mgimo.ru/news/announce/document211374.phtml МГИМО – СТРУКТУРА – МИУ – АНОНСЫ

http://www.mgimo.ru/news/announce/document211374.phtml МГИМО – СТРУКТУРА – МИУ – АНОНСЫ

Taxation and deals September - November 2011 Mark Okes-Voysey

Tax = both risk but also opportunity

Dealing with Tax Risks

Why does tax represent a risk? • Compliance • Typically penalties and interest • Also criminal charges • Reputation • Statute of limitation (risks of open years)

Warranties, Representations and Indemnities Warranty • Promise as to the state of the target’s affairs • Breach gives rise to a claim for damages • Damages are rewarded if the value of the target/ underlying asset decreased Representation • Statement of state of the target’s affairs • In the case of misrepresentation – the buyer may terminate the SPA • In the case of misrepresentation – the amount of damages may be greater that the one awarded in a warranty claim

Warranties, Representations and Indemnities Indemnity • Promise to reimburse the buyer for specific loss • No obligation of the buyer to mitigate the loss • No need to prove the decrease of value. Pound-for-pound basis • Is most appropriate to cover specific risks (e.g. potential claims) • Tax liabilities are often indemnities

Warranty • The Company is and has at all times been resident only in Russia for all Tax purposes. The Company is not liable to pay and has at no time incurred any liability to Tax chargeable under the laws of any jurisdiction other than Russia • The Company has paid all Tax which it has become liable to pay and is not, and has not in the six years ending on the date of this Agreement been, liable to pay a penalty, surcharge, fine or interest in connection with Tax. Example

Buyer-friendly warranty vs Seller-friendly warranty Buyer-friendly warranty: The Company has no outstanding debts payable to any third party or parties whether private or public, individual or legal, governmental or non governmental as well as no unpaid liabilities in respect of Taxation, duties, fees, fines or other official payments. Seller-friendly warranty: [So far as the Seller is aware], the Company has no outstanding debts [under loan agreements] payable to any third party [other than the Seller’s affiliates] in each case in excess of USD 500,000. Example

Indemnity • The Seller hereby agrees to indemnify and keep indemnified the Buyer and to hold the Buyer harmless against any and all liabilities, any losses, damages, costs, fines, penalties, disbursements and expenses which were suffered or incurred or may be suffered or incurred by the Buyer or the Company, directly or indirectly, as a result of, or based upon or arising from any failure by the Company prior to 31 December 2009 (i) to timely pay any Tax due and payable thereby, (ii) to timely file any Tax Return, (iii) to comply with any Applicable Law relating to Taxes Example

Limitation of Liability • Limitation of liability provisions – a tool to limit the liability in the case of a warranty claim. It is often seen in a “seller-friendly” SPA • Limitation on quantum • De minimis (“materiality threshold”): to avoid insignificant claims • De maximis: to set the maximum level of liability • Time limits for bringing claims • Specific limitations: • The seller is not liable for events which arose before the seller acquired the company • The seller is not liable for events which arose with the consent of the buyer • If the buyer fails to act in accordance with “conduct of claims” provisions • etc. • [To the best of the] Seller’s knowledge

Limitation of Liability • Limitation on Quantum • The Seller is not liable in respect of a Warranty Claim: • unless the amount that would otherwise be recoverable from the Seller (but for this paragraph) in respect of that Warranty Claim exceeds [amount]; and • unless and until the amount that would otherwise be recoverable from the Seller (but for this paragraph ) in respect of that Warranty Claim, when aggregated with any other amount recoverable in respect of other Warranty Claims (excluding any amounts in respect of a Warranty Claim for which the Seller has no liability because of paragraph), exceeds [amount] and in the event that the aggregated amounts exceed [amount] the Seller shall only be liable for the excess. • The Seller's total liability in respect of all Warranty Claims is limited to [amount]. • Time Limits for Bringing Claims • The Seller is not liable for a Warranty Claim in respect of a Warranty unless the Buyer has notified the Seller of the Warranty Claim stating in reasonable detail the nature of the Warranty Claim and the amount claimed on or before [date]. Example

Quiz What is the aim of tax structuring? • To avoid tax • To reduce tax within legal boundaries • To evade tax • To give tax consultants work to do

Tax Structuring – basic objectives Tax efficiency at the following stages • Acquisition - Transfer taxes - Stamp tax - Capital tax - WHT • Maintenance - WHT, dividends - Equity tax (annual taxes on assets) • Financing - WHT and income tax on interest - Thin capitalization rules - Capital tax • Exit - Capital gains /income tax - Any other taxes like for Acquisition stage

Tax structuring for the Buyer • Buyer’s key objectives: • I.Minimal tax cost upon acquisition and financing of the deal • II. Protection from historic tax risks of the Target I. Tax structuring for the Buyer: • What is for sale? • Who is selling (individual/ legal entity/ jurisdictions involved)? • Taxes on acquisition • Financing

Personal tax 9% Personal tax 9% Personal tax 13% Profits tax 0% WHT 0% НП 20% Foreign HoldCo* Rus HoldCo Rus HoldCo Rus OperCo Rus OperCo Sale of shares in HoldCo by the individual (Russian resident) Rusi OperCo Tax structuring for the Seller Example Sale of shares in Rus Co from the level of Foreign HoldCo and payment of dividend to individual (Russian resident) Sale of shares in Rus OperCo from the level of Rus HoldCo and payment of dividend to Individual (Russian resident)

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