Global Sourcing: Destination Russia

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1 Global Sourcing: Destination The World Webinar Series Global Sourcing: Destination Russia February 23, 2006 Eugene Kublanov, neoit Paul Melling, Baker & McKenzie-CIS, Limited Art George, Baker & McKenzie LLP Michael Mensik, Baker & McKenzie LLP Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a partner means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an office means an office of any such law firm.

2 Global Sourcing: Destination The World Webinar Series! Global Sourcing: Destination Costa Rica, March 16! Australia and India to follow in April and May! Registration 2006 Baker & McKenzie 2

3 Global Sourcing: Destination Russia Baker & McKenzie Moscow " Paul Melling Europe/Middle East Amsterdam Antwerp Bahrain Barcelona Berlin Bologna Brussels Budapest Cairo Dusseldorf Frankfurt Geneva Kyiv London Madrid Milan Moscow Munich Paris Prague Riyadh Rome Stockholm St. Petersburg Vienna Warsaw Zurich Asia Pacific North/South America Almaty Baku Bangkok Beijing Hanoi Ho Chi Minh City Hong Kong Jakarta Kuala Lumpur Manila Melbourne Shanghai Singapore Sydney Taipei Tokyo Bogota Brasilia Buenos Aires Calgary Cancun Caracas Chicago Chihuahua Dallas Guadalajara Houston Juarez Mexico City Miami Monterrey New York Palo Alto Porto Alegre Rio de Janeiro San Diego San Francisco Santiago Sao Paulo Tijuana Toronto Valencia Washington D.C 2006 Baker & McKenzie 3

4 Agenda I Business Environment II Legal and Tax Environment 2006 Baker & McKenzie 4

About neoit Silicon Valley Bangalore Boston Dallas Delhi Kansas City Manila A consulting firm singularly focused on helping Global 2000 improve operations and grow their business by capitalizing on

5 About neoit Silicon Valley Bangalore Boston Dallas Delhi Kansas City Manila A consulting firm singularly focused on helping Global 2000 improve operations and grow their business by capitalizing on services globalization Deep globalization experience and expertise Recognized industry thought-leaders Track record of advising on successful client transformation Trusted advisors to C-level executives and management Knowledge & Research Operations Improvement Expansion & Growth Risk Management neoit

Russia Balance Sheet Assets " High growth IT services export market " Long term presence of anchor clients " Destination for complex IT projects " Human Resources " Process

6 Russia Balance Sheet Assets " High growth IT services export market " Long term presence of anchor clients " Destination for complex IT projects " Human Resources " Process focus Liabilities " Service Provider Landscape - few players of scale " Perception of government s treatment of investors " Marketing maturity " IP rights enforcement neoit

Why Russia Focus on Assets " Human Resources " Highly skilled labor pool " Specialized expertise " Practical application experience " Cost savings " Cultural proximity to the West " Location "

7 Why Russia Focus on Assets " Human Resources " Highly skilled labor pool " Specialized expertise " Practical application experience " Cost savings " Cultural proximity to the West " Location " Proximity to EU, US " Time zone compatibility " Infrastructure " Good telecoms infrastructure " Available physical infrastructure " Reliable power infrastructure " Government " Increasing support IP laws, Tax laws " E-Russia program " Plan for Economic Zones & IT Parks neoit

Leveraging Russia " Custom Application Development " Requirements Gathering/Spec Development " Package Integration " Problem Analysis/Solution Planning "

8 Leveraging Russia " Custom Application Development " Requirements Gathering/Spec Development " Package Integration " Problem Analysis/Solution Planning " Application Management " QA Testing " Embedded Engineering " Legacy Application Re-engineering " Engineering Services " Captive, Third Party, BOT neoit

9 Service Provider Landscape " Approx 250 IT export companies " Only 5 companies with > 500 employee; only 2 companies with > 1,000 employees " 2 largest companies, Luxoft and EPAM both have ~ 1,500 employees " Adoption of ISO and SEI/CMM " Range of business models including: ODCs, Staff Augmentation, BOT Relatively smaller company size combined with high quality of labor pool means Russia is well-suited for lower volume, high value, complex work neoit

in Moscow " Designs include: " Landing gear " Overhead

10 Segment Focus: Complex Engineering Services " In Russia since 1995 " Invested over $1 Billion " Design center in Moscow " Designs include: " Landing gear " Overhead bins " Ceiling designs " Cockpit instruments neoit

