Julian Bohorquez/Zurich/CH/Amicorp,

Transcription

1 May 14 Wealth Structuring For High Net Worth Individuals From Global Growing Markets Wealth Structuring Issues, Trends and Solutions - Russia Julian Bohorquez/Zurich/CH/Amicorp, Presented by: Boris Bruk Of Counsel - Salans Moscow Copyright Notice: 2010 Amicorp Group. All rights reserved. The contents of this presentation have been prepared by the Amicorp Group A.G. for informational purposes only. The information contained in this presentation does not constitute or contain any type of advice, and neither our presentation of such information nor your receipt of it will create a commercial or legal relationship. Consequently, you should not act or rely upon the information contained in this presentation without seeking professional counsel. The information presented in this presentation, the access to the information contained herein or your receipt of it will not create any service provider-client relationship. Amicorp Group A.G. is the owner of all copyright and other rights in and to all copyrightable text and graphics on this presentation. Your company or its representatives may lawfully use this presentation for its own, noncommercial purposes, by displaying this copyright notice. Any other reproduction, copying, distribution, retransmission or modification of all or any parts of this presentationis strictlyprohibited without the express prior written permissionof the Amicorp Group. TrademarkNotice: The Amicorp word and device are trademarks of Amicorp Holding Limited. All rights reserved.

2 Scope of the Presentation Bankable assets - If we talk about bank accounts of individuals, then from a tax point of view it generally does not matter where the bank account is open; HOWEVER - PE issue arising from managing offshore holding structures in Russia; - Exchange of information is important Holding and operating yachts and aircrafts - Use of yachts/ aircrafts by BOs free of charge is taxable income The presentation will primatily focus on holding Russian operating companies (including real estate companies)

3 Russian Tax Residents: Who They Are? Russian tax resident individuals: a person staying at least 183 calendar days in any consecutive 12 months period leaving for less than 6 months for medical treatment/ education do not interrupt residence De facto tax residence is revisited as of the end of each calendar year (end of tax period for PIT purposes). Russian resident legal entities = Russian companies (incorporation test) All residents taxed on worldwide income Applicable tax rates differ

4 Taxation of Russian Tax Residents Russian tax resident individuals: General PIT tax rate: 13%; Dividend income tax: 9%; Deemed interest income on interest free or low interest loans, excessive interest income: 35%; Liquidation proceeds: 13%;? whether acquisition cost of holding deductible; position of the tax authorities controversial (see Letters of the RF Ministry of Finance No of 02 March 2012 and No /2-463 of 17 August 2010) Russian legal entities: General profit tax rate: 20%; Dividend profit tax rate: 9%, but 0% is also available (min. 50% holding held for at least 365 calendar uninterrupted holding); Capital gains tax: 20%, but 0% is available in respect of certain qualifying participations in Russian companies; Liquidation proceeds: 20% (net of investment for Russian shareholders; net of capital contribution for foreign shareholder, rate could be reduced under DTT) Tax treatment of all forms of legal entities is the same, no fiscal transparency regime available

5 Alternative Forms of Activities in Russia BRANCH Benefits: No thin capitalization rules apply No taxation on profits distributable to the head office Usually served by specially designated advanced tax inspectors Sale of foreign companies having real estate in Russia not subject to capital gains tax Drawbacks: Accreditation procedure more expensive No limited liability available Limited rights to clear the imported goods at customs Additional currency control formalities for the Russian customers dealing with branches SUBSIDIARY: Benefits: Limited exposure of foreign investor to Russian commercial and legal risks (although limited liability may sometimes be removed) Capital contribution of technological equipment free of customs duties available (however, no disposal of equipment allowed) Drawbacks: Dividend distributions subject to withholding tax (minimum treaty withholding tax 5%) Additional currency control formalities in dealing with foreign suppliers or customers

6 Personal Tax Planning Opportunities And Disadvantages in Russia Major opportunities: - PIT payable on cash basis (residents not liable to pay PIT until income received in cash or in kind); - No CFC rules (although there are plans to introduce some) Major disadvantages: Direct holding of Russian businesses by resident individuals could be most tax efficient in the long run (9% - ultimate personal tax burden on dividend income); Inheritance tax free; Intra-family gifts tax free; Anti-avoidance concepts (e.g. beneficial ownership) may cause increase of effective tax liabilities within offshore structures even higher; Russian Government seeks to enhance exchange of information with treaty countries (e.g. Cyprus, Luxembourg, Switzerland)

