Changes To Legislation And Key Management Decisions

Alexandrov • Vasilieva and Associates

Changes to Legislation and
Enforcement Practice - 2010
&
Key Management Decisions
Region: Russian Federation

Wednesday, June 30, 2010

Latest trends in various regulatory issues
currently under observation

• Possibility of introduction to precedent law (based on court decisions) is discussed
(the hearings in the Constitutional Court in March 2010)

• Four main “pressures” to business in the area of law: tax audits and different
“commission meetings” appointed by tax authorities (e.g. re losses, salaries, etc.) (a
continuing trend but tending to liberalization to some extent), social payments (due
to new legislation in force since 1 January 2010), anti-trust regulation and consumer
rights regulation and commercial disputes (the number has increased)

• Possibility to recover in court proceedings nearly full amount of fees paid to attorney
by winning party (in the past such amounts were limited to “small” ﬁgures like
5,000.00 rubles, 30,000.00 rubles, etc.)

• Tax dispute resolution is transferred from courts to tax administration due to
introduction of obligatory pre-court appellation procedure


Latest trends in various regulatory issues
currently under observation

• Increase of burden related to social payments is scheduled in 2011 - 2014 under
respective law

• Liberalization (to some extent) of VAT legislation and enforcement practice (e.g.,
simplified procedure of VAT reimbursement, clarifications on non bona-fide
taxpayers, etc.). Improvement of profit tax legislation. Liberalization in criminal law
re tax avoidance

• “Per industry targets” in appointment of obligatory tax audits (pharmaceutical
enterprises - in 2010)

• Development of transfer pricing legislation and major emphasis on cross-border
transactions

• Development of “Skolkovo Scientific Zone”. Tax incentives are under discussion

• Development of IP (intellectual property) enforcement practice

• Per industry presentations (automotive, retail) are to be presented at your request


Discussion of certain changes to legislation and enforcement practice

How they may affect key management decisions


Liberalization of criminal law re tax avoidance
What are the crucial figures of tax arrears
for tax management purposes?

• Introduced changes to Articles 198, 199 and 199.1 of the Criminal Code of the Russian
Federation

Changes Key Management Decision

New figures:
- “large-scale” avoidance for individuals:
(a) 600,000.00 rubles (vs. 100,000.00) of
non-paid taxes for the last 3 financial - To know these crucial figures and to take them
years provided that this amount exceeds into account when making tax planning
10 % of overall amount of taxes and other decisions
dues to be paid
(b) 1,800,000.00 rubles (vs. 300,000.00) Question for lawyers: whether the term “other
of non-paid taxes dues to be paid” in 10 % criterion covers social
payments which under new legislation are
- “large-scale” avoidance for legal entities: separated from tax payments or not
(a) 2,000,000.00 rubles (vs. 500,000.00), 3
years, 10 %
(b) 6,000,000.00 rubles (vs. 1,500,000.00)


Re-drafting (adjustment to the new requirements) of the Article of
association of Russian legal entities incorporated in the form of LLCs.
What if the respective Article of association was not adjusted?

• Limited liability companies should re-draft their articles of association (adjust them) due to
changes in the Civil Code of the Russian Federation and the Law on limited liability companies.
The deadline was 1 January 2010. Consequences for non-compliance with this requirement
were not introduced


- To check whether the Articles of association
were adjusted
Deadline was abolished. Limited liability
- If not, to make respective adjustments in order
companies may make respective
to avoid mistakes when making management
adjustments at the moment when they
decisions and applying to the Article of
apply to the tax authorities with any other
association and in order to avoid any delays with
changes to their articles of association
“urgent” changes to the Article of association
when they are required


Protection of web-domain names
What if another person (individual or legal entity) uses a web domain
identical to the Company’s name?

• Decision (“Postanovlenije”) of the Presidium of the Supreme Arbitration Court dated 8
December 2009 (case № A40-53937/08-51-526)


- To conclude whether the domain used by the
other company/ individual (if applicable) is
substantial for business or not (e.g., the
company did not previously register the domain
as a *.ru domain, but only as a *.com domain)
Usage and administration of web domain
- If yes, to compare the dates when the
names identical to the company name of
Company was registered (one of the questions
another legal entity is a breach of this
for lawyers: What is important - the date of
company’s right to the company name
registration abroad or the date of registration of
the subsidiary/ branch in Russia, or both) and
when the respective web-domain was registered,
to analyse other circumstances of the case and
to properly evaluate the situation


Different charges by the Bank - are they legal or not?

• Decision (“Postanovlenije”) of the Presidium of the Supreme Arbitration Court of the Russian
Federation dated 2 March 2010 № 7171/09 (Russian Bank of Development case)


The bank cannot reconsider
percentage rates in unilateral order - - To carefully check agreements between the
the clause in the agreement which company/ subsidiaries with banks, and clauses
stipulates the right of the bank to do related to further changes of the percentage
so is invalid rate, because most likely it won’t be possible to
claim that these clauses are invalid in the future
However, this applies to relations (after the respective agreement is concluded)
between banks and individuals only


Replacement of UST (Uniﬁed Social Tax) with social contributions
Whether to change existing remuneration system

• Federal law № 212-FZ dated 24 July 2009 on insurance contributions to the Pension Fund of
the Russian Federation, the Social Security Fund of the Russian Federation, the Federal Fund of
the Obligatory Medical Insurance and Territorial Funds of Obligatory Medical Insurance


UST (from ~ 2 to 26 %, regressive scale) is replaced
by contributions to funds (26 % in total in 2010,
34 % in total in 2011*, base is limited to
415.000,00 rubles annually to each individual, no
regressive scale) since 1 January 2010

Incentives for some types of companies

Former rule “no proﬁt tax deductions - no UST” - To check and to reconsider (if
does not work in respect of social contributions necessary) the existing system of
remuneration
Some former incentives no longer exist

Obligatory social accident insurance (from 0,2 %) is
not abolished
* There was discussion about decreasing the burden from 34 % to
32 %. But the decision will instead be to not decrease the burden
(see the latest statements of the Government)


Simplified procedure of VAT reimbursement
Whether the Company may apply

• Simplified procedure of VAT reimbursement is introduced. It is applied to the tax declarations
for 1Q 2010 and the following tax declarations. The procedure means the possibility to offset/
receive back from the government the VAT without having to wait the end of the line for a desk
tax audit related to the respective VAT tax declaration


Simplified reimbursement:
- 10,000,000,000.00 rubles of paid taxes (overall,
including VAT, profit tax, excise taxes, tax on
- To check whether the Company
extraction of mineral resources) is required
fulfills criteria or not
or
- Bank guarantee is required (go to www.minfin.ru
for the list of banks)


Possibility to make additional contributions into the share capital of
the Russian subsidiary (LLC) via offset
against the debt of the LLC to the parent Company
Whether to apply this measure

• The Federal Law № 352-FZ dated 27 December 2009 has introduced respective changes
(effective from 31 December 2009)


- To check the existing debts of the
Russian subsidiary to the parent
Company and to analyse the option of
It is not forbidden now to offset the debt of a
increasing share capital (probably with
Russian limited liability company to the
“share premium”, e.g., when nominal
shareholder/ shareholders against their
value of share capital might be less than
obligation to make the contribution into
actual contribution) and the option of
share capital
offsetting such debts against obligation
causing any contributions made to
increase share capital


Dividend taxation if the Russian subsidiary will acquire shares in
other entities (except offshore entities)
How dividends received by the Russian entity will be taxed

• The “participation exemption” rule (zero inbound dividend rate) became simpler, e.g.,
contribution of 500,000,000.00 rubles is no longer the obligatory requirement for application
of zero inbound dividend rate


Requirements for application of zero inbound
- To take this rule into account
dividend rate now are as follows:
when making decision on how to
- 50 % ownership
structure acquisition of shares in
- 365 days of ownership
other entities
- Company paying dividends is not “black listed”


New transfer pricing (TP) rules
Whether to re-consider cross-border contracts and contracts with
interrelated parties

• The draft of the law introducing new TP rules is passing through the State Duma (legislative
body)


- To check cross-border contracts
and contracts with interdependent
Developed TP rules will be introduced (2011 - ?)
parties to see whether they are in
compliance with the rules or not


Personal income tax rate of 13 % (instead of 30 %) for some groups of
non-residents

• From 1 July 2010. FZ № 86-FZ dated 19 May 2010


- To check whether there are
Personal income tax rate of 13 % for non-residents
grounds for application of
who are “highly qualiﬁed specialists”
personal income tax rate of 13 %


Commercial contracts and commercial litigation
How to use pledge in a more effective way

• Although the rules allowing the holder of the pledge to cover his interests at the expense of the
pledged property without court hearings were already in force in 2009, we would like to direct
your attention to them again


Commercial contract
+
Clause (or additional agreement) allowing the
holder of the pledge to cover his interests at the
expense of the pledged property without court - To use this mechanism
hearings
+
Clause (or additional agreement) establishing
respective mechanism


Alexandrov • Vasilieva and Associates

Our contacts:
Principal office in Prague, Czech Republic

Partnership consultancy ﬁrm in Vienna, Austria

Representatives in Moscow, Samara city and Nijny Novgorod (Russia)

Preferred law/ consultancy ﬁrms in UK, Belarus, Singapore/ Indonesia, the
Netherlands and Luxembourg

Address in Prague, Czech Republic: Husova 240/5, Praha 1, 110 00

Tel.: +420 224 401 218

Mob.: +420 776 751 538 (Tatiana Vasilieva)

Fax: +420 224 401 266

E-mail: vasilieva@avlegal.eu

Web: www.avlegal.eu


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