Foreign Investment in Russian Companies – Tax Implications Galina Klimenko Alinga Consulting

1. Foreign Investment in Russian Companies – Tax Implications Galina Klimenko Alinga Consulting October 29, 2008

2. Contents Principal forms of investment: • Investment in equity (in registered capital) • Investment in property without changes to equity (to registered capital) • Parent-Subsidiary assistance • Loan facilities

3. Formation of Registered Capital Investment with cash assets – in terms of taxation, this is the safest way of forming registered capital Investment with property If plant and equipment are imported, exemptions on VAT (Item 7, Article 150, Russian Tax Code) and customs duties apply. Re-exporting such equipment from Russia is difficult. A series of documents from the owner is required in order to include property in the tax accounting. There is a risk in accounting for amortization on such property.

4. Equity Investments with Property Documents confirming the value of the property: 1) Documents confirming the costs of acquisition (creation) of the property by the transferring party; 2) A document confirming the amount of accumulated amortization (on fixed assets); 3) A certificate confirming that an independent appraisal has taken place, using a form that adheres to the requirements of the foreign country’s legislation or to International Valuation Standards.

5. Necessity of Investing in Property without Changes to Equity Net Assets less registered capital Reduction of registered capital Increase in net assets Liquidation Investment in property Parent-Subsidiary assistance

6. Decision on investment Increase in additional capital Increase in net assets Investment in Property The possibility of investing in property without changes to equity is a civil law question (Article 27 of Federal Law on Limited Liability Companies). The risks involved in recognizing such investments as gratuitous transfers are a tax question.

7. Parent-Subsidiary Assistance 1. Risks related to amortization 2. Limitation on use for a period of one year Gratuitous transfer Cash assets Gratuitous transfer Property Exceptions (Paragraph 11, Item 1, Article 251, Russian Tax Code): • Stake held by transferring party in registered capital of receiving party is greater than 50%; • Stake of receiving party in registered capital of transferring party is greater than 50%

8. Loan Facilities 1. Thin capitalization –for corporate profit tax, the entire amount of interest payments cannot be deducted as expenses. Part of the interest payments are recognized as dividends(Item 2, Article 269, Russian Tax Code). 2. Provision of interest-free loans– the risks of additional corporate profit tax assessment are minimal (Ruling of Presidium of Russia’s Supreme Arbitration Court, August 3, 2004, # 3009/04). 3. Debt forgiveness – different implications exist for forgiveness of principal and for forgiveness of interest.

9. Debt Forgiveness

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