Cyprus et. al: Tax Look from Russia Evgeny Timofeev Partner, Head of Russian/CIS Tax Practice Berwin Leighton Paisner (Goltsblat BLP) 25 September 2013

Page 2 © Goltsblat BLP 2011 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

Page 3 © Goltsblat BLP 2011 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

Page 4 © Goltsblat BLP 2011 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

Page 5 © Goltsblat BLP 2011 Thin Cap – the Bad structure Shareholder 100% Financial company Operational company Loan Russia Abroad

Page 6 © Goltsblat BLP 2011 Thin Cap – the Good Structure Shareholder Financial company Operational company Ownership Loans Russia Abroad Holding company Operational company Operational company Operational company Ownership Loans

Page 7 © Goltsblat BLP 2011 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

Page 8 © Goltsblat BLP 2011 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

Page 9 © Goltsblat BLP 2011 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

Page 10 © Goltsblat BLP 2011 Contact information Capital City Complex, Moscow-City Business Centre Presnenskaya nab., 8, bld. 1 Moscow, , Russia Tel.: Fax: