VAG AEB presentation 24 May 2006.ppt


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VAG AEB presentation 24 May 2006.ppt

  1. 1. Association of European Businesses in the Russian Federation AEB TAXATION COMMITTEE BREAKFAST Grand Marriott Hotel, Tverskaya ul. 26 (M. Mayakovskaya) May 24, 2006 “ International Tax Structures for Russian and CIS Companies: Tax Planning Techniques and Practical Examples ” Chaired by Olga A. Boltenko, AEB Tax Committee Deputy Chairwoman, LeBoeuf, Lamb, Greene & MacRae (London)
  2. 2. Tax risks related to management of foreign structures out of Russia: current situation and tendencies Vladimir Gidirim Manager, International Tax Services, Ernst & Young
  3. 3. Topical questions and risks in management of foreign companies <ul><li>Current Russian and foreign regulatory environment aimed at combating tax avoidance </li></ul><ul><li>Russian tax risks in connection with activities (including management) of foreign companies from Russia </li></ul><ul><li>Concept of permanent establishment and other concepts applicable to various types of activities on behalf of foreign companies in Russia </li></ul><ul><li>Management structures to consider to reduce the tax risks </li></ul>
  4. 4. International anti-abuse measures <ul><li>A system of norms and rules elaborated by courts, aimed at preventing tax abuse has influenced significantly the ways how intra-group management functions are structured </li></ul><ul><li>In the international practice the following anti-abuse concepts can be found: </li></ul><ul><ul><li>priority of substance over form </li></ul></ul><ul><ul><li>concept of a bona fide taxpayer </li></ul></ul><ul><ul><li>institute of abuse of law </li></ul></ul><ul><ul><li>Institute of invalid transactions (sham transactions, “stepped” transactions) </li></ul></ul><ul><ul><li>“ business purpose” test </li></ul></ul>
  5. 5. Russian law enforcement practice <ul><li>Special Russian doctrines (based on “UKOS case”) : </li></ul><ul><ul><li>Non-bona fide taxpayer concept </li></ul></ul><ul><ul><li>“ beneficial ownership” in respect of imposing tax liabilities of a formally uncontrolled subsidiary on its “controlling” parent </li></ul></ul><ul><ul><li>Concept of “nominal” or nonexistent legal entities ; </li></ul></ul><ul><ul><li>“ Economic” place of business; </li></ul></ul><ul><ul><li>Adequacy of tax benefits to the investment made by the company into the regional economy . </li></ul></ul><ul><li>Doctrines based on civil law provisions regarding abuse of right (based on ” Baikonur ” schemes): </li></ul><ul><ul><li>Invalidity of a transaction concluded f or the p urpose, c ontradicting the principles public order and m orality (article 169 Civil Code) ; </li></ul></ul><ul><ul><li>Recognision of a transaction as fraudulent / sham ; </li></ul></ul><ul><ul><li>Absence of “business purpose” </li></ul></ul>
  6. 6. Focus <ul><li>Local and international legislation development is aimed at combat of of non bona-fide taxpayers’ behavior </li></ul><ul><li>Russian tax authorities resort to international principles regarding abuse of law (e.g. Report of “Haarmann Hemmelrath” to the Administration President) </li></ul><ul><li>Russian law enforcement practice has a tendency to the business purpose test as a criterion of the bona fide behavior of the taxpayer </li></ul><ul><li>The above indicates on escalation of risks related to currently existing approaches to management of foreign companies in Russia </li></ul>
  7. 7. Transactions in international tax context which could be exposed to risks <ul><li>Use of holding companies with no active business </li></ul><ul><li>Use of holding/operating companies in jurisdictions with low/absent taxations which business transactions are performed outside the country of their incorporation </li></ul><ul><li>Use of special-purpose companies (SPVs) e.g. for intra-group financing, IP ownership and other purposes </li></ul><ul><li>Intra-group (transfer) pricing not used on market principles </li></ul><ul><li>Use of trusts and funds for asset protection purposes </li></ul><ul><li>Restructuring, including set up of new companies, liquidation of existing companies, transfer of business/shares within the group </li></ul>
  8. 8. Management of offshore companies in Russian business practice <ul><li>Offshore companies used in Russian business practices typically do not have any identifiable business in the country of establishment, and all or major part of their commercial operations are performed in Russia. </li></ul><ul><li>Management decisions made on behalf of foreign companies are adopted and exercised in Russia by Russian authorized individuals being either directors or persons acting on the basis of a general power of attorney </li></ul><ul><li>Business functions of a foreign company are typically exercised by Russian employees of affiliated companies (drafting contracts , conducting correspondence, negotiations in the name of the foreign company) </li></ul><ul><li>Signing of contracts is normally performed by nominee directors abroad </li></ul>
  9. 9. Indirect evidences of a permanent establishment <ul><li>Business cards of Russian individuals may indicate on a director position in a foreign company, as well as specify an address and phone number in the country of incorporation or in Russia, e-mail address in zone “ru”, etc. </li></ul><ul><li>Templates of business correspondence of a foreign company may contain contact information of a Russian company (address, phone, fax etc). </li></ul><ul><li>Business correspondence in the name of foreign company may be found to be carried on from e-mails in the zone “ru”, etc. </li></ul>
  10. 10. Use of nominee directors <ul><li>This is erroneously believed to be a guarantee against a permanent establishment risk </li></ul><ul><li>This is a standard “packaged” service upon a purchase of an offshore company and is typically provided by local registered agent or secretarial firm </li></ul><ul><li>Instructions and relevant documentation are typically provided by beneficiaries and real decision makers from Russia to the nominee director for signature </li></ul><ul><li>As a rule, a nominee director is not responsible for his actions before third parties as he does not in fact take business decisions </li></ul><ul><li>Instructions and assignments (“recommendations”) from entitled Russian persons to nominee directors provide evidence of a factual place of management in Russia </li></ul><ul><li>Conclusion: use of nominee directors of a foreign company does not necessarily reduce the risk of a permanent establishment in Russia </li></ul>
