Effective structures for the Russian market Holding Financing Royalty Globalserve Moscow Seminar September 2013 By Phani Schiza Antoniou

Effective structures for the Russian marketHolding

Financing Royalty

Globalserve Moscow SeminarSeptember 2013

By Phani Schiza Antoniou

FACTS CYPRUS MALTA NETHERLANDS LUXEMBOURG

LOCATIONEU √ √ √ √

LEGAL SYSTEMCommon Law

Civil Law

√ √

√ √

Corporate issues of companiesMost frequently used forms of companies Ltd Ltd BV or NAV

Stichting or foundation

Soparfi in the legal form of SA and SARL

CAPITALMin capital

Deposited in advance

€1

NO

€1165

20% in advance

€ 1

NO

Depends on the formIf SA € 31000 but 25% prepaidIf SARL € 12500 all is prepaid


DIRECTORSMinimumLegal EntitiesSecretary

Shareholders

1YESCompulsoryLegal/ physical

1 single member co allowed

1YESCompulsory physical only

2 but also single member co allowed but restricted to one activity

1YESNO

1

1 for SARL1or3 for SAYESNO

1

incorporation 2-4 days 2-4 days 4 days 7 days

Shelf companies

YES Not usually but we have

NO NO

TAX REGIMECorporate taxEffective tax rate lower

12,5%

YES

35%

5%-10%If shareholders are foreigners through refund system

20% to € 20000025%over€200000

28.8%


TAX ON DIVIDEND 0 without condition

0 if participation exception



Participation Exception on dividends nil

•10% min shareholding or if less min equity €1,164,000 for min 1 year•EU co or if non EU with min tax 15% or if not then passive income to be less than 50%

•5% minimum shareholding in the subsidiary •held as participation not as an investment

•10% minimum shareholding or a minimum of € 1.2 m investment•For at least 12 months•EU co or if non EU to be taxed at tax rate at least equal to 10.5%

Capital Gains from sale of securities

0 without conditions

10% min shareholding or if less min equity €1,164,000 for min 1 year

•5% minimum shareholding in the subsidiary •held as participation not as an investment

•10% minimum shareholding or a minimum of 6 m investment•For at least 12 months•EU co or if non EU to be taxed at tax rate at least equal to 10.5%

Trading in secutiries

0% 35% and under the tax refund system 5%

20-25% 28.8%


TAX ON INTEREST

30% or 12,5% on net profit if financing co

35% but can fall to 10% as 5/7 is refunded

20-25% 28.8%

TAX ON ROYALTY INCOMEPASSIVEACTIVE

2,5%2,5%

10%5% (35%-6/7 refund)

5% 5.85%

Withholding taxes if non EU or qualified on outbound dividendInterestRoyalty

0%0%0%

0%0%0%

15%0%0%

15%0%0%


Losses carried forward 5 years 5 9 years indefinite

CFC NO NO

THIN CAPITALISATION RULES

NO NO1:3 equity /debt

15:85 equity/debt

Transfer pricing NO NO YES YES

DTT with Russia

InterestRoyalty

5*-10%*€100,000 investments

00

5*/10%*min investm. €100,000+25%

5%5%

5%*/15% *10% participation And € 80000 investment 0%0%

5%*/15%*25% participationAnd € 75000 investment 0%0%


Exchange of information YES YES YES YES

Capital Gains tax in Russia if subsidiary sold has more than 50% in property in Russia

YES as from 2017

YES YES YES

Limitation of benefits provision

Will not apply provided company not registered in one of the states

Will not apply provided substansive business in one of the states



HOLDING COMPANY SELECTION CRITERIA

Holding Company

Substance Minimum

Dividends 0%

Capital Gains 0%

Interest Deductibility Yes

Thin Cap Rules No

CFC No

Treaty Network -yesMinimum Share Capital YesWithholding Tax 0%

Capital Duty Minimal

Advance Ruling Yes

Legal/ Political / Economic Stable

Financial Report IFRS

Legal Impediments None

THE CYPRUS HOLDING CASE

• Dividend participation exemption with no conditions

• participation exemption on disposal of shares even in trading and without min holding period

• Other income taxed corporate tax rate of 12,5%

• Low interest margins of 0,125% - 0,35%

• Tax regime fully complaint with the EU Tax Code of Conduct

Cyprus Hold Co

Investor

Dividend/interest

Dividend/ interest

Russian Co 5% on

dividends

Other Treaty Co

0-10 on dividends

EU Co 0% on

dividends

Russian Co 5% on

dividends

Heaven Co 0% on

dividends

0% withholding tax0% on dividend income0% on disposal12.5% on net profit arising from interest received based on narrow interest margin

THE MALTA HOLDING CASE• Dividend participation

exemption with conditions• CG tax exempted on disposal

of shares if participation exemption applies; for trading in securities 35% tax which may be reduced to effective 5%

• Other income taxed corporate tax rate of 35% and effective5%

• Tax on interest 10%,• WHT on interest from Russia

5%

Malta Hold Co

Investor

Dividend/interest

Dividend/ interest

Russian Co 5% on

dividends

EU Co 0% on

dividends

EU Co 0% on

dividends

Russian Co 5% on

dividends/interest

Heaven Co 10% on

dividends

0% withholding tax0% on dividend income0% on disposal If participation conditions apply10% on net profit arising from net interest received

THE DUTCH HOLDING CASE

• Dividend participation exemption with conditions

• CG Tax on on disposal of shares if participation exemption applies; for trading in securities 20-25% tax

• Other income taxed corporate tax rate of 20-25%

• Tax on interest differential 20-25%,

• WHT on interest from Russia 0%• WHT on outbound dividend if

to non qualified 15%

Dutch Hold Co

Investor

Dividend/interest

Dividend/ interest

Russian Co 5% on

dividends

EU Co 0% on

dividends

EU Co 0% on

dividends

Russian Co 5% on

dividends/interest

Heaven Co 0% on

dividends

15% withholding tax on dividend if non qualified0% on dividend income0% on disposal If participation conditions apply20-25% on net profit arising from net interest received

THE LUXEMBOURG HOLDING CASE

• Dividend participation exemption with conditions

• CG Tax on on disposal of shares if participation exemption applies; for trading in securities 28.8% tax

• Other income taxed corporate tax rate of 28.8%

• Tax on interest differential 28.8%,

• WHT on interest from Russia 0%• WHT on outbound dividend if

to non qualified 15%

LUX Hold Co

Investor

Dividend/interest

Dividend/ interest

Russian Co 5% on

dividends

EU Co 0% on

dividends

EU Co 0% on

dividends

Russian Co 5% on

dividends/interest

Heaven Co 28.8% on dividends

15% withholding tax on dividend if non qualified0% on dividend income0% on disposal If participation conditions apply28.8% on net profit arising from net interest received

Comparison of IP regimes of Cyprus / Luxembourg and Netherlands

CYPRUS NETHERLANDS LUXEMBOURG

Effective tax rate Deduction rate

2.5%80%

5%No reduced tax rate

5.8%80%

Qualifying IP assets All IP assets, including patents, trademarks, copyrights, know how, formulas , designs , processes

Self developed IP relating to patents or approved R&D

Patents, trademarks, designs , domains, models and software copyrights

Ineligible IP Assets None Trademarks and brands

K now how, formulas, copyrights except software

Internally developed or acquired Both Self developed only

Both but not IP acquired from related party

Qualifying revenue All income and capital gains and compensations

Net income from qualifying assets

Royalties net of costs

CYPRUS IP COMPANY• Achieves offshoring of royalties

with no WHT• Uses Cyprus treaty network and

EU royalties directive• (12,5%) corporation tax on 20%

of profits from IP income – effective tax (2,5%)

• No tax in Cyprus on dividend flows

• No WHT on dividends from Cyprus Company

• If Cyprus Company owns IP outright, amortization available over 5 years

Cy IP Co

Parent Co

Dividends 0%

EU Op Co0% WHT

Russia 0% WHT

(2,5%)Royalties

DUTCH/ LUX IP COMPANY• Uses treaty network and EU

royalties directive to minimise WHT

• (28.8%) corporation tax on 20% of profits from IP income – effective tax (5.85%)

• For NL 5% • Tax on dividend flows may be

zero if participation exemption

NL/LUX IP Co

Parent Co

Dividends

EU Op Co0%WHT

Russia 0% WHT

(5% NL 5.85% LUX)Royalties

AS A FINANCE COMPANY for Russia

OPERATING CO

OFFSHORE COMPANY

CYPRUS FINANCING

•PROFITS REDUCED IN OPERATING COUNTRY DUE TO THE INTEREST PAID TO FINANCING CY CO •SMALL MARGIN TAXABLE AT 12.5% IN CYPRUS ON NET PROFIT MADE OF SMALL INTEREST DIFFERENTIAL VARYING FROM 0.325%-0.125%•NO WITHHOLDING TAX WHEN INTEREST IS PAID TO OFFSHORE LENDER•THE FINANCING CO SHOULD BE DIFFERENT FROM THE HOLDING CO IN THE RUSSIAN OPERATING CO TO AVOID CFC RULES•THE CY FINANCING CO SHOULD NOT HAVE SUBSTANTIAL INCOME FROM OTHER OPERATIONS TO AVOID DEFENCE TAX TAXATION ON INTEREST AT 30%

IN THE CASE OF LUX AND NL THE TAX ON INTEREST MARGIN IS 28.8%AND 20-25% RESPECTIVELY

Documents

Effective structures for the Russian market Holding Financing Royalty Globalserve Moscow Seminar September 2013 By Phani Schiza Antoniou