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Cyprus et. al: Tax Look from Russia. Evgeny Timofeev Partner, Head of Russian/CIS Tax Practice Berwin Leighton Paisner ( Goltsblat BLP ). 25 September 2013. Then and Now. Before November 2011 ( Severny Kouzbass case): Double tax treaties deeply respected by courts

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Cyprus et. al: Tax Look from Russia


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cyprus et al tax look from russia

Cyprus et. al: Tax Look from Russia

Evgeny Timofeev

Partner, Head of Russian/CIS Tax Practice

Berwin Leighton Paisner (Goltsblat BLP)

25 September 2013

then and now
Then and Now
  • Before November 2011 (Severny Kouzbass case):
    • Double tax treaties deeply respected by courts
    • Rather formal approach in application
    • Anti-abuse doctrine in place but rarely applied to international issues
  • Since then:
    • Halo gone
    • Substance questioned
    • Business purpose questioned
    • Beneficial ownership questioned
trade transactions transfer pricing
Trade Transactions - Transfer Pricing
  • Transfer pricing rules in place
  • Cyprus left out of the “black list” as of 2013 (transactions of 2012 still subject to pricing control irrespective of value)
  • With price too high:
    • Not just a correction as to expenses but also
    • VAT recovery (in “excessive” part) arguably may be disallowed
  • With price too low:
    • VAT due not withheld
      • Per the latest SCC ruling tax not withheld can be claimed by tax authorities from tax agents
interest
Interest
  • Transfer pricing rules arguably still apply
  • Should be wrong: special rules apply
    • Either within statutory safe harbors (0.8 CBR rate on foreign currency, 1.1 CBR rate on ruble loans), or
    • within 20% deviation from rates applied by Russian lenders
    • (so far it seems that as of 2014 the thresholds will be back to 15% and 1.1 CBR respectively with “market” measurement based on any, not just Russian lenders’ rates)
  • Thin cap rules – do apply under the Cyprus treaty (Severny Kuzbass SCC case)
    • Massive attacks on SCC to consider arm’s length criterion as to the structure of capital
    • “Sister” company loans loophole – still working but you need tons of documents to prove substance and separate business purpose
  • Ensure substance and avoid back-to-backs: disregard and beneficial owner concerns – tax not withheld can be claimed
thin cap the bad structure
Thin Cap – the Bad structure

Shareholder

Loan

Financial company

Abroad

Russia

Loan

100%

Operational

company

thin cap the good structure
Thin Cap – the Good Structure

Shareholder

Loans

Financial company

Ownership

Loans

Holding company

Operational

company

Ownership

Abroad

Russia

Operational

company

Operational

company

Operational

company

royalties
Royalties
  • Transfer pricing rules apply – check your level
  • Take care of the way the IP assets were received abroad
  • Ensure substance – sham companies can be disregarded
  • Avoid back to back arrangements – beneficial owner concerns
  • Tax not withheld can be claimed
dividends
Dividends
  • Ensure substance – sham companies can be disregarded
  • Avoid back to back arrangements – beneficial owner concerns
  • Tax not withheld can be claimed
  • Under thin cap rules treaty rates apply at source
using russian branches
Using Russian Branches
  • Arguably the way to avoid thin cap rules
  • However, arguably subject to transfer pricing as if a foreign company
  • The way to avoid dividend withholding tax
  • Arguably (under the non-discrimination clause) the way to ensure applicability of:
    • Dividend flow-through rules (dividends taxed in Russia only once)
    • 0% dividend rate
contact information
Capital City Complex, Moscow-City Business CentrePresnenskaya nab., 8, bld. 1Moscow, 123100, Russia

Tel.: +7 495 287 44 44

Fax: +7 495 287 44 45

Email: info@gblplaw.com

www.gblplaw.com

Contact information