11 Segment Focus: Product Development " In Russia since 1996 " Complete design, development and testing of a range of products " Leveraging 3 rd party in Nizhni Novgorod (Siberia) " Software for: " Pagers " Cell Phones GSM, 3G, GPRS neoit

12 A Portfolio Approach Portfolio Allocation (in %) Function % Risk Culture/Fit Complexity Biz Objectives India Brazil Singapore Russia Philippines Canada Mexico Reward Captive Investment ROI 3 rd Party Strategic ROI neoit

13 Contact Information neoit Global Headquarters 2603 Camino Ramon, 2nd Floor San Ramon, CA USA Eugene Kublanov Vice President neoit Asia Headquarters 210, Bellary Road Upper Palace Orchards Bangalore India neoit Philippines 8/F Pacific Star Building Senator Gil Puyat Ave. cor Makati Ave. Makati City, Metro Manila, 1200 Philippines neoit

14 The Russian Legal System! Russian laws are generally adequate to support contracting and investment in hi-tech sector.! Must distinguish piracy problems with consumer products from contracting with Russian IT service providers.! Most problems that have arisen are the parties own fault Baker & McKenzie 14

15 Choice of Legal Forum! Captive operation: # Subsidiary company: LLC vs. Joint-Stock Company # Branch office # Representative office! Contracting with Russian contractor (sometimes with U.S. affiliate) 2006 Baker & McKenzie 15

16 Tax Issues: Using Russian Contractor! VAT: 18% but potential exemption # No VAT if service performed in Russia is of consulting, engineering, project design, research, data collection, data processing, data systematization, and/or analogous nature, and the customer is not present in Russia. Utilize contracts under Chapter 38 of Civil Code to help qualify for exemption.! No other tax consequences for U.S. customer. Russian provider subject to 24% profits tax.! No import VAT or customs duties (import or export) if data and work product are delivered in electronic form Baker & McKenzie 16

17 Tax Issues: Captive Operation! Tax regime for branch or representative office: # Money transfers between office and parent of office, as well as work performed for parent s own use generally not taxable events. BUT work performed for related group companies other than Parent will give rise to permanent establishment, taxation. # VAT inapplicable 2006 Baker & McKenzie 17

18 Tax Issues: Captive Operation! Tax regime for Russian subsidiary: same rules for VAT and profits tax as in case of independent Russian contractor.! Customs and import VAT: same rule as in case of independent Russian contractor Baker & McKenzie 18

19 IP Issues: Classification Distinction between:! Personal non-proprietary rights lie solely with individuals, and are not assignable! Proprietary rights assignable 2006 Baker & McKenzie 19

20 Using Russian Contractors Two steps for assignment of IP rights:! Individual employees of contractor to contractor! Contractor to customer Also consider contractor subcontracting to individuals 2006 Baker & McKenzie 20

21 Individual to Contractor! Russia not work for hire jurisdiction. But generally, non-personal proprietary rights created by employees automatically transfer to employer if: # Created within scope of employment. Check for second employer of contractor s employees. # Employment agreement does not provide otherwise. Nevertheless, seek affirmative assignment in employment agreements. Also seek representation that IP rights transfer Baker & McKenzie 21

22 Individual to Contractor! Generally, no need for separate assignments from employees to contractor or to customer. But seek employee s agreement that mention of authorship is not necessary Baker & McKenzie 22

23 Contractor to Customer: Contract Issues! Contract should provide for automatic or future assignment of IP rights. Utilize Civil Code provisions as back-up.! Implementation documentation: statements of work, acts of transfer and assignment Baker & McKenzie 23

24 Contractors: Contracting with Individuals! Ensure that contractor is registered entrepreneur! Check for separate employment or contract relationships Baker & McKenzie 24

25 IP Issues in Captive Operation! Employment law aspects! IP Issues! Implement trade secrets regime 2006 Baker & McKenzie 25

26 Protecting Trade Secrets! Trade Secrets Law! Application of Law: # Personal data # Inventions of employees # Foreign companies with no presence in Russia 2006 Baker & McKenzie 26

