1. Foreign investments into Russia. Tax consequences.

2. Legal basics  Federal Law ‘On Foreign Investment in the Russian Federation’ (Law on Foreign Investments) from July 9, 1999, N 160-FZ  Civil Code (4 parts),  Tax Code (2 parts),  Federal Law ‘On Joint-Stock Companies’ from December 26, 1995, N 208-FZ,  Federal Law ‘On Limited Liability companies’, from February 8, 1998, N 14-FZ,  etc.

3. Main forms of commercial activities in Russia: - Export/import of commodities or services without permanent presence in Russia, - Joint activities through a partnership, - Activities through a representative office, - Activities through a Russian legal entity (a subsidiary).

4. Russian legal entities: 1. Commercial: 1.1. Unlimited partnership – a partnership whose members (partners) are fully liable for its obligation, 1.2. Limited partnership – a partnership within which several partners have full liability and at least one partner has limited liability (to the extent of such partners’ contribution), 1.3. Limited Liability Company – a company in which the liability of each participants is limited to the extent of such participant’s contribution, 1.4. Additional Liability Company – a company in which the participants are, in addition to the extent of their contribution, equally additionally liable in accordance with a multiple applicable to all their contributions, 1.5. Joint-Stock Company (open and closed), 1.6. Production cooperative – an association of individuals for joint production and other economic activities based on membership or personal labor or other participation, 1.7. Unitary enterprise – legal form reserved for state and municipal enterprises. 2. Non-commercial.

5. Registration of Commercial Organizations Law ‘On State Registration of Legal Entities and Individual Entrepreneurs’ from August 8, 2001, N 129-FZ Documents which are necessary for the registration: - an application for state registration in the established form, - the decision of establishing of a legal entity, - the legal entity’s foundation documents, - excerpt from the relevant register of legal entities of the country of the founder’s origin, or any other certificate proving the legal status of the foreign legal entity, - receipt for payment of the state registration duty in the amount of 2 000 rubles (approx. 55 euro). State registration must be carried out within 5 days as of the moment of submission of the documents to the tax body.

6. Registration of Commercial Organizations Upon completion of registration a company receives: 1. Certificate of registration of the legal entity, 2. Certificate of the company’s registration as a taxpayer with the local tax authority, 3. Information letter issued by the Territorial Body of the Federal Service of State Statistics on the Company’s registration therewith. 4. The legal entity’s foundation documents with stamp of tax body, 5. Excerpt from Single State Register of legal Entities. Then by post: 6. Notice on the company’s registration as a payer of pension contributions with the Territorial Body of the Russian Federation Pension Fund, 7. Notice on the company’s registration as a payer of insurance premiums with the Territorial Body of the Russian Federation Social Insurance Fund, 8. Notice on the company’s registration as a payer of insurance premiums with the Territorial Body of the Russian Federation Obligatory Medical Insurance Fund

7. Limited Liability Company Closed Stock-Joint Company Way of creationArticles of Association and Charter (if there is only one participant – only Charter) Articles of Association and Charter (if there is only one participant – only Charter), Registration of issuance of shares with Federal Service for Financial Markets Max. quantity of shareholders (participants) 50 Share capitalMin. 10 000 roubles (50 % must be paid before state registration, 50 % - within one year after) Min. 10 000 roubles (50 % must be paid within 3 month after state registration, 50 % within 1 year)

8. Limited Liability Company Closed Stock-Joint Company Shares (parts)Share capital is divided by parts (which considered to be rights) Share capital is divided by shares (which considered to be securities) Increasing share capital Registration with tax authorities amendments to the Article of Association and Charter Registration with tax authorities amendments to Charter. Registration of issuance of shares with Federal Service for Financial Markets Transfer of shares (parts) Registration with tax authorities of amendments to Article of Association and Charter No need for state registration. Writings in the register of shareholders.

9. Limited Liability CompanyClosed Stock-Joint Company Right to exitParticipant may exit at will. In this case he is entitled to receive from LLC price of his part. Shareholder has no right to exit (he may sell his shares). Exclusion of participant (shareholder) Possible (by way of court trial).Impossible Managerial Bodies 1. General Participants Meeting, 2. Board of Directors (Supervisory Board), 3. Executive Bodies (General Director and may be Directorate) 1. General Shareholders Meeting, 2. Board of Directors (Supervisory Board), 3. Executive Bodies (General Director and may be Directorate)

10. Withholding taxes - passive income (such as dividends, interest, royalties), fines, - income from sale of immovable property and shares related to charter capital, which consists of more than 50 % of immovable property, - lease income, - freight, - international transportation, received by foreign legal entities from sources in Russia is subject to profits tax withholding at source.

11. Tax rates Unless lower Double Tax Treaty rates apply, the domestic withholding rate for: - dividends is 15 %, - interest, royalties and other types of income listed in the tax code (except freight) is taxed at 20 %. To enjoy Double Tax Treaty benefits, a foreign legal entity should provide to a Russian tax agent (paying company) a residence certificate from the tax authorities.

12. Some current problems 1.Royalties for trademarks with Russian origin. An aggressive scheme of tax optimization. 2.‘Beneficial ownership’. Conception is not determined in Russian legislation and practice. 3.‘Thin capitalization’. Rules have a loopholes.

13. Morozov Andrei Head of Legal Department MCFR-consulting Tel. +7 495 937 90 86 ext. 1705 Fax. +7 495 937 90 86 ext. 2431 Amorozov@mcfr.ru www.mcfr-consulting.ru