Funding of and Repatriating Profits for Russian Companies: recent developments. Kulakov Dmitry September 22, 2006

Funding of and Repatriating Profits for Russian Companies: recent developments.Kulakov Dmitry

September 22, 2006

Financing and repatriation tools: hot issues2 © 2006 Deloitte & Touche Regional Consulting Services Limited

• Funding and repatriating

– Debt financing: interest payments and thin capitalization rules– Equity financing: contribution of assets into charter capital– Liquidation proceeds paid to foreign shareholders

Agenda


Debt financing: interest

• Interest is deductible subject to the following limitations:

– Deductibility caps:– Interest rate should not differ by more than 20% from the average interest rate on

similar debt obligations,

Alternatively,

– 15% for loans granted in foreign currency– 1.1*Russian Central Bank refinancing rate (making 12.65 % at present) for loans

granted in RUB

– Thin capitalization rules


Thin capitalization: new scope

The scope of thin capitalization rules was significantly expanded starting from 1 January 2006 and in addition to

– Debt obligations to a foreign company, which directly or indirectly owns more than 20% in the Russian company’s charter capital;

the rules now also cover:

– Debt obligations to a Russian company, which is considered to be affiliated with such a foreign company; and

– Debt obligations guaranteed/secured in any way by the foreign company and/or its Russian affiliate


50%50%

New thin capitalization rules: example (1)

Foreign Country

Russia

FLE FLE FLE

RLE (debtor)

100%

Direct or indirect ownership of more than 20% in the charter capital

Debt



Foreign Country

Russia

Affiliated parties Debt Direct or indirect ownership of more than 20% in the charter capital

FLE

RLE (debtor)

RLE



Foreign Country

Russia

Affiliated parties Debt Direct or indirect ownership in the charter capital Surety/guarantor

FLE

RLE (debtor)

RLE

Third party


When thin capitalization rules should not apply (1)

Foreign Country

Russia

There is no guarantor affiliated with the foreign owner under the transaction

FLE

RLE (debtor) Independent lender


Debt


When thin capitalization rules should not apply (2)

Debt


FLE

RLE (debtor)

FLE Foreign Country

Russia

FLE


Thin capitalization: issues for consideration

– ‘Affiliated’ companies

– Scope of “debt obligations” – inclusion of outstanding liabilities under sales contracts with deferred payments

– Negative net assets: when a company has negative capital the whole amount of interest may be considered non-deductible by virtue of the formula

– The moment to withhold tax: accrual basis?

– Double Tax Treaty relief/reduced withholding income tax rate applicable to excessive interest?


Charter capital contributions

• Contribution of assets into charter capital

– Value of the contributed fixed assets

– Valuation by an independent valuator


Liquidation

• Liquidation proceeds paid to foreign shareholders

– Excess of liquidation proceeds over initial contribution may be treated as dividends and be subject to WHT

– Withholding income tax: dividends (15%) vs. other income (20%)

– Double Tax Treaty relief available?


Contact details

Dmitry Kulakov

Senior ManagerTax and Legal Services

Tel: +7 (495) 787-0600

e-mail: [email protected]

© 2006 Deloitte & Touche Regional Consulting Services Limited. All rights reserved.Member ofDeloitte Touche Tohmatsu

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Funding of and Repatriating Profits for Russian Companies: recent developments. Kulakov Dmitry September 22, 2006