7 Goals and Targets for Personal Asset Structuring Main goal asset protection against hostile seizures Targets: Confidentiality of beneficial ownership of the assets; Set up of legal impediments for take over of the assets; BUT Retaining full control over the assets; Reinvestment of assets and income therefrom with minimum tax costs

8 Asset and Investment Protection Tools Popular in Russia Tools we see used for personal tax planning in Russia: - Personal holding companies - Trusts - Fiduciary foundations/ investment funds (mostly for collective investments) Holding structure usually includes intermediary holding companies (no tax treaties between RF and low tax jurisdictions) Most popular jurisdictions for intermediary holding companies: Cyprus, the Netherlands, Luxembourg; Singapore is still deemed exotic In principle structures involving PICs/ trusts / foundations/ investment funds could be used for holding various types of assets

9 Typical Holding Structure Russia BO 9% Profit distribution NL СООРERATIVE 0% Dividends BV 0% Russia OpCo 5% Dividends

10 Typical Offshore Holding Structure (in general) Pros: Much utilized in practice; Provides for effective tax deferral reducing the tax cost of reinvestment of profits from OpCo or from disposal thereof; BO ensures control over the assets Contras: Level of confidentiality in insufficient; May not be tight enough against third party claims or hostile actions

11 Personal Holding Companies Pros: PHCs are clear for Russian regulatory authorities PHCs could be rather cheap to set up and maintain PHCs could be flexible in terms of asset management control and limitation of liabilities of BOs (cell / separate portfolio companies) Contras: PHC shares shall be deemed BO s assets and could be subject to legal claims or hostile actions from third parties; Limitation of liability inside one legal entity may be disregarded in other jurisdictions; Multilayer holding structure may ultimately trigger higher level of taxation for BO; tax treaty benefits may be denied (if PHC held in a low tax jurisdiction)

12 Typical Trust Holding Structure Protector Appointment Letters of Wishes Settlor Trust Deed Trustee 5% 0% BO Trust Russia 0% NZ Profit distributions CyCo OpCo 0% Dividends 0% Dividends 5% CY Russia

13 Trusts Pros: Much utilized in practice; High level of confidentiality and proof against legal or hostile actions of third parties Special mechanisms for BO protection: letters of wishes; protector, BO usually has legal remedies against the trustee Contras: Russian settlors/ BOs are uncomfortable to lose ownership title on the assets; Thorough structuring required (trusts are challengeable) Trusts could be more expensive than PHCs May be subject to scrutiny in other jurisdictions, many countries require disclosure of BOs for tax purposes (France, the Netherlands) Distributions from trusts to resident individuals are subject to higher PIT rate in Russia (13%)

14 Fiduciary Foundations Pros: No legal link between BOs and the assets (similar to trusts); Still the BOs have formalized legal rights against foundations; Recognized in non-common law jurisdictions (also in Russia); BO could retain control over management and disposal of the assets which is greater to compare with trusts but lower than under the PHC structure Contras: Economic rights of BOs against the foundation could be viewed as the BOs assets and therefore could be subject to legal ir hostile actions from third parties (NB! This needs to be clarified on case by case basis); Public registration of foundations and submission of certain internal documentation to the public authorities; Distributions will most probably be subject to 13% PIT in Russia (if do not qualify as dividend income under the law of the residence state of the foundation)

15 Fiduciary Foundation Structure: STAK (Netherlands) Split of legal title (STAK) and the economic rights on contributed property (depositary receipts holder); BO or his PHC contributes shares into STAK in return for depositary receipts issued by the foundation; BO or his trusted appointees may participate in the board of STAK; The list of the depositary receipts holders is not disclosed; The creditors of the BO cannot bring the claims against the contributed assets, but may potentially seize depositary receipts; Dividends/ capital gains attributable to STAK are not subject to tax in the Netherlands, provided they would not be subject to tax, if distributed directly to the depositary receipts holder BOs often interpose corporate intermediaries to ensure tax free distributions of profits

