1. Слайд www.pgplaw.ru www.pgplaw.ru Discriminatory Practice of Applying Thin Capitalisation Rules Yuri Vorobyev, Head of Tax Practice Group Annual Tax Conference American Chamber of Commerce in Russia 19 October 2011 Moscow

2. Слайд www.pgplaw.ru 2 Discriminatory practice of applying thin capitalisation rules Thin capitalisation rule (article 269(2) of the Tax Code ) is: the procedure set out by the Tax Code with regard to re-classifying interest accrued on loans as dividends.

3. Слайд www.pgplaw.ru 4 Discriminatory practice of applying thin capitalisation rules As a result of the thin capitalisation rule being applied: ―the Russian borrower may not deduct the entire amount of paid interest as expenses. ―the foreign creditor is taxed with regard to the part of its income under the rules established for dividends.

4. Слайд www.pgplaw.ru 5 Discriminatory practice of applying thin capitalisation rules Discrimination of foreign investors’ rights : 1)the thin capitalisation rules apply irrespectively of the purpose of loan. 2)article 269(2) of the Tax Code will never apply to Russian investors. 3)the thin capitalisation rules are at variance with most of double tax treaties.

5. Слайд www.pgplaw.ru 6 Discriminatory practice of applying thin capitalisation rules The case law in in favour of taxpayers: ―Federal Arbitration Court for Moscow Region: Resolution No. КА-А40/0171-11 of 24 August 2011 Resolution No. КА-А40/4501-11 of 23 June 2011 Resolution No. КА-А40/5322-11 of 22 June 2011 ―Federal Arbitration Court for the North Western Circuit: Resolution No. А26-6967/2008 of 23 September 2009 ―Federal Arbitration Court for the Central Circuit: Resolution No. А54-766/2010 of 21 December 2010, etc.

6. Слайд www.pgplaw.ru 7 Discriminatory practice of applying thin capitalisation rules Negative tendencies: clause 9.3 of Key aspects of Russian tax policy in 2012 and the period of 2013- 2014: ―the tax policy will aim to limit the benefits established by double tax treaties. Letter No. 03-08-05/1 of the Ministry of Finance dated 6 October 2011: ―thin capitalisation rules do not contradict the double tax treaty. Ruling No. VAS-8654/11 of the Supreme Arbitration Court dated 12 August 2011 in the case of OAO UK Severny Kuzbass ―Russian companies should be taxed under Russian Tax Code without taking into account the double tax treaties.

7. Слайд www.pgplaw.ru 8 Discriminatory practice of applying thin capitalisation rules Possible implications: ―Foreign investors might find themselves in a worse position in Russia as the double tax treaties will not in fact be complied with.

8. Слайд www.pgplaw.ru 9 12, Krasnopresnenskaya Nab., Entrance 7 World Trade Center-II Moscow 123610, Russia Tel.: +7 (495) 967 0007 Fax: +7 (495) 967 0008 E-mail: info@pgplaw.ru 54, Shpalernaya St. Golden Shpalernaya Business Center St. Petersburg 191015, Russia Tel.: +7 (812) 333 0717 Fax: +7 (812) 333 0716 E-mail: spb@pgplaw.ru Contacts Discriminatory practice of applying thin capitalisation rules