  11. 11. Permanent establishment concept <ul><li>The &quot;permanent establishment&quot; concept is not a civil law concept but a tax concept qualifying the activity of a foreign company as giving rise to a tax liability in Russia </li></ul><ul><li>Profits attributable to the activity exercised through permanent establishment are subject to tax in Russia </li></ul><ul><li>Discussion of the concept of a permanent establishment </li></ul><ul><ul><li>Fixed place of business of a foreign company </li></ul></ul><ul><ul><li>Place of management </li></ul></ul><ul><ul><li>“ Dependent agent” </li></ul></ul>
  12. 12. Risk of permanent establishment: fixed place of business <ul><li>According to the Russian Tax Code a permanent establishment is a fixed place of business through which the organization regularly carries on business activities in the territory of the Russian Federation , except activities of a preparatory and auxiliary nature </li></ul><ul><li>Fixed place of business includes the following : </li></ul><ul><ul><li>branch </li></ul></ul><ul><ul><li>representation </li></ul></ul><ul><ul><li>division </li></ul></ul><ul><ul><li>bureau </li></ul></ul><ul><ul><li>office </li></ul></ul><ul><ul><li>agency </li></ul></ul><ul><ul><li>any other economically autonomous subdivision </li></ul></ul><ul><ul><li>other place of business </li></ul></ul>
  13. 13. Risk of permanent establishment: fixed place of business <ul><li>International double tax treaties based on the OECD Model Convention include statements similar to the Russian legislation </li></ul><ul><li>A “place of management” as one of the grounds of permanent establishment is considered as a separate criterion in tax treaties (in the OECD model convention) </li></ul><ul><li>According to Russian legislation a place of management is not considered as separate criterion of a permanent establishment but is rather covered by its general definition </li></ul>
  14. 14. Risk of permanent establishment: “dependent agent” <ul><li>The Russian “dependent agency” concept broadly follows the OECD approach </li></ul><ul><li>According to the Tax Code activity carried through a “dependent agent” means activity through a person, which: </li></ul><ul><ul><li>on the basis of contractual relations with that foreign organization, represents its interests in the Russian Federation </li></ul></ul><ul><ul><li>acts in the Russian Federation in the name of that foreign organization </li></ul></ul><ul><ul><li>has and habitually exercises authority to conclude contracts or to negotiate significant conditions of contracts in the name of that organization, thereby creating legal consequences </li></ul></ul><ul><ul><li>creates legal consequents for that foreign organization </li></ul></ul><ul><li>Activity carried on through a broker, a commission agent, a professional participant in the Russian securities market or any other person acting in the course of his main (normal) activities does not constitute permanent establishment. </li></ul>
  15. 15. Reducing tax risks: general observations <ul><li>Make your foreign company “real” </li></ul><ul><ul><li>Local management to be materially involved into preparation/processing transactions </li></ul></ul><ul><ul><li>Substance (office, employees, board meetings, protocols) </li></ul></ul><ul><ul><li>Singing contract/other documentation abroad </li></ul></ul><ul><li>Careful planning required where to place the company management and which management functions are allocated to management representatives /beneficial owners in Russia </li></ul><ul><li>Avoid transactions/bank transfers which cannot be duly documented in the future </li></ul><ul><li>Arrange for financial statements to be drafted for companies even if those are not required under local laws </li></ul><ul><li>Use reputable corporate service providers with recognized name in international business </li></ul><ul><li>Always create a business justification for any company, any restructuring or transaction </li></ul>
  16. 16. Reducing tax risks: examples <ul><li>Transfer of business functions of the company from Russia abroad: </li></ul><ul><ul><li>The foreign company operates as an independent business enterprise, employees and management of which act not in Russia (e.g. transfer of trading staff to Cyprus, Gibraltar etc.) </li></ul></ul><ul><ul><li>Where necessary , individuals situated in Russia could in principle have limited authorities for “simple signing of contracts” on basis of a specific power of attorney and detailed instructions from foreign directors </li></ul></ul><ul><li>2. Use of a collegial executive body with the majority of non-residential directors </li></ul><ul><ul><li>Russian directors should not have a sole signature power </li></ul></ul><ul><ul><li>Decisions must be adopted by a majority of votes </li></ul></ul>
  17. 17. Reducing tax risks <ul><li>3. Use of a service company for rendering services from Russia in a favour of foreign company </li></ul><ul><ul><li>such services are actually rendered </li></ul></ul><ul><ul><li>parties conclude a service contract instead of an agency one </li></ul></ul><ul><ul><li>consideration stipulated by parties should be at arm’s length </li></ul></ul><ul><li>4. Use of a management company instead of service company </li></ul><ul><ul><li>management activities to foreign companies should be carried on basis of the relevant management agreement </li></ul></ul><ul><ul><li>the structure/activities should be carefully elaborated vis-à-vis the permanent establishment risk </li></ul></ul><ul><ul><li>consideration stipulated by parties should be at arm’s length </li></ul></ul>
  18. 18. Contact <ul><li>Vladimir Gidirim </li></ul><ul><li>Manager, International Tax Services </li></ul><ul><li>[email_address] </li></ul><ul><li>Office +7-495-7559716 </li></ul><ul><li>Mob. +7-495-7676990 </li></ul>