1. International tax developments in Russia New Challenge and New Solutions Chair: Roustam Vakhitov Panel: Denis Schekin, Pepeliaev Group, Russia Nicolas Fermaud, Allen&Overy, Luxembourg Martin Bergwerff, Hamelink Van den Tooren, The Netherlands

2. OUTLINE OF THE PRESENTATION 1.Recent legislative and judicial developments ‒ Affecting inbound investment ‒ Affecting outbound investment 2.Comparative analysis of core provisions of Russian double tax treaties with the Netherlands, Luxembourg and Cyprus

3. 1. RECENT DEVELOPMENTS: LIMITATION ON DEDUCTIBLE INTEREST Russia OpCo HoldCo Interest Deductible interest rate for loans in Russian currency 1,8 * refinancing rate of the RF Central Bank in 2010 and 2011 for loans in foreign currency 15% in 2010, 0,8 * refinancing rate (6,4%) in 2011

4. 8 Loan FinCo Russian Co Interest Cyprus Russia HoldCo Dividends 1.Direct loan from HoldCo to Russian Co would be covered by thin cap rules 2.Loan via foreign sister co does not fall under thin cap limitations 3.Can we re-characterize loan via Hungary FinCo into direct loan to from HoldCo to Russian Co? 4.Court of first instance – yes Court of appeal – yes Court of cassation – no. Thin capitalization 1. RECENT DEVELOPMENTS: MIRLAND CASE Hungary Loan

5. 3 5 Capital Gains: Alienation of shares deriving more than 50% of their value from property situated in a contracting state may be taxed by the state where the immovable property is situated; Grace period of 4 years following the entry into force of the Protocol (expected 2016) Article 6 (income from immovable property): income received from real estate investment fund 1. RECENT DEVELOPMENTS: PROTOCOL TO TAX TREATY WITH CYPRUS Holding Russian Company Cyprus Russia Russian Real estate

6. 3 6 Article V (Dividends) definition of dividends includes payments on shares of mutual investment funds or similar collective investment vehicles and excessive interest under thin cap rules direct investment of US 100,000 needed to trigger a 5% dividend withholding rate has now been increased to EURO 100,000 Article 27 (Assistance In Collection) Contracting states shall lend assistance to each other for the collection of revenue claims or any other tax penalties and costs of collection 1. RECENT DEVELOPMENTS: PROTOCOL TO TAX TREATY WITH CYPRUS

7. 7 RF President and RF Ministry of Finance seek to use this concept to combat treaty shopping This concept targets multilayer structures How does it work? No treaty benefits (0% or reduced withholding tax rates) apply to income received by person not qualifying as beneficial owner Who is beneficial owner of income (Russian approach)? -person having formal title on income AND -person detemining «economic destiny of income» Beneficial ownership concept does not apply to repatriation of profits from branches/ rep. offices 1. BENEFICIAL OWNERSHIP: RISKS, MINIMIZATION STRATEGIES

8. If DutchCo not considered beneficial owner of dividend income, benefits under the Netherlands – Russia DTT may be denied; If treaty benefits denied then Russian domestic tax rules should apply; The Dutch tax implications (WHT) will not be affected; May Germany – Russia DTT apply? RusCo1 DutchCo RusCo Germ Co 5% WHT 0% / 9% WHT 15%/ 5% WHT? 100%; EUR 100 000 49%/90%51%/10%

9. 7 What factors may indicate person is not beneficial owner of income? - person has no presence in the residence state (no office, no personnel, no bank accounts, no financial reporting obligations etc); - person has no activities other than those which treaty benefits are claimed for; - person does not bear normal commercial risks (subsidies from parent company; no adequate margin); - person assumes legal obligations to distribute income it receives; - the terms of back - to - back operations are same or similar (e.g.for debt financing: principal amount, currency, interest rate, payment terms etc) 1. BENEFICIAL OWNERSHIP: RISKS, MINIMIZATION STRATEGIES

10. 7 How could we mitigate the risks? Case by case approach General recommendations: - simplify structures: do not use multilevel structures until necessary; - substance and presence in residence state: office space, personnel, bank accounts, board and shareholders meetings, bookkeeping and accounting, general overhead expenses etc; - consolidation of business functions (group financing company; group IP holding company); - multiple project vehicles; - arm’s length remuneration (margin); - sound economic reasons behind use of offshore companies (foreign markets, foreign investors and flexibility of foreign law, statutory requirements under foreign law when making outbound investments) 1. BENEFICIAL OWNERSHIP: RISKS, MINIMIZATION STRATEGIES

11. 7 Head office: preparing integrated product, management, sales Decision of Moscow commercial court Of 08.12.2010 in case № А40-94391/2010 (not appealed): 1. Rep. office of a US company gathered information and prepared news. Considering main office’s functions, this was core activity and not preparatory or ancillary activity. 2. Revenue was defined as all sales in Russia Rep.office in Russia: Collection and preparation of news, VAT returns Russia US 1. RECENT DEVELOPMENTS: BLOOMBERG CASE