27 Definitions! Trade secrets: the confidentiality of information that allows its owner under existing and potential conditions to increase income, avoid unjustified costs, preserve its position on the market for [its] products, works or services, or to obtain other commercial advantages! Information constituting trade secrets: scientifictechnical, technological, production, financial-economic or other information (including secrets of production (know-how)), which has actual or potential commercial value because it is not known to third parties, to which there is no free access on a legal basis and in relation to which the owner of such information has established a trade secrets regime 2006 Baker & McKenzie 27

28 Trade Secrets Regime! Protection of trade secrets arises only when regime is created! Aspects: # Establishment of basic regime (within independent or inhouse developer) # Application of employment relations (in-house software development) # Application to independent contractors (developers) 2006 Baker & McKenzie 28

Five Requirements of Trade Secrets Regime! Create list of information constituting trade secrets! Limit access to such information by establishing and implementing such controls!

29 Five Requirements of Trade Secrets Regime! Create list of information constituting trade secrets! Limit access to such information by establishing and implementing such controls! List people having such access and who have been given access or to whom information was transferred! Reflect regime in agreements with employees and contractors! Put legends on copies of such information 2006 Baker & McKenzie 29

30 Application to Employment Relationship! Present list of information to employees having access and have them acknowledge receipt! Present regime and consequences of violations to employees and have them acknowledge same! Create necessary conditions for employees to comply with regime! Reflect regime in employment agreements, with particularities for General Director! Three-year continuation of protection after termination of employment, unless contract specifies other period 2006 Baker & McKenzie 30

31 Application to Contractors: Contracting! Must reflect regime in contracts, which must specify conditions for protecting information, including in case of reorganization or liquidation of one of the parties, and also the contractor s liability for unauthorized disclosure! To extent not specified otherwise in contract, contractor is responsible for determining method of protecting information! Contractor must report unauthorized disclosures! Contractor s obligation not to disclose information to third parties or to terminate its status as trade secrets, unless contract allows otherwise! Customer as owner of TS should implement TS regime 2006 Baker & McKenzie 31

32 Employment Law Issues! Existence of employment relationship! Parallel employment! Assignment of IP! Preservation of trade secrets 2006 Baker & McKenzie 32

33 Dispute Resolution! Courts of your home jurisdiction? Pointless if Russian party has no attachable assets in that jurisdiction! International commercial arbitration in home jurisdiction or neutral third country? Most overseas arbitration awards enforceable in Russia but slow, very expensive and enforcement can not be counted upon absent very large claim where time is not of the essence, overseas arbitration is a toothless tiger Baker & McKenzie 33

Dispute Resolution! Russian courts? Previously for the very brave or the very foolish but their quality (and honesty) much improved particularly in the major commercial centers!

34 Dispute Resolution! Russian courts? Previously for the very brave or the very foolish but their quality (and honesty) much improved particularly in the major commercial centers! Advantages quick and cheap and ease of enforcement means litigation is a meaningful threat to counter misbehavior! Threshold question who is more likely to be the claimant? 2006 Baker & McKenzie 34

35 Special Economic Zones! New law, types and locations of SEZs! Investment requirements! Benefits (generally 20-year period): # tax privileges # customs and import VAT # infrastructure, lower administrative costs 2006 Baker & McKenzie 35

Conclusions! Russia is no longer the Wild East! Nor is it the planet Mars structures and documentation used elsewhere in the world can be adapted to work here!

36 Conclusions! Russia is no longer the Wild East! Nor is it the planet Mars structures and documentation used elsewhere in the world can be adapted to work here! With proper attention to the legal issues, an enormous and talented pool of quality persons can be utilized to your business advantage 2006 Baker & McKenzie 36

37 Questions? Michael Mensik Tel: mensik@bakernet.com Paul Melling Tel: paul. melling@bakernet.com Eugene Kublanov, neoit Tel: eugene@neoit.com Art George Tel: arthur.l.george@bakernet.com 2006 Baker & McKenzie 37

Global Sourcing: Destination Australia

Global Sourcing: Destination The World Webinar Series Global Sourcing: Destination Australia June 21, 2006 Suresh Gundappa, neoit Anne-Marie Allgrove, Baker & McKenzie Anthony Foley, Baker & McKenzie Paul