West of Russia T Dmitri Babiner Partner, Head of Tax & Legal Practice, St. Petersburg office Dmitri Babiner Partner, Head of Tax & Legal Practice, St. Petersburg office 2 Greenfield Project Greenfield Project STRUCTURING WORK Investment Incentives Project Financing Customs planning Foreign Labor LEGAL WORK Land Access to utilities / infrastructure Construction Supply & distribution Intellectual property OUR EXPERIENCE STRUCTURING WORK Investment Incentives Project Financing Customs planning Foreign Labor LEGAL WORK Land Access to utilities / infrastructure Construction Supply & distribution Intellectual property OUR EXPERIENCE 3 Major Tax Implications Major Tax Implications Tax Concessions in St. Petersburg still a draft law Project financing Allocation of costs incurred by foreign company for the project in Russia (before and after Russian legal entity is set-up), inter alia - design and project documentation costs - infrastructure / civil works costs - management fees Value of contribution in-kind for tax purposes Input VAT on construction expenses bona fide qualification Sales structure Structuring of foreign labor in Russia Tax Concessions in St. Petersburg still a draft law Project financing Allocation of costs incurred by foreign company for the project in Russia (before and after Russian legal entity is set-up), inter alia - design and project documentation costs - infrastructure / civil works costs - management fees Value of contribution in-kind for tax purposes Input VAT on construction expenses bona fide qualification Sales structure Structuring of foreign labor in Russia 4 Investment Based Concessions Investment Based Concessions Tax rate: - reduced from 24% to 20% (for investments over RUR 3bln) Period: 5 years after the plant is put into operation Tax rate: - reduced from 24% to 20% (for investments over RUR 300ml) -reduced from 24% to 22% (for investments over RUR 150ml) Period: 3 years after the plant is put into operation Tax rate: reduced from 2.2% to 0 (for investments over RUR 3bln) Period: 5 years after the plant is put into operation Proposed Leningrad Region St. Petersburg YES (feasibility study should be verified by an accredited consulting company) NO (though practically Investment Agreement is required for large investment projects) Agreement with authorities In lieu of tax refund (though unrealistic in practice) NO Subventions Depends on tax rules of particular municipality NO (abolished from 1 January 2006) Land Tax Tax rate: reduced from 2.2% to 0% Period: payback period + 2 years Tax rate: reduced from 2.2% to 1.1% (for investments over RUR 150ml) Period: 3 years after the plant is put into operation Property tax Tax rate: reduced from 24% to 20% Period: payback period + 2 years Effective Profits tax 5 Project Financing - Overview Project Financing - Overview Cash contributions to the charter capital Gratuitous transfer: mind tax implications and Russian civil law restrictions Inter-company loans: arms length principle and thin capitalization rules In-kind contribution of equipment: customs VAT and duties exemption Leasing: weigh benefits against drawbacks Cash contributions to the charter capital Gratuitous transfer: mind tax implications and Russian civil law restrictions Inter-company loans: arms length principle and thin capitalization rules In-kind contribution of equipment: customs VAT and duties exemption Leasing: weigh benefits against drawbacks 6 Project Financing. Cash in-flow Project Financing. Cash in-flow Cash contributions to the charter capital. Feasible and quick process in LLC form. Inter-company loans: arms length principle thin capitalization rules currency control implications Gratuitous transfer. Will not be taxed in Russia if provided by major shareholder. Donations between commercial organizations are restricted by Russian civil law rules. Cash contributions to the charter capital. Feasible and quick process in LLC form. Inter-company loans: arms length principle thin capitalization rules currency control implications Gratuitous transfer. Will not be taxed in Russia if provided by major shareholder. Donations between commercial organizations are restricted by Russian civil law rules. 7 Project Financing: Equipment (overview) Project Financing: Equipment (overview) In-kind charter capital contribution: exemption from VAT and customs duty (very often and mostly used mechanism) Leasing: benefits against drawbacks In-kind charter capital contribution: exemption from VAT and customs duty (very often and mostly used mechanism) Leasing: benefits against drawbacks 8 Project Financing. In-kind Contribution. Project Financing. In-kind Contribution. Classification decisions with the State Customs Service (likely required) Independent appraisal of the property to be contributed Corporate actions and registration formalities associated with increase of the charter capital VAT exemption approval by the State Customs Classification decisions with the State Customs Service (likely required) Independent appraisal of the property to be contributed Corporate actions and registration formalities associated with increase of the charter capital VAT exemption approval by the State Customs 9 Project Financing: Importing Equipment In-kind Project Financing: Importing Equipment In-kind Strengths: Import VAT exemption (for designated technological equipment); Customs duty exemption (for fixed production assets). Strengths: Import VAT exemption (for designated technological equipment); Customs duty exemption (for fixed production assets). Weaknesses: Some items may not qualify Claw back provisions Time-consuming No accelerated depreciation available Weaknesses: Some items may not qualify Claw back provisions Time-consuming No accelerated depreciation available 10 Project Financing: Cross-border leasing Project Financing: Cross-border leasing Strengths: Full deductibility of lease payments Withholding tax exemption for lease payment under most double tax treaties Temporary import VAT and customs duty payments by installments for 34 months (no interest charged; the sum fixed in rubles) Strengths: Full deductibility of lease payments Withholding tax exemption for lease payment under most double tax treaties Temporary import VAT and customs duty payments by installments for 34 months (no interest charged; the sum fixed in rubles) Weaknesses: Issues with customs VAT recovery if paid by non- registered foreign lessor Double VAT hit: customs VAT + VAT reverse charge on lease payments Weaknesses: Issues with customs VAT recovery if paid by non- registered foreign lessor Double VAT hit: customs VAT + VAT reverse charge on lease payments 11 Foreign Labor Foreign Labor Management Agreement - PE exposure Secondment Agreement (widely used in practice) - no PE exposure - work permit issue Local Employment - supplement tax payment (unified social tax) Dual employment Management Agreement - PE exposure Secondment Agreement (widely used in practice) - no PE exposure - work permit issue Local Employment - supplement tax payment (unified social tax) Dual employment 12 Land. Availability of Land Plots Land. Availability of Land Plots Depending on the size of the plot needed: Within St. Petersburg boundaries In the Leningrad Region Directly from the state (local authorities) From private owners Depending on the size of the plot needed: Within St. Petersburg boundaries In the Leningrad Region Directly from the state (local authorities) From private owners 13 Land issues. Greenfield : Main Implications Land issues. Greenfield : Main Implications Land category appropriate for production? Sanitary zone and environmental approvals. Increased complexity of approving with sanitary authorities Legal restrictions and procedures associated with obtaining rights to the land plot Infrastructure / access to utilities Land category appropriate for production? Sanitary zone and environmental approvals. Increased complexity of approving with sanitary authorities Legal restrictions and procedures associated with obtaining rights to the land plot Infrastructure / access to utilities 14 Obtaining Rights to the Land Plot (Greenfield) Obtaining Rights to the Land Plot (Greenfield) Auction alternative not practical With prior approval of the production location: Apply to the authorities (in St. Petersburg Investment Department) Respective approvals (Investment Department in St. Petersburg, MVK in Leningrad oblast) Act on site selection Decision on location (in St. Petersburg to be taken by SPb Government on provision of the land plot, in LO preliminary approval of location) Site boundaries and cadastre plan Leasehold rights, Investment Agreement Auction alternative not practical With prior approval of the production location: Apply to the authorities (in St. Petersburg Investment Department) Respective approvals (Investment Department in St. Petersburg, MVK in Leningrad oblast) Act on site selection Decision on location (in St. Petersburg to be taken by SPb Government on provision of the land plot, in LO preliminary approval of location) Site boundaries and cadastre plan Leasehold rights, Investment Agreement 15 Ownership to Land Ownership to Land PROS Greater independence from the state; Land tax is more stable than rent payments; Increase of investments liquidity; Current buy-out price is relatively low; The price may grow. PROS Greater independence from the state; Land tax is more stable than rent payments; Increase of investments liquidity; Current buy-out price is relatively low; The price may grow. CONS Possible only after completion of the construction and registration of the real estate; Rent is deductible; Land plots can not be depreciated; Rent could be comparable to land tax. CONS Possible only after completion of the construction and registration of the real estate; Rent is deductible; Land plots can not be depreciated; Rent could be comparable to land tax. 16 Utilities: Contracts Utilities: Contracts Utilities (electricity, gas, water) are provided by monopolists Expect severe connection costs Negotiations of contracts are possible, but very difficult. Start negotiations at the very beginning Lenenergo is much more difficult to negotiate with Utilities (electricity, gas, water) are provided by monopolists Expect severe connection costs Negotiations of contracts are possible, but very difficult. Start negotiations at the very beginning Lenenergo is much more difficult to negotiate with 17 Gas: Main Stages Gas: Main Stages Gas limits approval Permission for usage of gas as fuel Gas Supply Agreement Technical Conditions for Gas Connection Gas Transportation Agreement (if any) Gas limits approval Permission for usage of gas as fuel Gas Supply Agreement Technical Conditions for Gas Connection Gas Transportation Agreement (if any) 18 Construction Stages (high level) Construction Stages (high level) Organizing selection and liaison with building contractors Construction permit Relations with utility providers: Ensure accessibility of utilities at the selected site Commencement of the project Organizing selection and liaison with building contractors Construction permit Relations with utility providers: Ensure accessibility of utilities at the selected site Commencement of the project 19 Intellectual Property Intellectual Property Patent / trademark / domain name registration Examination / drafting / registration of license and franchising agreements Development of intellectual property / copyright protection system: - Inter-company Regulations on commercial secrets; - Related labor agreements / job descriptions Royalties taxation issues Patent / trademark / domain name registration Examination / drafting / registration of license and franchising agreements Development of intellectual property / copyright protection system: - Inter-company Regulations on commercial secrets; - Related labor agreements / job descriptions Royalties taxation issues 20 Ernst & Young Services Ernst & Young Services 21 St.Petersburg & Leningrad Region Our Experience St.Petersburg & Leningrad Region Our Experience Selected projects: Japan Tobacco International, Vena Brewery, Baltika Brewery, Gillette, Coca-Cola, Rocco Forte, Moller / Maersk; International Paper/OAO Svetogorsk, Merloni, Philip Morris, British American Tobacco, Cres Neva, Rockwool Full scope legal and tax support with investment structuring and overall project start-up; Assistance in obtaining customs and tax concessions on in-kind contribution; Allocation of land plot for development and assistance with land plot buy-out; Registration of a license agreement between a Russian legal entity and a foreign owner with the Russian patent authorities; Development of manufacturing facilities; Structuring investment activities and coordination of all necessary steps with relevant state authorities (including, the currency control issues, taxation of cross-border transactions, legal support in establishing of new legal entities, etc.); Structuring cost sharing agreements with Lenenergo to ensure energy infrastructure functionality; Analysis of risks related to the currency regulation and corporate requirements; Assistance in maintaining loan/credit relations to hedge potential risks of devaluation of the ruble assets of the client; Customs planning; Full scope assistance with management of real estate issues. Selected projects: Japan Tobacco International, Vena Brewery, Baltika Brewery, Gillette, Coca-Cola, Rocco Forte, Moller / Maersk; International Paper/OAO Svetogorsk, Merloni, Philip Morris, British American Tobacco, Cres Neva, Rockwool Full scope legal and tax support with investment structuring and overall project start-up; Assistance in obtaining customs and tax concessions on in-kind contribution; Allocation of land plot for development and assistance with land plot buy-out; Registration of a license agreement between a Russian legal entity and a foreign owner with the Russian patent authorities; Development of manufacturing facilities; Structuring investment activities and coordination of all necessary steps with relevant state authorities (including, the currency control issues, taxation of cross-border transactions, legal support in establishing of new legal entities, etc.); Structuring cost sharing agreements with Lenenergo to ensure energy infrastructure functionality; Analysis of risks related to the currency regulation and corporate requirements; Assistance in maintaining loan/credit relations to hedge potential risks of devaluation of the ruble assets of the client; Customs planning; Full scope assistance with management of real estate issues. 22 St.Petersburg & Leningrad Region Our Experience St.Petersburg & Leningrad Region Our Experience Close cooperation with the regional authorities Established practical relationship with Region Administrations and municipalities Ernst & Young authorized consulting company permitted to sign off on investment documents of applicants Vast experience in negotiating tax concessions for brownfield and greenfield projects Developed real estate practice Introduction of novelties in investment legislation Close cooperation with the regional authorities Established practical relationship with Region Administrations and municipalities Ernst & Young authorized consulting company permitted to sign off on investment documents of applicants Vast experience in negotiating tax concessions for brownfield and greenfield projects Developed real estate practice Introduction of novelties in investment legislation 23 Ernst & Young Team Dmitry is the Head of Tax & Legal Practice in St. Petersburg. He has participated in the largest projects in