12. 7 Head office: preparing integrated product, management, sales Possible reasons for negative outcome: -lack of proper description of functions of personnel and rep. office -lack of proper allocation of revenues and expenses, attributable to Russian and Head office Rep.office in Russia: Collection and preparation of news, VAT returns Russia US 1. RECENT DEVELOPMENTS: BLOOMBERG CASE

13. 1. RECENT DEVELOPMENTS: NEW PARTICIPATION EXEMPTION Foreign Jurisdiction Russia SubHoldCo HoldCo Dividends 1.50% participation 2.365 days 3.Dividends should come from non-blacklisted jurisdictions 4.Investment of at least RUR 500 million 1.50% participation 2.365 days 3.Dividends should come from non- blacklisted jurisdictions 4.Investment of at least RUR 500 million 5.Extended to qualifying capital gains Foreign Jurisdiction Russia SubHoldCo HoldCo Dividends Participation exemption in 2010 Participation exemption in 2011

14. 10 2: CYPRUS: TAXATION OF DIVIDENDS, INTEREST, ROYALTIES AND CAPITAL GAINS Taxation of dividends and capital gains 1.Dividends: 5%/10% 2.Capital gains: 0% Taxation of interest and royalties 1. Exempt from tax in Russia, 2. No explicit BO test 3. No special provision on full deductibility of interest Russian OpCo Top oldCo FinCo Cyprus Dividends Interest, royalties HoldCo Russia Cyprus Low tax jurisdiction

15. 10 2: LUXEMBOURG: TAXATION OF DIVIDENDS, INTEREST, ROYALTIES AND CAPITAL GAINS Taxation of dividends and capital gains 1.Dividends: 10%/15% 2.Capital gains: 0% Taxation of interest and royalties 1. Exempt from tax in Russia, 2. No explicit BO test 3. No special provision on full deductibility of interest Russian OpCo Top HoldCo FinCoLux Dividends Interest, royalties HoldCo Russia Luxembourg Low tax jurisdiction

16. Low tax jurisdiction/ Russian HoldCo Lux Holding Company Russian Company Russian Branch Tax free after-tax profits by a PE distribution WHT on dividends: 10%/15% Zero WHT due to non- discrimination claues? Distribute profits with low or no dividend withholding tax 2: LUXEMBOURG: INVESTMENT VEHICLES EU Company

17. 10 2: THE NETHERLANDS: TAXATION OF DIVIDENDS, INTEREST, ROYALTIES AND CAPITAL GAINS Taxation of dividends and capital gains 1.Dividends: 5%/15% 2.Capital gains: 0% Taxation of interest and royalties 1. Exempt from tax in Russia, 2. Explicit BO test for zero WHT on interest and royalties 3. Special provision on full deductibility of interest Russian OpCo TopHoldCo FinCoNL Dividends Interest, royalties HoldCo Russia The Netherlands Low tax jurisdiction

18. Dutch Holding Company Russian Company Russian Real Estate Company Russian Branch Participation exemption on profit distributions and capital gains at the level of the Dutch Holding (Re)invest international profits or provide financing Distribute profits with low or no dividend withholding tax 2: THE NETHERLANDS: DUTCH HOLDING COMPANY Russian Real Estate Branch

19. 10 BUSINESSES POTENTIALLY INTERESTED IN DUTCH AND LUXEMBOURG SOLUTIONS Real estate investment projects Mutual funds Russian groups with outbound investments (Lux) Russian subsidiaries with loans in foreign currency with interest rate exceeding 6,4% (NL) Holding Russian Company /Fund Cyprus NL/LUX Russia Russian Real estate

20. 12 Roustam Vakhitov Head of International Section of the Scientific and Expert Council of the Russian Chamber of Tax Advisers T:+79060598008 E-mail: vakhitov@palata-nk.ruvakhitov@palata-nk.ru Roustam Vakhitov specialises in international taxation. Roustam has experience of working in law firms and consulting companies in Russia, the Netherlands and Luxembourg. He is focusing on international tax issues since 2002. Roustam’s main practice area is advice on Russian international tax structuring involving Benelux countries and tax support of transactions involving financial instruments and capital market projects, including Islamic finance. His clients include large Russian banks and enterprises, as well as investment companies. Roustam is the Deputy Head of the Russian Branch of the International Fiscal Association and Head of the International Taxation Section of the Research and Expert Council within the Russian Chamber of Tax Advisors and the member of Coordination Council of the Russian Association of Experts in Islamic Finance. Roustam speaks English and Dutch languages. He is an author/co-author of Russian national IFA branch reports to National Congresses of 2003, 2006, 2008 and 2010. Roustam has authored many publications on international taxation and tax structuring. ROUSTAM VAKHITOV