16 STAK Holding Structure Russia BO 9-13% NL Russia COOPERATIVE STAK BV OpCo 0% 0% 0% 5% profit distributions dividends dividends

17 Investment Fund Holding Structure BVI US Russia Personal Holding Company 9-13% Cayman/ Malta/ Curacao Investment Fund 0% 0% profit distributions dividends Cyprus CY 0% dividends dividends Russia OpCo 5%

18 Investment Funds From Russian tax perspective foreign investment funds will probably be viewed as companies (their legal personality will be respected). This implies that Russian BOs will not be subject to tax unless distribution takes place. The problem may arise in respect of the tax rate (9% v. 13%) applicable profit distributions, if distributions are not treated as dividends in the jurisdiction where the investment fund is established. The investment fund looks like a legitimate vehicle for collective investments; office with qualified personnel (analysts etc) brings more substance to the holding structure.

19 Personal Holding Structures: General Challenges Distributions from PHC/ trust/ foundation/ investment fund to the BO disclose the structure; Intensification of exchange of information between Russian tax authorities and their European counterparts (Cyprus, Luxembourg, Switzerland); Russian tax authorities become more aggressive in combatting offshore tax structuring (unjustified tax benefit concept, beneficial ownership concept, introduction of CFC rules, black list of low tax and non-cooperative jurisdictions); Erosion of traditional tax planning tools to obtain greater flexibility may question their level of defense (e.g, special types of trusts)

20 General Anti-Avoidance Rules ( Unjustified Tax Benefit Concept) The concept is not incorporated in the law, developed through the court practice (the RF Supreme Arbitration Court); General principle: any tax benefit (deductibility of expenses, lower tax rates, tax refund etc) should be denied, if qualifies as unjustified; Although the taxpayers are generally treated bona fide in seeking for tax benefits, tax benefit could be deemed unjustified, if: - Tax treatment of operations by a taxpayer is not in line with economic substance thereof (the substance over form test ); OR - The operations of a taxpayer have no sound economic reasons or obtaining tax benefit is not linked to actual business activities of the taxpayer (the business purpose test ); OR - The taxpayer has no capacity necessary to perform the booked operations or does not have evidence/ bookings of operations necessary to carry out the declared activities (the reality test ); OR - The taxpayer was negligent to deal with a counter party which was knowingly in breach of its tax liabilities (this particularly applies to VAT or deductibility of expenses) Apart from denial of a particular tax benefit, the concept provides for tax reconstruction : the tax authorities/ courts determine tax liabilities of the taxpayer based on true economic substance of the transaction

21 Beneficial Ownership Concept Generally would apply to passive income (dividends, interest and royalties) RF President and RF Ministry of Finance seek to use this concept to combat treaty shopping This concept targets multilayer structures (e.g. back to back loans or IP licensing) 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 ;

22 Beneficial Ownership Concept 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)

23 Beneficial Ownership Concept 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)

24 Back to Back Debt Financing Tax Issues BVI US Russia Personal Holding Company 9-13% Cayman/ BVI/ Jersey Investment Fund 0% 0% profit distributions interest Cyprus CY 0% WHT 10% on Δ interest interest Russia OpCo 0% interest

25 Back to Back Financing Issues Two major tax issues in Russia: Beneficial ownership Limitations on deductibility of interest: - General limitations (statutory safe harbour thresholds): 1.1* the Central Bank of Russia refinancing rate (currently the CBR refinancing rate is equal to 8% p.a.) for ruble denominated loans; 15% p.a. for foreign currency denominated loans. Please note that the above safe harbour thresholds were temporarily substituted by Federal Law No.229-FZ dated 27 July 2010, which provided the following temporary safe harbour thresholds: 1.8* the Central Bank of Russia refinancing rate for rouble denominated loans (from 1 January 2010 to 31 December 2012); 0.8* the Central Bank of Russia refinancing rate for foreign currency denominated loans (from 1 January 2011 to 31 December 2012). - Thin capitalization rules:

26 Thin Capitalization Rules: When Apply (1) Foreign State Parent company Loan 20% direct holding Russia Subsidiary

27 Thin Capitalization Rules: When Apply (2) Foreign state Parent company Holding 20% indirect holding Subsidiary Loan Holding Russia Subsidiary

28 Thin Capitalization Rules: When Apply (3) Foreign state Parent company Russia Companies affiliated under Russian law Subsidiary Loan Subsidiary

29 Thin Capitalization Rules: When Apply (4.1) Foreign state 20% direct or indirect holding Parent company Obligations of the Subsidiary secured by Parent company Bank Russia Subsidiary Credit

30 Thin Capitalization Rules: When Apply (4.2) Foreign state 20% direct or indirect holding Parent company Obligations of the Subsidiary secured by Parent company Bank Russia Credit Subsidiary

31 Thin Capitalization Rules: When Apply (5.1) Foreign state Parent company Companies affiliated under Russian law 20% direct or indirect holding Bank Russia Subsidiary Subsidiary Credit Obligations of Subsidiary secured by another Subsidiary

32 Thin Capitalization Rules: When Apply (5.2) Parent company Foreign state Companies affiliated under Russian law 20% direct or indirect holding Russia Credit Bank Subsidiary Subsidiary Obligations of Subsidiary secured by another subsidiary

33 Thin Capitalization Rules: Major Loophole Foreign state Parent company Holding Subsidiary Holding Loan Russia Subsidiary

34 Thin Capitalization Rules: Tax Planning Opportunities in the Past Thin cap rules do not apply to loans from foreign sister companies or to loans/ credits secured by foreign sister companies; Non discrimination defense under DTTs; Special interest deductibility provisions under certain treaties (Germany, France, the Netherlands, US)

35 Thin Capitalization Rules: Recent Trends Two major court cases having significant effect on application of thin capitalization rules: the Northern Kuzbass Coal Mining Company case and the Naryanmarneftegaz case Lessons from Northern Kuzbass and Naryanmarneftegaz: - DTTs do not preclude Russian Government from application of domestic anti-abuse concepts; - Enterprises could be deemed associated (art. 9 of the OECD Model) when (i) level of debt financing is high; (ii) the enterprises are affiliated; (iii) the debt is not repaid; - DTTs allow reclassification of debt into equity; - Non-discrimination provisions of DTTs cannot be extended to associated enterprises; - Non-discrimination provisions of DTTs imply comparison between two Russian companies owned by qualifying non-resident shareholders Major conclusion: non-discrimination provisions of DTTs do not override Russian thin capitalization rules; The unjustified tax benefit concept may apply if back to back loans through the foreign sister company was aimed at circumvention of thin capitalization rules

36 Thin Capitalization Rules: Modified Structure Grandparent company External creditors Foreign state Holding Holding Funds received Subsidiary Holding Parent company Finance company Funds received Russia Holding Funds extended Subsidiary Subsidiary External creditors

37 Thin Capitalization Rules: Modified Structure Main goal: creation of one or several financial centers - Getting funds from different sources; - Using financial centers to finance several projects (finance company is not an SPV); - Substance of finance company (office and personnel in residence state); - Finance company should bear commercial risks (different terms of giving and receiving funds). Benefits: the structure should be more sustainable against the attacks of the tax authorities: - Clear business purpose (concolidation of intragroup financial resources; reduction of transactional costs of debt financing; more benefitial terms of external debt financing); - When financing of various projects is derived from different sources it is difficult to prove the ultimate source of financing for each particular project; - Difficult to prove the finance company is merely a conduit, as it bears commercial risks and is rewarded accordingly.

38 Thin Capitalization Rules: Other Points for Consideration Increase of equity of Russian borrower - Capital injections (with or withour share premium); - Contribution to the assets (free financing; applies to Russian LLCs only); - Conversion of debt into equity (scope of application is narrowed to parent subsidiary debt financing); - Revaluation of assets (could become a trap). Carrying out business activities in Russia through the PE - Russian thin capitalization rules do not apply to the Pes of foreign companies; - BUT there should be clear link between debt financing and the activities of the PE.

39 Other Tax Developments in Russia Affecting International Tax Planning Protocol to Cyprus Russia DTT Protocol to Luxembourg Russia DTT Protocol to Switzerland Russia DTT

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