Asset managers expand outside their initial area of success to include a variety of investment vehicles (real estate, venture capital, distressed debt etc.)
  • 4. General comments on taxation principles and concepts
      • From a tax perspective the principal goals of fund structuring will typically include:
        • No further tax incurred by investors than they would have incurred if they would have invested directly in the underlying assets;
        • No entity level tax incurred by the fund;
        • Minimizing the tax incurred by the fund manager (as a business entity) and the individual principals;
        • Enabling access to required double tax treaty network.
      • Unfortunately, tax authorities frequently have suspicions that alternative investment funds may be used to unlawfully avoid taxation in their home jurisdictions. As a result, the structure of a fund will often need to take into account numerous anti-avoidance rules and interpretations that work against tax neutrality.
  • 5. General comments on taxation principles and concepts
      • Typical fund structure for offshore fund looks like the following:
        • a Cayman Islands exempt company as a fund;
        • A Cayman Islands company as the investment manager, who would receive the fixed management fee;
        • A UK company who would receive a sub-advisor’s fee consisting of a portion of management fee (in Russia sub-advisor is frequently located in Cyprus); and
        • An English limited liability partnership which would receive a performance fee directly from the fund.
      • The major tax risk for offshore funds in Russia would be creation of a permanent establishment for profits tax purposes. This risk could be mitigated by creating substance outside Russia. From business perspective creating substance outside Russia could be difficult since portfolio managers need regular contact with investors.
  • 6. Onshore or offshore
      • Selecting an offshore jurisdictions begins with the following questions:
        • What legal structures are available in the jurisdiction?
        • What are the regulatory requirements?
        • How is the jurisdiction perceived by targeted investors?
        • How will interest in a vehicle in this jurisdiction be taxed in the investor’s home country?
        • What are costs and time requirements?
      • Luxembourg and Ireland have extensive approval processes and prescriptive requirements, although greater flexibility than many onshore jurisdictions.
      • Jersey and Guernsey require vetting and pre-approval of new funds, although the process is less consuming.
      • British Virgin Islands and Cayman Islands are recognized as being very efficient and reliable jurisdictions.
  • 7. Onshore or offshore
      • Offshore funds have the following advantages:
        • generally give more flexibility from regulatory point of view;
        • may attract a wider range of investors;
        • may achieve better effective tax rate due to location in low tax jurisdictions.
      • Onshore funds have the following advantages:
        • could be marketed in Russia;
        • could achieve deferral of taxation for fund investors due to exemptions in the Russian tax legislation;
        • a number of unclear rules in taxation.
      • In case of offshore funds sub-advisor’s fee would be subject to Russian profits tax at the rate of 24%. In case of onshore funds management/performance fee would be subject to 24% profits tax. Fund investors could be taxed only domestically and in case of Russian funds taxation could be deferred.
  • 8. Transfer pricing
      • When structuring offshore funds, the allocation of revenue and costs between offshore and onshore management companies must be closely examined. Allocation not based on the substance of operations will be subject to challenge by the tax authorities.
      • Allocation between offshore and onshore entities should be based on the risks and responsibilities assumed by those companies.
      • Fund managers should be capable of providing documentary evidence to support the manner in which fees are allocated.
  • 9. Conclusions
      • Permanent establishment risk for asset managers of offshore funds increases. More entities start to consider ways to mitigate the above risk through creating substance outside Russia, allocating functions and responsibilities.
      • Asset managers who establish offices in “complex” jurisdictions would need to review its structure from regulatory and tax perspective.
  • 10. © 2006 PricewaterhouseCoopers. All rights reserved. “PricewaterhouseCoopers” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. *connectedthinking is a trademark of PricewaterhouseCoopers LLP (US). Thank you! Vladimir Vinogradov Tax Director PricewaterhouseCoopers Tel.: +7 (495) 232 5526 E-mail: vladimir.vinogradov@ru.pwc.com

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