telecommunications, food processing and manufacturing during his 9-year tax and legal work experience. He has been widely involved in tax and customs planning, complex analysis of inter-related legal, tax and accounting risks in the process of mergers and acquisition of the legal entities. He also specializes in comprehensive tax and customs studies on tax optimization of cross- border transactions. He has extensive experience in tax dispute resolution and successful tax litigation. Dmitry is a member of the Executive Committee of SPIBA (St. Petersburg International Business Association for Northwest of Russia). Dmitry has advised the following companies: International Paper, Toyota, Gillette, Cadbury, Amcor, Swedwood, Quadriga Investment Fund, Gazprom- Media, Sviazinvest. Dmitri Babiner Partner, Head of Tax & Legal Practice in St. Petersburg + 7 812 703 78 39 Dmitri.Babiner@ru.ey.com 24 Ernst & Young Team Galina Dontsova has approximately 13 years experience in the customs area, including: due diligence of clients customs operations; application of different customs regimes, such as temporary import, customs bonded warehouse, processing of goods under customs control etc.; application of customs privileges and exemptions, including exemptions granted for foreign investors; refund of customs deposits; negotiation with customs authorities during customs audits; monitoring Russian and CIS legislation developments in customs area; research on specific customs problems, especially investigation of ambiguous and inconsistent issues. Galina is a member of the Advisory Council on realization of customs policy attached to the Federal Customs Services. 1998 to present Ernst & Young, Moscow, Senior Manager. 1992 to 1998 The State Customs Committee of the Russian Federation: Specialist, Senior Specialist, Head of the International Law Department. Galina Dontsova Senior Manager, Head of Customs Group, Russia + 7 495 938 66 63 Galina.Dontsova@ru.ey.com 25 Ernst & Young Team Dmitry is a Tax manager with Ernst & Young, specializing in Customs. Dmitry graduated from the Russian State Customs Academy and served in the St. Petersburg Customs Office for 8 years. He is currently one of the most experienced customs consultants in the Northwest region of Russia. Dmitry advises our Russian and multinational clients on various complex customs-related matters, including which customs regime to choose, how to proceed with customs valuation and structure export-import operations and in-kind contributions. Dmitri Mayorov Manager, Customs + 7 812 703 78 27 Dmitry.Mayorov@ru.ey.com 26 Ernst & Youngs Credentials Ernst & Youngs Credentials The experience of Ernst & Young customs team specialists is applied for development and improvement of the Russian customs law. This task is performed by our specialists through participation in: A range of the RF State Duma Parliamentary committees on development of a new RF Customs code and of the laws on free zones The RF Governmental Advisory Committee for foreign investment The American Chamber of Commerce The Association of European Business in Russia The workgroup of the Russian Union of Industrialists and Entrepreneurs on accession of Russia to the WTO and on the customs policy reforms The Advisory Council for implementation of the customs policy attached to the FCS of Russia The recent major clients of our Customs Group include in particular: The experience of Ernst & Young customs team specialists is applied for development and improvement of the Russian customs law. This task is performed by our specialists through participation in: A range of the RF State Duma Parliamentary committees on development of a new RF Customs code and of the laws on free zones The RF Governmental Advisory Committee for foreign investment The American Chamber of Commerce The Association of European Business in Russia The workgroup of the Russian Union of Industrialists and Entrepreneurs on accession of Russia to the WTO and on the customs policy reforms The Advisory Council for implementation of the customs policy attached to the FCS of Russia The recent major clients of our Customs Group include in particular: 27 Ernst & Youngs Automotive Credentials Our Automotive Qualifications in Russia and the CIS Ernst & Youngs Automotive Credentials Our Automotive Qualifications in Russia and the CIS In Russia as in the rest of the world, Ernst & Young has a strong team of automotive specialists. Ernst & Young provides its automotive clients with audit and assurance services; advises them in corporate and personal tax matters; offers financial solutions and due diligence services; and provides valuable market insight and business development strategies to make a success of operations in the CIS. Our key competence areas include detailed market research and forecasts; feasibility studies; assistance in finding a suitable business partner; business and expansion plan design; and tax customs and VAT review planning. Foreign Automotive Clients in Russia and the CIS A Sample Ernst & Young is the CIS leader in providing professional services to foreign automotive producers and suppliers. We serve all major international companies present in the market, including: