Changes To Legislation And Key Management Decisions

Changes to Legislation and Enforcement Practice - 2010

& Key Management Decisions

Region: Russian Federation

Alexandrov • Vasilieva and Associates

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 avoidanceWhat 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 years provided that this amount exceeds 10 % of overall amount of taxes and other dues to be paid(b) 1,800,000.00 rubles (vs. 300,000.00) of non-paid taxes

- “large-scale” avoidance for legal entities:(a) 2,000,000.00 rubles (vs. 500,000.00), 3 years, 10 %(b) 6,000,000.00 rubles (vs. 1,500,000.00)

- To know these crucial figures and to take them into account when making tax planning decisions

Question for lawyers: whether the term “other dues to be paid” in 10 % criterion covers social payments which under new legislation are separated from tax payments or not


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


Deadline was abolished. Limited liability companies may make respective adjustments at the moment when they apply to the tax authorities with any other changes to their articles of association

- To check whether the Articles of association were adjusted- If not, to make respective adjustments in order to avoid mistakes when making management decisions and applying to the Article of association and in order to avoid any delays with “urgent” changes to the Article of association when they are required


Protection of web-domain namesWhat 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)


Usage and administration of web domain names identical to the company name of another legal entity is a breach of this company’s right to the company name

- 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)- If yes, to compare the dates when the Company was registered (one of the questions for lawyers: What is important - the date of 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 - the clause in the agreement which stipulates the right of the bank to do so is invalid

However, this applies to relations between banks and individuals only

- To carefully check agreements between the company/ subsidiaries with banks, and clauses related to further changes of the percentage rate, because most likely it won’t be possible to claim that these clauses are invalid in the future (after the respective agreement is concluded)


Replacement of UST (Unified Social Tax) with social contributionsWhether 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” does not work in respect of social contributions

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)

- To check and to reconsider (if necessary) the existing system of remuneration


Simplified procedure of VAT reimbursementWhether 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 extraction of mineral resources) is requiredor- Bank guarantee is required (go to www.minfin.ru for the list of banks)

- To check whether the Company fulfills criteria or not


http://www.minfin.ru

http://www.minfin.ru

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 CompanyWhether to apply this measure

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


It is not forbidden now to offset the debt of a Russian limited liability company to the shareholder/ shareholders against their obligation to make the contribution into share capital

- To check the existing debts of the Russian subsidiary to the parent Company and to analyse the option of increasing share capital (probably with “share premium”, e.g., when nominal value of share capital might be less than actual contribution) and the option of 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 dividend rate now are as follows:- 50 % ownership- 365 days of ownership- Company paying dividends is not “black listed”

- To take this rule into account when making decision on how to structure acquisition of shares in other entities


New transfer pricing (TP) rulesWhether 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)


Developed TP rules will be introduced (2011 - ?)- To check cross-border contracts and contracts with interdependent 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


Personal income tax rate of 13 % for non-residents who are “highly qualified specialists”

- To check whether there are grounds for application of personal income tax rate of 13 %


Commercial contracts and commercial litigationHow 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 hearings + Clause (or additional agreement) establishing respective mechanism

- To use this 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: [email protected]

Web: www.avlegal.eu


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Changes To Legislation And Key Management Decisions

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