Doing business in Russia EY Sadovnicheskaya nab., 77, bld. 1 115035, Moscow, Russia Paveletskaya Pl., 2, bld. 2 115054, Moscow, Russia Tel: +7 (495) 755 9700 Fax: +7 (495) 755 9701 2 Doing business in Russia Introduction

This guide has been prepared by EY Russia to give the potential investor an insight into Russia and its economy and tax system, provide an overview of forms of business and accounting rules and answer questions that frequently arise for foreign businesses.

Russia is a fast-developing country and is committed to improving the investment climate and developing a better legal environment for doing business. On the one hand, this makes doing business in Russia an attractive prospect; on the other, it can make for difficult decisions both when starting a business and further down the line.

EY provides assurance, tax, legal, strategy, transactions and consulting services in 150 countries and employs over 300,000 professionals across the globe1, including more than 3,500 employees in 9 offices in Russia.

EY possesses extensive, in-depth knowledge of Russian realities and is always ready to come to the assistance of first-time and experienced investors alike.

This guide contains information current as at March 2021 (except where a later date is specified).

You can find more information about doing business in Russia as well as up-to-date information on developments in its legal and tax environment on our website: www.ey.com/ru.

1 Who we are – Builders of a better working world | EY — Global

Doing business in Russia 1 2 Doing business in Russia Contents

01 Welcome to Russia Trade law 42 The Eurasian Economic Union 42 02 General Business Information Licensing 43 Time 11 Permits for certain activities 43 Public holidays 11 Licences for subsurface access 44 The Russian legal system 12 Environmental permits 45 Overview 12 Recycling requirements 45 The court system 12 Data protection and privacy 46 Registration, certification and disclosure 14 Regulation of the digital sphere 47 Registration of rights in real estate 14 Investment platforms (crowdfunding) 47 Corporate law 15 Financial platforms (marketplaces) 48 LLCs vs JSCs 15 Digital financial assets (tokens) Contract law 21 and related information systems 48 The financial system 24 Cryptocurrency 49 Banking system 24 Sanctions and restrictive measures 50 FATCA implementing legislation 30 Automatic exchange of tax information (CRS) 30 03 Tax System Tax rates 53 Basic principles of Russian securities regulation 31 Penalties for late payment and tax filing violations 56 Currency control 34 Corporate Profits Tax 57 General principles 34 Taxpayers 57 Currency control restrictions for Russian residents 35 Tax year 57 Liability for violation of currency law 36 Russian legal entities 57 Competition law 37 Rates 57 Merger control 37 Tax base 57 Abuse of dominance 38 Taxable income 57 Anti-competitive agreements, concerted Exempt income 58 actions and illegal coordination 39 Tax-deductible expenses 58 Unfair competition 41 Unjustified tax benefit 58 State aid 41

Doing business in Russia 3 Interest 58 Calculation of VAT 83 Depreciation 59 Recovery of VAT by taxpayers 83 Investment tax credit 61 Tax reporting and payment 84 Expenses subject to special rules 62 Imported goods 84 Loss carry-forward 62 Withholding of VAT on purchases from Dividend income 63 foreign legal entities 85 Capital gains and losses 63 VAT on e-services 85 Tax reporting and payment 65 VAT and the EAEU 86 Tax accounting 66 07 Corporate Property Tax Foreign companies operating through a branch Taxpayers 89 or representative office (FLEs) 66 Tax base 89 Tax compliance requirements 67 Tax rate 89 PE risk for profits of an FLE attributable to its Russian business 69 Tax reliefs 91 Tax reporting 91 04 Real Estate Transaction Costs and Taxes 08 Other Taxes Sale of real estate via an asset deal 71 Excise duty 93 Sale of real estate via a share deal 71 Transport tax 93 Mineral extraction tax 93 05 Tax Control Additional income tax on hydrocarbon production 94 Tax audits 73 Other taxes and duties 94 Administration of major taxpayers 75 Digital tax control 76 09 International Taxation Tax Monitoring 77 Matters Taxation of Russian-source income of FLEs Hot trends 79 without a PE in Russia 97 06 Value Added Tax (VAT) Treaty relief 98 Taxpayers 81 Foreign tax relief 99 MLI 99 Registration 81 Taxable operations 81 10 “Deoffshorization” Place of supply of goods and services 81 Measures Rates 81 CFC rules 101 Non-taxable supplies 82 The concept of Russian tax residence Time of supply 83 for foreign companies 102

4 Doing business in Russia The beneficial ownership concept 103 Regional investment projects (RIPs) 127 Special administrative districts 104 Investment protection and promotion agreement (IPPA) 128 11 Tax Treatment of Company Reorganizations 15 Offshore Oil and Gas Developments 12 Customs Overview 109 16 Financial Reporting Eurasian Economic Union of Russia, Belarus, and Auditing Kazakhstan, Armenia and Kirgizia 109 Sources of accounting principles 135 Import duties 109 Applicability of IFRS for consolidated financial statements of public companies in Russia 136 Export duties 109 Significant accounting concepts for investors 138 Customs value 109 Disclosure, reporting and filing requirements 140 Customs coding 110 Customs procedures 102 17 Individuals CIS free trade regime 111 Personal income tax 143 Free trade with other countries 112 General 143 Tariff preferences for goods originating from Who is liable? 143 developing and/or least developed countries 112 Definition of resident 143 Import permissions 112 Object of taxation 143 13 Transfer Pricing Tax rates 144 Overview 117 Tax collection procedure 145 Scope of TP control 107 Capital gains and losses 146 TP methods 118 Tax deductions 146 Documentation requirements 118 Exemptions 147 TP audits 121 Immigration 148 Penalties 121 Highly Qualified Specialists (HQS) 148 Penalty relief 121 Submission of forecasts of foreign labour Advance pricing agreements 121 needs (quota applications) 148 Mutual Agreement Procedure 122 Work permits 148 Work visas 149 14 Investment Promotion Notifications 149 Measures Registration and deregistration 149 Special economic zones (SEZs) 125 Sanctions for non-compliance with Special investment contracts (SPICs) 125 immigration legislation 149

Doing business in Russia 5 Mandatory notification of second citizenship 150 Liability 150 Social security 151 Exemptions 151 Social contribution rates 151 Workplace accident insurance 152

Russian labour law 153 Sanctions for non-compliance 155 18 Appendices Appendix 1: Useful addresses and telephone numbers 157 Appendix 2: Exchange rates (as of year’s end) 162 Appendix 3: Treaty withholding tax rates 163 Appendix 4: Blacklist of jurisdictions approved by the Ministry of Finance 170 Appendix 5: Blacklist of jurisdictions approved by the Federal Tax Service 171 States 171 Territories 171 Appendix 6: Compliance calendar 172 EY in the CIS 179

6 Doing business in Russia Doing business in Russia 7 Welcome to 1Russia

8 Doing business in Russia Like the rest of the world, Russia had to disruptions in supplies and increased fight economic headwinds in 2020 amid food production costs drove inflation up. the disruption caused by the Covid-19 1.9% In the corporate sectors, companies pandemic. However, support measures postponed new investment projects is expected growth of Russia’s taken by the government alleviated the amid rising uncertainty. As a result, fixed economic impact of the crisis: Russia’s GDP in 2021. capital investment declined 4.1% in the GDP is expected to contract 3.9% in first 9 months of 20205. The level of 2020 and projected to gain 1.9% in inward foreign direct investment also 2021. During the harsh second wave remained subdued in 2020. of the pandemic, the Russian economy showed strong resilience, and the Regardless of short-term fluctuations, country demonstrated both the stability an EY survey for the Foreign Investment of its healthcare and social systems and Advisory Council in Russia (FIAC) 53% the robustness of its public finances.2 confirmed the strategic importance of of surveyed companies plan the Russian market for foreign investors. to increase their presence The consumer sector was the weakest The pandemic, commodity price on the Russian market. link for Russia in 2020. Transportation, volatility and macroeconomic instability entertainment and catering companies have not changed their opinion. The faced lockdown restrictions in the spring proportion of multinational companies of 2020 and had to lay off or furlough that view Russia as a strategic market part of their workforce. Companies is consistently high and has grown in other industries were cautious compared to 2019. 53% of surveyed about hiring new staff. As a result, the companies plan to increase their unemployment rate in Russia climbed presence on the Russian market. from 4.7% in January 2020 to 6.1% in November 20203, which is above International and domestic companies the 5-year average level. Increased have successfully coped with the unemployment, a competitive job market restrictions of the pandemic, transferring and economic uncertainty pushed employees to remote working and consumer confidence down, with people switching communications to online tending to switch to saving mode, channels. They intend to increase postponing non-essential spending. investment in technology but are looking to cut down on office maintenance costs. Despite lower demand for goods and Supporting people and organizations services, consumer prices increased affected by the pandemic is an important 4.9% in December 2020 year-over-year4, priority for international businesses which is the highest gain since 2017. operating in Russia, EY research shows. The depreciation of the Russian rouble,

2 Oxford Economics. Russia economic forecast, December 2020 3 https://fedstat.ru/indicator/57341 4 http://cbr.ru/press/event/?id=9492 5 https://rosstat.gov.ru/storage/mediabank/wahUjgZn/inv20.xls

Doing business in Russia 9 General Business 2Information

10 Doing business in Russia Time Public holidays General facts Russia has 11 time zones. It does not The following days are non-working observe daylight saving time. public holidays in Russia: Russia is the largest country Moscow time is GMT plus 3 hours. Holiday Date in the world in terms of area, 1, 2, 3, 4, 5, 6 covering 1/7 of the world’s land Time differences between Moscow and New Year holidays some major cities of the CIS are shown and 8 January surface, or 17,125,000 square 6 in the following table: Russian Orthodox kilometres. 7 January Christmas Hours ahead of City Defenders of It has a population of over 146 or behind Moscow 23 February the Fatherland Day million.7 Kyiv –1/0 International Women’s Day 8 March St. Petersburg 0 Spring and Labour Day 1 May The capital city, Moscow, has Baku +1 a population of 12.6 million8 Victory Day 9 May 9 Almaty +3 and is one of the 30 largest Russia Day 12 June Novosibirsk +4 cities in the world. National Unity Day 4 November Vladivostok +7 Besides Moscow, Russia has In the event that a day of rest and a non- 14 other cities with populations Flying times between Moscow and some working public holiday coincide, the day exceeding 1 million. major cities of the world, as well as time of rest is usually carried over to the next differences, are shown in the table below: working day after the public holiday. If a Structurally, Russia is a Time holiday falls on a Tuesday, the Monday presidential federative republic City Flying time difference before will serve as a bridge holiday. In consisting of 85 administrative London -3 or -2 3 hours 50 minutes this case, the following or the previous units. Saturday will be a regular working New York -8 or -7 8 hours 30 minutes day, making up for the Monday bridge The President is Vladimir Putin. Paris -2 or -1 3 hours 45 minutes holiday. Those of the New Year holidays Beijing* +5 9 hours 45 minutes that fall on a weekend are now being The Prime Minister is Mikhail Tokyo* +6 10 hours 25 minutes carried over to later in the year. Mishustin. * China and Japan do not observe daylight saving time. Source: http://www.timeanddate.com/ The national currency is the rouble (1 US$ = 72.32 roubles10).

th 11 6 Information on land distribution in the Russian Federation by category of land as at 01.01.2020 Russia holds 11 place in the (by regional entity) world in terms of nominal GDP 7 Federal State Statistics Service (rosstat.gov.ru) and 6th place in terms of GDP 8 https://mosstat.gks.ru/ 9 World’s largest cities by population 2020 list. Largest cities, table - www.statdata.ru – Website about adjusted for purchasing power countries, cities, population statistics, etc. parity. 10 2020 Average exchange rate based on Russian Central Bank figures 11 GDP, PPP (constant 2017 international $) | Data (worldbank.org)

Doing business in Russia 11 The Russian legal system

Overview Government of Russia issues decrees The court system and regulations which must comply with The Russian legal system is a civil law The court system in Russia consists federal legislation and the President’s (codified) system. Unlike common law of general and arbitration courts. edicts. countries, the main source of law in General courts consider cases Russia is the statutes and regulations As the next tier of regulation, state involving individuals (whether civil adopted by the legislative and executive executive authorities (federal ministries, law, administrative law or criminal law authorities. services and agencies) issue regulations cases), whereas the arbitration courts on matters within their competence consider cases arising from business Legislation in Russia is divided into (Ministry of Transport, Federal Tax relationships of legal entities and country-wide (federal) and regional. Service, Federal Anti-Monopoly Service, individual entrepreneurs, including tax Regional legislation is subsidiary to Federal Customs Service, etc.). claims, claims arising from commercial federal. contracts, and corporate disputes. Regional legislation is adopted in those Federal laws are adopted by the Russian areas which, under the Constitution, The arbitration court system is Parliament (the Federal Assembly) come under the joint competence of comprised of five instances. The court and are applicable throughout the the federation and the regions, such of first instance renders a judgement, territory of Russia. The core legal as environmental, administrative, and which may be appealed through four rules are codified into special federal housing law (as opposed to areas such as appeal instances one after another, laws, or “Codes” (e.g., Civil Code, Tax criminal law, the financial system, military i.e., if the appellant misses one of the Code, Criminal Code, Labour Code, matters, etc., which come under the successive instances it loses the right Administrative Offences Code, Family exclusive competence of the federation). to appeal further. The arbitration court Code, Land Code, etc.). The legislatures of each region adopt system consists of: regional laws and regional executive Other federal laws elaborate on • Regional Courts (1st instance) regulation provided by the Codes authorities issue regulations which have (i.e., adding specific rules to general legal force in that territory only. • Regional Courts of Appeal nd guidelines: for instance, the Limited (2 instance) Rulings made by Russian courts are Liability Companies Law and the Joint rd considered as decisions on specific • District Courts (3 instance) Stock Companies Law establish specific cases and from a formal perspective are • the Commercial Bench of the Supreme rules in line with the general regulation not binding on other Russian courts (do Court (4th instance) and established by the Civil Code) or provide not establish legal precedents), although regulation on matters not covered by • the Presidium of the Supreme Court in practice judges do consider the legal th the Codes (for instance, the Currency (5 instance). positions of other courts. The Russian Control Law, the Competition Law, the Supreme Court may adopt special acts The general court system is comprised Licensing Law, etc.). interpreting the law or summarizing of up to six instances depending on the The President of Russia adopts edicts case law that serve as guidance for all type of case. In 2019 the general court on particular matters required for the commercial and non-commercial courts, system underwent major reform: new implementation of federal laws. The but it cannot create new legal rules. appellate and cassation courts were

12 Doing business in Russia established, and jurisdiction over certain cases was transferred from regional level to the newly established courts. The Supreme Court acts as the final appeal instance for both general and arbitration courts. Within the arbitration court system, first instance proceedings commonly last from four to six months. However, it is compulsory to file a pre-litigation claim one month ahead of filing a claim with the arbitration court. The duration of proceedings in each appeal instance rarely exceeds two months. The maximum stamp duty charge for filing a claim with an arbitration court is RUB 200,000 (approx. US$ 2,765 ). The fee for filing a petition of appeal is RUB 3,000 (approx. US$ 41). A judgement may be enforced unless it is appealed to a second instance court (which must be done within 30 days), in which case it may be enforced after the second instance court has rendered a judgement, except where the first instance judgement is sent back to the first instance court. The parties may also refer a commercial dispute to commercial arbitration, which is carried out in Russia both through permanent arbitration institutions and by ad hoc arbitration.

12 Here and hereinafter calculated based on an exchange rate of RUB 72.32 to US$ 1.

Doing business in Russia 13 Currently there are three arbitration to the tax authority which maintains does not affect the validity of relevant tribunals which can consider commercial the register), otherwise the information agreements, guarantees or pledges, disputes in Russia: in question will not have validity in but may lead to the imposition of dealings with third parties. An extract administrative penalties on a company • The Arbitration Centre at the from the State Register of Legal Entities and its officers. Russian Union of Industrialists and is considered as an official source of Entrepreneurs, Notaries public in Russia are officials information on the current status of a who certify (notarize) legal and other • The Arbitration Centre at the Russian company and its Chief Executive Officer. documents. Russian law requires certain Institute of Modern Arbitration, and Any person may request an extract from commercial transactions, corporate the register with respect to any legal • The International Arbitration Court at decisions and one-party documents entity. the Russian Chamber of Commerce. (such as powers of attorney) to be Maritime disputes can be heard by The state registers of intellectual certified by a notary public to be legally the Maritime Arbitration Commission property (trademarks, inventions, valid and enforceable. For instance, any at the Russian Chamber of Commerce utility models, industrial designs, etc.) transaction to transfer participating and Industry, while disputes on sporting contain information about particular IP interests in an LLC is subject to matters may be addressed by the assets, such as the rights holders and certification by a Russian notary public National Sports Arbitration Centre. encumbrances that are required to be (including preliminary and principal registered. SPAs, options and pledges). International arbitration institutions in Russia are treated as ad hoc bodies. Most of the information contained in the various state registers is aggregated in Registration of rights a special publicly available web-based in real estate Registration, certification register in Russian known as Fedresurs and disclosure (http://www.fedresurs.ru/). Some data Save for some exceptions, rights in is entered by the tax authorities, which real estate arise only upon their state Russian law requires certain commercial are responsible for maintaining the State registration, i.e., the registration of transactions and civil states to be Register of Legal Entities. This includes title to real estate is a mandatory officially registered in state registers information on the establishment, precondition for the execution of any which are made available to the public. reorganization or liquidation of a transaction with it. Most transactions In some cases, state registration is involving real estate must also be legal entity, changes in its CEO, share essential for the enforceability of a registered: capital or address, and so on. Some transaction, while in others it is just an data is entered by a company itself: the element of mandatory disclosure. • contracts of sale and other issuance, suspension or revocation of agreements providing for the transfer For instance, the State Register of Legal licences, pledges of movable property, of title Entities contains information about financial statements (if publication is • leases and subleases exceeding one Russian legal entities, their founders, required by law), value of net assets, and year CEOs, share capital, reorganization other information. Certain disclosures status and, in the case of LLCs, the are relevant for specific parties, such as • enterprise leases owners of participating interests in the issue of guarantees for guarantors, • easements the company and encumbrances over property leases for leasing companies, them. A company must enter this data factoring agreements for financial • construction co-investment in the register (by filing an application agents, etc. Breach of this obligation agreements

14 Doing business in Russia • granting of land plots for use free of participants. The Charter and any 50 shareholders is subject to additional charge for a period exceeding one year amendments to it must be approved obligations involving the publication of by the General Meeting. Although the an annual report and annual financial • assignment of any agreement which Charter is not made available to the statements. was subject to state registration public, it must be registered in the State Information about participants in an LLC Register of Legal Entities. State registration records are entered in is publicly available in the State Register the Unified State Register of Real Estate, Businesses such as LLCs and JSCs of Legal Entities. The company must which is maintained by the Federal Service must have charter (statutory) capital. also maintain a list of its participants for State Registration, Cadastral Records Such matters as the amount of initial internally or arrange for it to be and Cartography. State registration takes charter capital, the company’s Charter, maintained by the Federal Chamber of up to 12 business days depending on the the Chief Executive Officer and the Notaries. In case of discrepancy between type of right or agreement being registered address must be approved the State Register of Legal Entities and registered. Basic information on every by the founders in the decision on the list of participants, the State Register property contained in the Register (area, the incorporation of the company (in prevails. Except for the initial founders, year of construction, title holder, addition to which, if there are two or shareholders of a JSC are not disclosed encumbrances and limitations, etc.) is more founders, they must also approve in the register, but the company must available to the public. a foundation agreement). appoint a professional licensed registrar Russian law prohibits a single- to maintain the register of shareholders. shareholder structure where a company Corporate law with one shareholder is the sole A participant in an LLC may sell or Russian corporate law provides for shareholder of another company. transfer its participating interest to a two categories of legal entity: (1) third party only subject to pre-emption commercial legal entities and (2) non- rights enjoyed by other participants commercial legal entities. Commercial LLCs vs JSCs (and the company if provided by its legal entities include, but are not The most frequently used types of Charter) at the price offered by the limited to, companies, partnerships and commercial legal entity are limited third party or stipulated in the Charter. commercial co-operatives, and may be liability companies (LLCs) and joint In addition, the Charter of an LLC may private or public. Non-commercial legal stock companies (JSCs). Only a JSC can make it mandatory to obtain the consent entities include funds, associations, become a public company, but a JSC is of other participants and the company agencies, etc. generally considered non-public unless for such third-party transactions or its public status is directly indicated in even completely prohibit them. Any A legal entity may be established for a the name of the company and in the contract providing for the transfer of definite or indefinite period of time. An company’s Charter. a participating interest in an LLC is entity is considered as established when The financial statements of any JSC subject to certification by a Russian a relevant registration entry is made in must be audited annually by an external notary public. the State Register of Legal Entities. auditor (there is no such obligation for Each company must have a Charter In a JSC, the pre-emption right is not an LLC). (Articles of Association) setting out a default rule of law, but it may be general information about the company The maximum number of participants stipulated in the Charter of a non-public and regulating the general principles in an LLC is 50. The number of JSC (the establishment of pre-emption of the company’s corporate structure shareholders of a JSC is unlimited, rights for public JSCs is prohibited and the status of its shareholders/ but a non-public JSC with more than unless specifically provided for by law).

Doing business in Russia 15 The law allows both participants in If a participant opts to withdraw from capital of a JSC must be paid in within 3 an LLC and shareholders of a JSC to an LLC, the company acquires its months of its registration and the other make “contributions to the assets” of participating interest and is obliged to 50% must be paid in within 1 year of its the company that do not impact its pay the participant within three months registration. charter capital and are not returnable the “actual value” of its stake calculated After a company has been established, to the contributors. In effect, such as a corresponding portion of the value the charter capital may be increased contributions are a form of legitimized of the company’s net assets as shown in by contributions made by participants/ corporate gift. In-kind contributions to the financial statements. Withdrawal is shareholders in cash or in kind (subject assets are limited to tangible assets, not an option for shareholders of a JSC. to the same limitations as for in-kind shares in other companies, intellectual contributions to assets) provided that property, and state and municipal bonds. Charter capital the initial charter capital has been For both LLCs and JSCs the minimum Participants in an LLC also benefit from fully paid in. In an LLC, an increase is charter capital is RUB 10,000 (approx. a specific exit mechanism. If directly US$ 138). The minimum charter effected by increasing the nominal value provided for by the Charter of an LLC, capital for a public JSC is RUB 100,000 of some or all participating interests, a participant is entitled to “withdraw” (approx. US$ 1,383). There is no while in a JSC the shareholders may from the company at any time. The maximum amount. decide to increase the charter capital withdrawal is executed by submitting either by issuing additional shares or a relevant application to the company The initial charter capital of an LLC must by increasing the par value of existing and does not depend on the will of the be paid in within 4 months of its state shares. Debt-to-equity conversion company or other participants. registration. 50% of the initial charter (where capital is paid in by offsetting

16 Doing business in Russia debt owed to a shareholder/participant) the amount of the company’s charter body but is typically convened only is permitted. Any decision to increase or capital, the shareholders/participants occasionally to decide on fundamental reduce charter capital must be adopted have one year to increase them. If, after issues, while the Board of Directors (if by a General Meeting. that year, the value of net assets is still one is established) acts as a supervisory less than the amount of charter capital, rather than executive body.. In an LLC, charter capital is divided into the shareholders/participants have 6 a number of participating interests equal months to pass a resolution to reduce General Meeting to the number of participants. Each charter capital. If the value of net assets The General Meeting must be convened participant has one participating interest falls below the minimum charter capital annually. In an LLC, the annual General with a nominal value proportionate to level, the shareholders/participants Meeting must be convened between 1 the amount of its contribution to the must pass a resolution to liquidate the March and 30 April, while in a JSC it charter capital. company. must be convened between 1 March and The charter capital of a JSC is divided 30 June. Any other General Meeting into shares of equal nominal value. Public companies is considered to be an extraordinary Unlike participating interests in an A public company is obliged to disclose meeting. LLC, shares in the charter capital of a information in the manner prescribed by The competence of the General Meeting JSC have the status of securities and law and must have a Board of Directors is divided into exclusive (decisions each issue of shares in a JSC must be within its corporate structure. which may be taken only by the General registered with the Bank of Russia. If a shareholder or a third party Meeting) and non-exclusive (decisions A JSC may issue both common and (together with its affiliates) acquires which may be taken by the General preferred shares. Various types of over 30% or 50% or 75% of the shares Meeting or another management preferred share are allowed but the in a public company, it must make a body of the company, depending on total nominal value of preferred shares public offer to all other shareholders. If the company’s Charter). The exclusive may not exceed 25% of the JSC’s the stake of an individual shareholder competence of the General Meeting charter capital. At the time of initial exceeds 95% in the course of the public includes decisions on such fundamental placement, shares are distributed offer, that shareholder is entitled to matters as liquidation, reorganization, among shareholders and/or third parties exercise a squeeze-out right with respect changes to charter capital or to the by either private or public subscription. to the remaining shares; conversely, the Charter, and the payment of dividends. remaining shareholders have the right Matters falling within the non-exclusive Net assets to force a mandatory buy-out of their competence of the General Meeting are limited to those specified in the Charter. Russian law obliges LLCs and JSCs to shares. keep their net assets (calculated on Corporate governance Board of Directors the basis of the company’s books) at a level equal to or exceeding their charter Corporate governance in Russian In a non-public company, the Board of capital. When a company is established, companies is CEO-focused: the Directors is not a mandatory corporate it has 2 years to commence its business, competence of any other management body. The competence of the Board of and starting from the 2nd year the body of a company must be set out in Directors must be expressly laid down in the Charter and may include any company is obliged to check annually the company’s Charter and all decisions matters other than those falling within whether the value of its net assets is lying outside that competence fall within the exclusive competence of the General less than the amount of charter capital. the authority of the CEO. The General Meeting. If the value of net assets falls below Meeting is the highest management

Doing business in Russia 17 The requirement to appoint independent to numerous cases of abuse. Although companies in Russia) now expressly members of the Board of Directors CEOs have a duty to act reasonably and allows the imposition of subsidiary applies to certain public companies only. in good faith, historically shareholders liability on the management or have found it very difficult to prove that controllers of a company if it has been Chief Executive Officer damage to the company was caused by struck off the corporate register owing The Chief Executive Officer (who may the actions of management. to inactivity. have the title of General Director, The situation changed in 2013 when Director, President or otherwise as the Supreme Arbitration Court issued a Shareholders’ agreements provided by the Charter of the company) ruling establishing that in certain cases Shareholders in a Russian company may is the only body entitled to act on behalf (for instance, where the Chief Executive enter into a shareholders’ agreement of the company without a Power of Officer ignored the usual approval (“corporate contract”) that includes Attorney. procedures or did not disclose a conflict an undertaking to vote in a particular of interest), the CEO should be deemed manner at general meetings and special The Chief Executive Officer may be to have acted unreasonably or in bad provisions regarding disposal of shares represented by: (1) an individual; (2) faith and the burden of proof should and other matters. The agreement two or more individuals acting jointly as switch to them, requiring them to justify may be governed by Russian law or one Chief Executive Officer; (3) two or their actions. This led to a major shift by foreign law provided that there is a more individuals acting separately as in case law, and since then the number foreign element involved (i.e., where two or more Chief Executive Officers; of cases where CEOs have been found some or all of the shareholders are and (4) a legal entity acting as a liable has grown by a third each year. non-Russian persons). An agreement Management Company. governed by foreign law must be In LLCs and JSCs the Chief Executive Piercing the corporate veil compliant with mandatory provisions of Officer cannot take the position of Russian law limits the liability of Russian law. For example, under Russian Chairman of the Board of Directors. shareholders of a company to the law it is not permissible for the exclusive amount of their stakes in the charter competence of the General Meeting to Management Board capital (a shareholder that has not fully be delegated to a lower level authority, The law allows LLCs and JSCs to paid for its stake will be jointly liable there is no alternative/deputy CEO, the establish a collective executive body with the company to the extent of the mandatory voting threshold cannot be alongside the Chief Executive Officer unpaid share). Shareholders or persons lowered and pre-emption rights in an (Management Board, Executive Board, controlling a company may also be LLC cannot be eliminated. etc.). The authority of the Management held jointly and severally liable for the The majority of contract law instruments Board must be expressly laid down in the company’s obligations if the company provided for in Russian law and Charter and the Chief Executive Officer goes bankrupt through their fault. discussed in the “Contract law” section acts as Chairman of the Board. In recent years, the legal framework has may be used in a shareholders’ changed to expand the application of agreement (representations, Fiduciary duties of management joint and several liability. For instance, indemnities, securities, etc.). In CEO-focused corporate governance has the rules allowing the imposition of addition, the particular characteristics for a long time impaired the protection joint and several liability under the of individual companies must be taken of shareholders in Russian companies. Bankruptcy Law have been significantly into account. Since any deal to transfer Chief Executive Officers are deemed elaborated and the LLC Law (which a participating interest in an LLC must the “decision kings” and this has led regulates the most common form of be notarized, a shareholders’ agreement

18 Doing business in Russia with incorporated call/put options must agreement) or a transaction made In addition to the provisions of the likewise be notarized in order to be in violation of the agreement (if it is LLC Law and the JSC Law, a company enforceable. proved that the other party knew or Charter may contain a list of additional should have known about the violation). transactions that require corporate A shareholders’ agreement may be approval. It is standard business practice concluded by all shareholders in a Any disputes arising from or in to restrict the powers of the company’s company or only some of them. The connection with a shareholders’ CEO through the extension of matters law also allows creditors of a company agreement in a Russian company are reserved for the higher management and other third parties with a legitimate deemed to be corporate disputes. If the bodies. Depending on the essence of interest (for instance, a person agreement is silent about competent the company’s business, the list may possessing an option to buy a share in forum and jurisdiction, the Russian include, inter alia, transactions involving the company) to become parties to such state arbitration court operating in the real estate, intellectual property, share an agreement. At the same time, the company’s locality will review and settle capital or securities of other companies, company itself cannot be a party, and such disputes. The opportunity to refer either irrespective of the transaction the law does not allow an obligation to such disputes to arbitration is limited amount or where the total price/book be imposed on shareholders to act in by the fact that the law only allows value exceeds a certain threshold. accordance with the instructions of the some such disputes to be considered by company’s management. permanent arbitration institutions (for Major transactions more information about the regulation The shareholders’ agreement is a Major transactions are any types of of arbitration please refer to the section confidential document and is not transaction (sale/purchase of assets, entitled “The court system”). disclosed to third parties or the cash borrowing/lending, issue of surety/ guarantee, property lease/rental, authorities unless the agreement places Extraordinary transactions restrictions or special conditions on etc.) that meet one of two criteria: Russian law lays down special rules the disposal of shares/participating quantitative and qualitative. The first for obtaining corporate approvals interests or grants parties rights that are refers to the ratio of the transaction for two types of transaction of an disproportionate to their stakes in the amount/book value of the subject of LLC and a JSC: major transactions capital of the company. In such cases, the transaction to the value of the and interested-party transactions. the fact that there is a shareholders’ company’s assets (25% or more). The Unless specified below, these rules are agreement in the company must be second means that the transaction mandatory, apply by default and cannot recorded in the State Register of Legal is outside the ordinary course of a be changed by a company’s Charter. Entities. The company itself must in any company’s business. This means that Nor may a transaction be entered into the company, in entering into the case be notified of the shareholders’ by a company’s CEO or authorized transaction, is not operating in the agreement. Failure to make such representative on behalf of the company ordinary course of business as carried disclosure allows parties not bound by in the absence of relevant corporate on prior to the transaction, and the the agreement to claim damages against approval obtained from the competent transaction results or may result in the the parties to the agreement. management body of a higher level termination of the company’s activities The law allows the parties to a (i.e., the General Meeting, the Board of or a significant change in the nature or shareholders’ agreement to challenge Directors or the Management Board as scale of its business. If either of these corporate decisions made in violation the case may be). A corporate approval two conditions is met, the transaction of the agreement (if all the company’s may be granted in the form of prior must be approved in accordance with shareholders are bound by the consent or subsequent approval. special rules.

Doing business in Russia 19 The rules vary slightly for LLCs and JSCs. If the transaction amount or book value of the subject of a transaction exceeds 50% of the company’s assets, the transaction must be approved by the company’s General Meeting. If the ratio is from 25% to 50%, the company’s Board of Directors must approve it (in JSCs — by law, in LLCs – if provided by the company’s Charter). The relevant company decision must specify the parties to the transaction, the subject, the price and other material terms. The law allows the decision to set minimum and maximum parameters of the transaction rather than exact figures and to approve alternative terms and conditions or a series of identical transactions, etc. The decision may also specify the period of validity of the relevant approval (if the decision is silent, the approval will remain in force for one year). that the company entered into the an agreement) more than 50% of the The LLC Law and the JSC Law set forth transaction in breach of the rules. voting rights at the General Meeting of certain exceptions where these rules do a controlled company or the right to Interested-party transactions not apply (e.g., when a company enters appoint its CEO and more than 50% of into a transaction under the terms Where certain persons affiliated with its Management Board. a company have a conflict of interest set forth in a preliminary agreement By default, the law does not require properly approved in advance or a regarding a particular transaction, special notification and approval rules mandatory approval for such transaction that the company is required transactions, but a special procedure to undertake by law). apply. Such persons include members of the company’s Board of Directors must be observed. Any persons who A major transaction concluded in breach and Management Board, the CEO, have a conflict of interest must inform of the law may be invalidated at the and controlling persons or persons the company’s General Meeting and suit of the company, a member of its with the right to give mandatory its Board of Directors of legal entities Board of Directors or a shareholder/ instructions to the company (i.e., that are controlled by them or in which shareholders owning at least one through a shareholders’ agreement, they hold management posts and in per cent of total voting power in the silent participation agreement, etc.). For transactions with which they may be company. This may be done within one these purposes, a “controlling person” recognised as interested parties (the year from the date when the claimant is a person who possesses directly or same applies to their close family became or should have become aware indirectly (through a shareholding or members).

20 Doing business in Russia If a transaction is deemed to be an An interested-party transaction may for certain activities, such as those interested-party transaction, the be invalidated if it is detrimental to requiring licences which are issued only company (i.e., its CEO) must notify in the company’s interests and the other to Russian legal entities. advance the shareholders, members party knew or should have known that of the Board of Directors and the the transaction was an interested-party Representative office Management Board. They may request transaction and requested corporate Under Russian law, representative additional information from the CEO. approval was not obtained. Other rules offices are not allowed to carry on for challenging such transactions are A transaction must be approved by a commercial activities, their main the same as for challenging major competent superior management body purpose being to gather information transactions. only at the special request of any of the about the Russian market and following persons: the company’s CEO, a generally to promote their parent member of the Board of Directors or the Representation of foreign companies. The same accreditation/ Management Board, or a shareholder/ companies registration procedures are applicable shareholders owning at least one Foreign companies may operate in to representative offices that are per cent of the total voting power in Russia without creating a local legal applicable to branches of foreign legal the company. If no request is filed, entity through the establishment of a entities. the transaction does not need to be branch or a representative office. Such approved. branches/representative offices are Contract law not bound by any Russian corporate If approval is requested, a relevant law rules on corporate governance, net For years, Russian contract law was decision must be adopted by the assets, extraordinary transactions and applied quite rigidly. Every provision of company’s General Meeting if the so on. the Civil Code that was not qualified by transaction amount or the book value of the words “unless the contract provides the subject of the transaction exceeds Branch otherwise” was treated by the court as 10% of the company’s assets. In other A branch of a foreign company must a mandatory provision that could not be cases, the Board of Directors must be accredited with the tax authorities changed by the parties. For instance, a approve it (in JSCs – by law, in LLCs – if (and with the Chamber of Commerce contractor and its client could not enter provided by the company’s Charter). and Industry as part of the accreditation into a risk-sharing agreement since the The LLC Law and the JSC Law set forth a process). The accreditation is unlimited law mandated the reimbursement of number of exceptions where these rules in time. In addition, a branch of a a contractor’s costs in any situation, do not apply (e.g., where all shareholders foreign company must be registered while long-term service contracts were have an interest in the transaction with the tax authorities, social funds compromised because the law had an and there are no other reasons for the and other state bodies. imperative rule that service agreements transaction to be deemed an interested- could be terminated at the discretion of The branch must have a manager or party transaction, etc.). any party at any time. head of branch who acts on the basis Notwithstanding the above, the Charter of a power of attorney issued by its In addition, the courts were very of a non-public company may establish parent company. Since a branch is reluctant to grant protection to a different procedure for approving not considered to be a separate legal such contractual mechanisms as interested-party transactions or may entity, all obligations and rights accrue representations, indemnities, options or determine that the relevant provisions of to the legal entity which created the break-up fees, as they had no distinct law do not apply to that company at all. branch. A branch may be inappropriate regulation in the Civil Code.

Doing business in Russia 21 The situation has changed in the last as bad-faith conduct, which gives the matter), the legal status and authority few years, however, first of all due to other party a right to claim damages. of the parties, the legal effect of an important amendments introduced The parties may also enter into an agreement, etc. . to the Civil Code in 2015 as part of a agreement establishing the procedure Russian law allows parties to agree major reform aimed at bringing the Civil for conducting negotiations, allocating on various types of performance of a Code closer to the civil law concepts negotiation costs, etc. contract: that are commonly used in standard All contracts must be made in writing business practice. The Russian Supreme • alternative performance, where a except for contracts between individuals Arbitration Court has also played an party may choose to exercise any of up to a maximum amount of RUB important role by issuing a number of a number of options specified in the 10,000 (approx. US$ 138). A contract rulings in which it protected freedom of contract to fulfil its obligations under is concluded when the party making contract and instructed the lower courts the contract an offer receives acceptance of the to restrict the treatment of legal rules as offer from the other party. Russian law • substitute performance, where a mandatory to a limited number of cases. allows parties to sign a separate option party may choose to use an alternate agreement where one party makes an method to the one provided for in the Negotiating and executing irrevocable offer to another party (for contract terms to fulfil its obligations an agreement or without consideration) to enter into a under the contract, and Russian law establishes freedom of principal contract under particular terms • optional performance, where the contract: parties are free to enter into an and conditions. obligee may request the other party to agreement and to determine its terms If, before, during or after the conclusion perform at any time at its discretion and conditions. A contract is deemed to of an agreement, a party makes a Failure to fulfil an obligation under a be concluded if the parties have reached representation to the other party contract gives the injured party a right agreement on all essential conditions concerning circumstances relevant to claim damages or a penalty, or to of the contract as prescribed by law to the conclusion, performance or terminate the contract (depending on or expressly specified by the parties termination of an agreement, and the terms of the contract and specific (typically the law only treats the subject- that representation proves to be provisions of law). Force majeure is matter as essential, i.e., the object to incorrect, the party concerned must acknowledged as a legitimate excuse for be sold, the property to be leased, the compensate or pay a penalty or the failing party. service to be rendered, etc.). There are damages to the non-breaching party. principal contracts that set out specific If the representation has crucial Russian law also allows business entities obligations of the parties, framework importance for the non-breaching to indemnify the other party against contracts that only set out the general party, the latter is also entitled to seek losses arising out of or in connection contours of contractual relations, and the termination of the agreement. In with certain circumstances agreed by preliminary contracts that record the the case of a representation made by the parties. parties’ intention to enter into a principal a business entity, the effect of giving a If such circumstances have occurred, the contract. false representation applies irrespective indemnified party must prove this fact The law requires the parties to negotiate of whether the representing party knew only. This is much easier than recovery a contract in good faith. The sudden and that it was false of damages, which under Russian law unjustified termination of negotiations Representations may relate to the terms requires an injured party to prove the when the other party could not and conditions of an agreement (e.g., amount of damage and the causal link reasonably have expected it is judged specific characteristics of the subject- between the damage and the actions of

22 Doing business in Russia the defendant. The indemnified party A contract between business entities liquidation of the debtor). The law must not act in a way that may serve to may allow for a unilateral waiver of allows any person to issue a guarantee increase losses sustained. obligations. If the party that is entitled of performance by another person, to waive some or all of its obligations whereas previously only banks could Invalidation or termination of notifies the other party of its intention issue guarantees. an agreement to do so, the contract is deemed It is essential to consider the formal Under Russian law, a contract may be amended or terminated respectively. requirements for the execution of deemed invalid only in certain cases The exercise of this right may be subject pledges under Russian law. A pledge of specified in the Civil Code (such as to the payment of a special break-up fee real estate (a mortgage) is subject to fraudulent or sham transactions, agreed by the parties in a special break- official registration in the Real Estate contracts made by an incapable person, up fee clause. However, such a clause State Register. No mortgage exists for under duress, in violation of the law, would be void if a party’s right to claim third parties until it is registered in the etc.). Besides these cases, a contract early termination or modification of the manner required by law. A pledge of is void when the parties have not been agreement is established by mandatory shares in a JSC must be registered in able to reach an agreement on all provisions of law a non-public register of shareholders essential conditions stipulated by the kept by a specialized registrar. A pledge law or by the parties themselves. Securing an agreement of participating interests in an LLC However, the law has an estoppel Russian law provides for various is subject to state registration in the principle whereby a party to a contract types of security for commercial and/ State Register of Legal Entities, and the that has accepted performance by the or corporate obligations, which may pledgee’s right of pledge arises from other party cannot claim the contract generally be classified into two groups: the date of such registration. Official as void by reason of the absence of (i) those specified in the Civil Code registration is also required for a pledge essential terms if this contradicts the (the most frequently used are: pledge, of IP rights in cases where IP assets principle of good faith and fair dealing. suretyship, independent guarantee and (e.g., trademarks, patents, etc.) are Nor may a party challenge a transaction security payment), and (ii) other legal subject to state registration in publicly if it knew or should have known of the instruments used in business practice as accessible state registers. security. circumstances on which the challenge is A pledge of movable property does based when it expressed its intention to Russian law has evolved substantially not require any state registration to be enter into the transaction. over recent years, making the regulation enforceable, but it may be recorded by a As a general rule, a contract may of security instruments more diverse Russian notary in a special register upon be amended or terminated only by and flexible. For instance, an escrow the pledgee’s or pledgor’s application. agreement between the parties. mechanism has been introduced The absence of such a record does not Unilateral amendment or termination whereby parties may deposit cash, affect the validity of the pledge, but, if a of a contract is possible only when the securities and other movable assets pledged asset with missing registration other party has materially breached it with an escrow agent (being any person is acquired by a bona fide third party, (meaning that the damage suffered by chosen by the parties). In another the pledge will terminate. Therefore, the injured party substantially deprives development, a suretyship now remains registration is highly advisable for such it of the benefit it expected to derive valid if the debtor is liquidated provided pledges as well. when it entered into the contract) or in that the creditor has presented a cases specifically provided by the law or claim to the surety in advance (earlier, the contract. the suretyship terminated upon the

Doing business in Russia 23 The financial system

Credit institutions, non-state pension funds, insurance companies and investment funds are the major pillars of the Russian financial system.

The Central Bank of the Russian professional participants is investment categories: (1) banks with a basic Federation (the Bank of Russia) acts advisers, who provide targeted licence, (2) banks with a general licence, as the single financial mega-regulator investment recommendations to their and (3) banks with a general licence responsible for oversight of the entire clients. which are systemically important (SIBs financial segment of the Russian or “too-big-to-fail”). Compared to banks economy, with authority extending from Banking system with general licences, banks with basic the supervision and licensing of financial licences are subject to restrictions on institutions, including exchanges, to Banking operations in Russia may be certain banking operations and dealings regulation and registration of securities carried out by licensed credit institutions with foreign clients. Such banks are only, which include banks and non-bank offerings. In addition, the Bank of Russia also restricted in their rights to open credit institutions. Banking operations is vested with the exclusive right to issue correspondent accounts with foreign are listed in the relevant statute and Russian national currency – the Russian banks and to have subsidiaries, branches include: accepting deposits (in cash rouble – and is in charge of overall and representative offices in foreign and precious metals) from legal monetary policy in Russia. countries. SIBs may perform the same entities and individuals, placement of operations as regular banks but are Cash transactions and transfers are funds and precious metals, opening subject to stricter capital requirements. carried out by financial institutions and maintaining bank accounts (in within the framework of the national cash and precious metals) for legal Non-bank credit institutions are payment system. Organized trading in entities and individuals, execution of permitted to perform limited types of securities, currencies and commodities money transfers and electronic money banking operations only as listed in their takes place via exchanges and trading transfers, cash collection services and licences and may only accept deposits platforms. Professional participants in foreign currency exchange. from, and open accounts for, legal the securities market such as brokers, entities (but are not allowed to carry out A banking licence may only be issued dealers, forex dealers, asset managers similar operations with individuals). and fund managers are the major to a Russian legal entity that satisfies financial intermediaries facilitating a vast number of requirements. All The Bank of Russia establishes securities and derivatives trading as licensed banks in Russia are entitled mandatory regulations applicable well as other financial transactions, to accept deposits from and open to banking operations and sets whilst registrars, depositories (including accounts for legal entities and financial ratios which Russian credit the National Settlement Depository) (subject to compliance with additional institutions must meet, approves senior and clearing institutions (including requirements) individuals, place funds management appointments at credit the Central Counterparty) are the key and perform money transfers. From institutions, holds their mandatory providers of financial infrastructure the regulatory standpoint, all banks in reserves and monitors their compliance services. Another category of Russia are generally divided into three with applicable requirements.

24 Doing business in Russia Russian credit institutions are required to comply with Basel III capital requirements. The introduction of the Basel III requirements resulted, in particular, in new regulation of subordinated financing for credit institutions, which provides for the mandatory release of credit institutions from their obligations in case of their failure to meet certain capital adequacy ratios, or the implementation of insolvency prevention measures in relation to the institutions concerned.

Foreign banks are not currently permitted to carry out banking activities in Russia directly or through branch offices, but they are allowed to set up Russian banking subsidiaries. The establishment and operation of such subsidiaries is subject to certain additional requirements (e.g., Russian citizens must make up at least 75% of the overall employee headcount and at least 50% of the management board if the chief executive officer is a foreign national). The other notable restriction, which applies to both Russian and foreign investors, is the requirement to obtain prior approval of the Bank of Russia when acquiring ownership or control over 10% (or more) of shares in a Russian bank, directly or indirectly.

Doing business in Russia 25 Foreign entities may not control more evaluating prospects for entering the and mechanisms for money transfers than 50% of the aggregate amount Russian banking market and providing (wire transfers) both for funds in bank of charter (share) capital of all credit advisory services to the bank’s clients. accounts and for electronic funds. institutions in the Russian Federation. Accordingly, representative offices of Balances held in various types of The proportion controlled by foreign foreign banks cannot carry out any bank accounts (including current entities is calculated by the Bank of banking operations in Russia. (settlement), escrow, nominee and Russia on an annual basis. The Bank pledge accounts) serve as the main of Russia is not allowed to register National payment system source of funds for money transfers. new credit institutions or approve The National Payment System Law acquisitions of credit institutions if it establishes the legal and organizational The National Payment System Law might result in an excessive share of framework for transactions within allows credit institutions to create foreign-controlled capital in Russian payment systems in the territory of private payment systems, which are credit institutions. the Russian Federation, including the subject to supervision and oversight by the Bank of Russia. As a general rule, Foreign banks are also allowed to payment system operated by the Bank the processing and clearing of payments establish representative offices in of Russia, the national payment card between Russian credit institutions the territory of Russia subject to the system, and other payment systems of within the private payment system may prior approval of the Bank of Russia. national significance, as well as private only be carried out by Russian entities. Representative offices of foreign banks payment systems and foreign payment Operators of private payment systems may only be established with a view to systems, and sets out the procedures are generally required to make and maintain security deposits with the Bank of Russia, unless they arrange for payments by international bank cards within Russia to be carried out through the national payment card system. The National Payment System Law also regulates the operations of “bank payment agents”, legal entities or individual entrepreneurs engaged by a credit institution to identify customers and to collect or make payments of cash or electronic funds on behalf of the credit institution. Operations of “nonbanking­ payment agents” responsible for the collection of cash from individuals on behalf of suppliers of goods, works or services are also subject to similar regulation under a different piece of legislation: the Law on Operations Involving the Collection of Payments from Individuals by Payment Agents.

26 Doing business in Russia Deposit insurance Failure to meet these requirements may It monitors compliance with regulatory A bank may only accept deposits from result in a bank being disqualified from requirements relating to the operations or open accounts for individuals, legal accepting deposits from or opening of insurance companies and their officers entities classed as “small enterprises”, accounts for individuals, legal entities and shareholders. The Bank of Russia and certain non-commercial classed as small enterprises, and certain is also authorized to pass regulations organizations if the bank is a member non-commercial organizations. determining classes of assets that are acceptable for the purposes of the of the national deposit insurance Member banks pay contributions to investment of insurance reserves. system in accordance with the Deposit the deposit insurance fund. These Insurance Law. contributions are calculated as a At present, foreign insurance companies The Deposit Insurance Law provides for percentage of the average daily balance may not provide insurance in Russia the creation of the Deposit Insurance of covered deposits maintained with a directly or through their branch offices, Agency (the “Agency”). The Agency acts particular bank and are subject to an but they are allowed to set up Russian upper limit. insurance subsidiaries. Operations of as the insurer in the deposit insurance such subsidiaries are generally subject system. Its responsibilities include to certain additional restrictions (for collecting insurance contributions, Insurance companies and instance, an insurance company with managing funds in mandatory insurance non-state pension funds foreign ownership exceeding 49% pools, establishing insurance premiums Insurance companies may not carry out insurance at the and monitoring insurance payments. In the Russian Federation, insurance expense of the public budget, insurance Any bank that has been granted a services may be provided only by in the area of public procurement or banking licence is entered in the licensed insurance companies. The types insurance of the interests of state and Agency’s register as a participant in the of activities that are subject to licensing municipal organizations). Furthermore, mandatory deposit insurance system. include property insurance, liability foreign entities or their subsidiaries insurance, accident insurance, health The Agency plays an active role in may not control more than 50% of the insurance, life insurance and business the implementation of bankruptcy aggregate amount of charter (share) risk insurance, as well as reinsurance prevention measures in relation to capital of all insurance companies in the and insurance brokerage. member banks: it may act as temporary Russian Federation. Foreign insurance administrator of troubled financial An insurance company may not or reinsurance companies may (if institutions, provide them with simultaneously hold licences to licensed to do so in their country of financial support (or support investors provide life insurance (a “life insurance incorporation) reinsure obligations of that assume responsibility for their company”) and property, liability and Russian insurance companies owed to rehabilitation), and even acquire shares business risk insurance (a “property their clients. Foreign insurance brokers in them. insurance company”). However, both may not conduct business in Russia types of insurance companies may directly or through their branch offices, Banks participating in the deposit provide health and accident insurance. except for insurance brokerage activity insurance system are subject to a related to reinsurance. Foreign insurance number of requirements, including The Bank of Russia is in charge of brokers may also set up Russian compliance with monitored mandatory regulating and supervising the Russian subsidiaries as insurance brokers. ratios (capital adequacy, liquidity, etc.) insurance sector. It sets certain financial set by the Bank of Russia, reliability requirements relating to the capital The Russian authorities are currently of financial accounts and reports, and adequacy of insurance companies and considering a draft amendment to transparency of ownership structure. the formation of insurance reserves. legislation that would allow foreign

Doing business in Russia 27 insurance companies of WTO countries opts for them to be managed by such in the Russian Federation” dated 24 July to establish branches in Russia to carry pension funds. Mandatory contribution 2002. Pension funds managing private out insurance activities. It is expected funds are subject to tighter regulatory pension schemes are subject to a lighter that this amendment will be approved requirements but may also manage set of restrictions applicable to their and will enter into effect in 2021 in line private pension schemes. Amounts of investment strategies. with Russia’s undertakings to its WTO mandatory state pension insurance The Bank of Russia acts as the major partners. contributions are insured by the Deposit regulating authority for pension funds. Insurance Agency. Non-state pension funds It sets certain financial requirements A new pension fund or mandatory relating to the capital adequacy of Licensed non-state pension funds contribution fund may only be pension funds and the formation (“pension funds”) are the structures established in the form of a joint stock of pension reserves. It monitors most commonly used to set up pension company. compliance by pension funds and asset and retirement schemes in Russia. managers (who may be engaged to Pension insurance may also be provided The discretion of mandatory manage a fund’s assets) with regulatory by insurance companies. contribution funds as to the choice requirements. of investment strategy for amounts Pension funds either manage private received as contributions to the pension schemes (“private pension mandatory state pension insurance Investment funds and asset funds”) or manage a portion of managers system is significantly limited by mandatory state pension insurance numerous restrictions set out in the An investment fund is the most common contributions (“mandatory contribution Federal Law No. 111-FZ “On the framework for professional asset funds”) if an employee for whose Investment of Funds for the Financing of management of financial assets for larger benefit such contributions are made the Funded Part of a Retirement Pension groups of investors in Russia. Private

28 Doing business in Russia asset management schemes may be set The Anti-Money Laundering Law narrow exceptions set out in the Anti- up based on a contract for direct fiduciary requires institutions that engage in Money Laundering Law for public management of financial assets by a monetary transactions, including bodies, certain publicly listed companies licensed asset manager or based on an all kinds of financial institutions and foreign unincorporated structures investment partnership agreement, which (in particular, credit institutions, without beneficiaries. This means that allows a managing partner(s) to manage pension funds, insurance companies, a regulated entity must ascertain the a pool of assets contributed for the professional participants in the securities identity of an individual who ultimately, purposes of investment by commercial market (excluding investment advisers), whether directly or indirectly, holds legal entities acting as limited partners. mutual fund managers, payment agents, shares in, or has a dominant interest An investment partnership agreement operators of investment platforms, of more than 25% in the capital of, a must be notarized and must comply with financial platforms and digital financial corporate customer, or who has the certain statutory requirements. Managing asset platforms, leasing and factoring ability to control that customer. partner activity is not per se subject to companies, etc.) and companies such Starting from 2021, the law allows licensing. as mobile operators, pawn shops, banks to perform the initial identification federal post offices, realtors, precious Investment funds are usually organized in of an individual customer or a CEO of a metal dealers, casinos and consultants the form of a mutual or “unit” investment corporate customer (who is authorized (collectively referred to as “regulated fund – a pool of assets (rather than a to act on behalf of the corporate entities”) to establish mandatory legal entity) that is jointly owned by customer without a power of attorney) internal protocols for client and payment the fund members (whose interests without his/her personal presence acceptance. are evidenced by certificates) and is by establishing and confirming the managed by a licensed fund manager In particular, regulated entities must accuracy of information about him/her based on the fund rules, including its exercise due diligence procedures to via the Russian unified identification and investment declaration, which are subject ascertain the identity of a customer authentication system and the Russian to registration with the Bank of Russia. and its ultimate beneficial owner unified biometric system in the manner Alternatively, investment funds may also (“the beneficiary”) and to monitor prescribed by law. Identification without be organized as joint stock companies. transactions for suspicious activity. personal presence may not take place if Operations of investment funds and their Identification of non-registered trusts, the bank has any suspicions regarding asset managers are heavily regulated by funds or similar structures also entails either the customer or its operations / the Bank of Russia, which, among other identification of their name, registration transactions (e.g., suspicions of things, specifies the categories of assets and taxpayer data, jurisdiction, connection to money laundering or the in which the fund manager is permitted composition of assets, settlors and financing of terrorism). The Bank of to invest. managers (trustees). Russia is entitled to establish limits on “Know Your Customer” procedures As a general rule, identification of an transactions and operations performed individual customer is required unless by a bank with customers identified The Anti-Money Laundering Law is without the personal presence. the primary legislative act in Russia the amount of the operation is below aimed at preventing money laundering RUB 15,000 (approx. US$ 207) or Regulated entities must identify and activities and the financing of terrorism, the equivalent in foreign currency. report transactions falling under and is supported by numerous Higher thresholds are set for operations mandatory control to the Federal recommendations, binding instructions involving jewellery. Financial Monitoring Service, the and regulations of the Bank of Russia Identification of the beneficiary is designated monitoring authority. Those and other authorities. required for all customers with certain transactions include, among others,

Doing business in Russia 29 (i) cash transactions, acquisitions of legislation. Preventive measures may Automatic exchange precious metals and precious stones, and include issuing an order to cease a operations under leasing agreements to violation and provide the Bank of of tax information (CRS) the value of RUB 600,000 (approx. Russia with a compliance improvement Russia participates in the automatic exchange of financial information based US$ 8,296) or more, (ii) postal programme, and establishing additional on the OECD’s Common Reporting remittances and refunds of unused monitoring measures. Enforcement Standard (CRS) for countries that have balances of funds paid in advance for measures with respect to credit signed up to the automatic exchange communications services to the value of institutions may also include the system. This means that RUB 100,000 (approx. US$ 1,383)or imposition of a fine and the withdrawal more, and (iii) any immovable property of their banking licence. • Russian banks and financial institutions transactions amounting to RUB 3 million are obliged to disclose information on (approx. US$ 41,482) or more, or the clients that are tax residents of other equivalents of these amounts in foreign FATCA implementing countries participating in the CRS to currency. If one of the parties to a legislation the Russian tax authorities, and transaction is suspected of being linked The United States Foreign Account • the Russian tax authorities exchange to terrorist activity, the transaction is Tax Compliance Act (“FATCA”) the information received with the subject to mandatory control regardless requires foreign financial institutions, tax authorities of other participating of the amounts involved. among other things, to perform due countries. Regulated entities, as well as investment diligence procedures with respect to Russia began to exchange financial advisers, exchanges, trading platforms, their customers and report certain information in September 2018. At the clearing organizations and central information to the competent authority end of 2019 the Federal Tax Service counterparties, are required to identify in the United States. approved a new list of countries with and report to the Federal Financial Russian legislation allows Russian which information is automatically Monitoring Service transactions that they financial institutions to adopt and exchanged. The new list includes 77 suspect are related to money laundering implement policies and procedures that countries and 12 territories13. or the financing of terrorism. In addition, are required for the purposes of FATCA. In addition, with effect from 2020 the the Federal Financial Monitoring Service Collection of additional information from Federal Tax Service removed Panama is vested with the authority to request clients and reporting of information and San Marino from the list of offshore from such entities certain information to foreign competent authorities are jurisdictions that do not co-operate with relating to their clients and transactions. allowed with the clients’ consent. In Russia in the area of the exchange of cases where a client fails to give consent The Bank of Russia may undertake information on tax matters. to the disclosure and reporting of preventive or enforcement measures information, the financial institution The Federal Tax Service publishes in relation to a regulated financial concerned is authorized under Russian a list of states of jurisdictions with institution involved in transactions which law to rescind the agreement with that which tax information is not exchanged. violate anti-money laundering client and close the relevant account. This includes 98 countries and 18 territories (see Appendix 5)14.

13 Federal Tax Service Order No. MMV-7-17/582@ of 21 November 2019 “On Approval of the List of States (Territories) with Which the Automatic Exchange of Financial Information is Not Carried Out and the Annulment of Federal Tax Service Order No. MMV-7-17/784@ of 4 December 2018” 14 Federal Tax Service Order No. MMV-7-17/511@ of 11 October 2019 “On Approval of the List of States (Territories) Which Do Not Provide for the Exchange of Information for Tax Purposes with the Russian Federation and the Annulment of Federal Tax Service Order No. MMV-7-17/786@ of 4 December 2018”

30 Doing business in Russia Basic principles of Russian be performed by the relevant digital There are also new rules for transacting platform operators. with individuals who do not have securities regulation the status of a qualified investor: to In the case of a public offering, the Regulation of securities offerings engage in certain transactions involving registration of a prospectus must securities or derivatives, such individuals Russian legislation prohibits the public take place simultaneously with the will have to pass a specific test. These offering or sale of any instruments registration of the securities issue itself. new rules will come into force on 1 April other than securities issued under The Securities Law provides for statutory 2022 (the Bank of Russia has suggested Russian law and, in certain cases, foreign safe harbours for private offerings, bringing the date forward to 1 October securities. The definition of a “security” which are not subject to the prospectus under the Securities Law encompasses registration requirement. These safe 2021). The offering of complex and/or shares (stocks), bonds, warrants and harbours include offerings totalling high-risk investment products to non- Russian depositary receipts. Subject to less than RUB 1 billion (approx. US$ qualified investors has become a matter compliance with certain requirements, 13,827,743 million) per year and closed of increasing concern for the Bank of any commercial paper may qualify as a subscriptions to less than 150 persons Russia, which recommends refraining security; however, Russian law prescribes (not including “qualified investors” from making such offerings at least until an exhaustive list of types of commercial and persons who a preferential right to the above-mentioned date. paper, which makes it impractical to issue purchase the securities in question). Requirements relating to the content securities in any form other than those of a prospectus include a prospectus expressly listed in the Securities Law. The Securities Law distinguishes the category of “qualified investors” and summary, information on the issuer As a general rule, offerings of securities prescribes certain instruments (e.g., and its subsidiaries, including financial in the Russian Federation, both public foreign securities) which may be offered statements, and details of the securities and private, are subject to mandatory only to qualified investors. Professional offered. Russian law allows issuers to registration with the Bank of Russia or, participants in the securities market, incorporate certain information into in certain cases, with other authorised credit institutions, investment funds, the prospectus by reference to prior institutions. Registration of share pension funds, insurance companies and filings, provide a draft prospectus for issues upon the establishment of joint clearing organizations are recognised comment prior to submission of the final stock companies may be carried out as “qualified investors” by law. Certain prospectus for registration and register by securities registrars and some corporations or individuals may be a shelf prospectus (which would be valid bond offerings may be registered by recognised as qualified investors if they for one year). an exchange or a central depositary. are classed as such by a broker or an asset Issuers who have registered a In these cases, the exchange, central manager. They may also be recognised as prospectus are subject to continuous depositary or securities registrar must qualified investors by operators of digital disclosure requirements in the form of assign an identification number to the platforms in order to be able to invest in a reports and disclosure of significant wider range of digital financial assets. share/bond issuance and send a relevant events that may affect the financial notification to the Bank of Russia. An offering of securities to any number position or business activities of the If the shares of a joint stock company of qualified investors is not considered a issuer, which should be posted on are issued as digital financial assets, public offering and does not require the an internet site and, in some cases, the registration of the issue must registration of a prospectus. disseminated through a newswire.

Doing business in Russia 31 Issuers of bonds may, and at the Secondary transactions involving exceed 25% of the overall share capital demand of bondholders are required to, restricted securities are only allowed of the Russian issuer and 50% of the convene meetings of bondholders that between entities that are qualified particular equity offering. are authorized to approve amendments investors by law or, via a broker, between to the bond placement terms, grant other qualified investors. Securitization waivers of bondholders’ rights and The above-mentioned restrictions on Russian legislation sets the regulatory appoint a bondholder representative securities of foreign issuers may be framework for such forms of (whose functions are similar to those lifted on the basis of a decision of the securitization as the issue of mortgage- of an indenture trustee). The Securities Bank of Russia made at the request of backed securities, securities backed by a Law prescribes situations where a Russian exchange submitted together pool of other financial assets (including the appointment of a bondholder with the prospectus prepared by the credit card debts, retail loans, etc.) and representative is mandatory, for issuer. Securities of a foreign issuer that infrastructure bonds backed by claims example in cases of collateralized are not restricted for public offering under contracts pertaining to long-term placements of public bonds. by applicable foreign law and are in investment projects. the process of being listed or already The Securities Law establishes special Regulation of secondary listed on an internationally recognised corporate governance and bankruptcy transactions foreign exchange (including NYSE, rules for securitization vehicles and sets Any secondary transactions involving NASDAQ and London Stock Exchange) out procedures for the issue of different securities that are subject to state may be admitted for listing by a Russian tranches of securities backed by the registration with the Bank of Russia, but exchange without the need to obtain same collateral. have not been registered, are generally permission from the Bank of Russia. prohibited. Where securities have been In the latter case, the foreign issuer Title transfer registration system registered by the Bank of Russia but no will be deemed compliant with the for securities prospectus is available for the securities Russian prospectus disclosure and From 1 January 2020, all Russian or the issuer is not subject to continuous continuous disclosure requirements if it securities may be issued only in disclosure requirements or, in the case meets the relevant requirements of the registered form. of equity securities, the issuer is not a internationally recognised exchange. public company, any public offerings or Russia has adopted a two-tier system Starting from 1 April 2022, securities of of title registration for registered sales of such securities are restricted. foreign issuers will have to comply with securities. Transactions involving all Other transactions involving securities additional requirements set for various such securities must be recorded in of Russian issuers are generally types of securities. The Bank of Russia a register maintained by a licensed permitted with no mandatory holding has issued recommendations for the registrar. Licensed depositaries are periods set in the Securities Law. transitional period. free to open nominee securityholder Securities of foreign issuers (as well as The placement of securities of Russian accounts with registrars or other a few types of Russian securities that issuers overseas and the establishment of depositaries and are authorized to are expressly designated for qualified depositary receipts or a similar program record transactions in respect of investors only) are deemed “restricted with respect to Russian securities may securities held by such depositaries as securities” in Russia and are subject to only take place with the permission of the nominees. Securityholders then are much tighter restrictions on secondary Bank of Russia. Currently, the number of free to choose to have the title to their transactions than registered securities shares offered overseas or deposited in securities recorded by the registrar or for which no prospectus is in place. a depositary receipts program may not the depositary.

32 Doing business in Russia The National Settlement Depository The Bank of Russia performs a Russia. It implements government policy has the status of the national Central supervisory function in relation on the securities market, regulates the Securities Depository (CSD) and as such to professional participants in the activities of professional participants in has an exclusive right to act as nominee securities market. In particular, it sets the securities market, and protects the securityholder in all registers of qualification requirements for senior rights of investors and shareholders. Its securities of issuers that are subject to managers and oversees compliance with major functions are as follows: the continuous disclosure requirement. internal control, internal audit and risk • Developing a regulatory legal No other Russian depositories (besides management procedures. framework for the securities market, the CSD) are allowed to open nominee Foreign financial institutions are including adoption of relevant accounts with the registrars of securities subject to restrictions on the public regulations of reporting issuers. offering (advertising) of their financial • Determining the key directions for the Russian securities underlying depositary services (including both licensed and development of the securities market receipts or similar foreign securities unlicensed services) or the public must be held in a “foreign depositary dissemination of information on those • Registering securities offerings, pro- program account”, which must be services in the territory of the Russian spectuses and reports on securities opened with a Russian depository that Federation. However, there are currently offerings has in turn opened an account with the no restrictions on foreign companies • Keeping appropriate records and central depository. Foreign depositories setting up Russian subsidiaries engaged ensuring the disclosure of information (custodians) are allowed to exercise in professional activities on the on the securities market voting rights only with respect to shares securities market (with the exception of underlying such foreign securities forex dealers, which may not be owned, • Licensing and overseeing professional whose holders have been disclosed to directly or indirectly, or controlled by participants in the securities market an entity incorporated in a jurisdiction the Russian issuer. • Performing inspections, issuing man- that does not disclose information on datory instructions, bringing adminis- Professional participants financial transactions). in the securities market trative actions and taking other legal Foreign financial institutions may also action The Securities Law identifies several establish representative offices in the types of professional participants territory of the Russian Federation In addition, the Russian market has a in the securities market (brokers, subject to the prior approval of the Bank number of self-regulatory organizations dealers, forex dealers, asset managers, of Russia. Representative offices may that unite professional securities market investment advisers, depositaries and be established only for the purpose of participants and develop uniform registrars). Activities of professional evaluating prospects for entering the standards for their members’ activities. participants in the securities market Russian market and providing advisory PARTAD is the Professional Association may only be carried out by Russian services to clients (thus, they may not of Registrars, Transfer Agents and legal entities licensed by the Bank of carry on any activities of a professional Depositaries; the National Securities Russia, with the exception of investment participant in the securities market in Association (NFA) mainly unites advisers, who are not subject to Russia). banks that are licensed as professional licensing requirements and must securities market participants; and obtain membership of a self-regulatory Control and supervision on the members of the National Association of organization and be registered in the Russian securities market Stock Market Participants (NAUFOR) register of investment advisers held by Control and supervision on the securities also include non-bank securities market the Bank of Russia. market is carried out by the Bank of participants.

Doing business in Russia 33 Currency control

General principles • Legal entities registered under All other persons and entities are Russian law and foreign branches, deemed non-residents, including Russian currency control rules representative offices and other Russian branches, representative offices differentiate requirements for Russian subdivisions of Russian legal entities, and other subdivisions of foreign legal currency residents and currency except for legal entities registered as entities. International companies that non-residents, and currency residence international companies are registered as Russian legal entities criteria are different from those through redomiciliation are considered established for tax purposes. • Diplomatic missions, consular non-residents for currency control The following persons are considered offices and other official purposes. Russian currency residents: representative bodies of Russia located abroad, and Transactions between residents and • Russian nationals non-residents involving payments • The Russian Federation and its • Foreign nationals and stateless persons in roubles and foreign currency or regions and municipalities who live permanently in Russia on the securities denominated in roubles and basis of a residence permit foreign currency may be concluded without limitations, except for the sale and purchase of foreign currency and cheques, which must take place through authorized organizations. Foreign currency transactions between Russian residents are prohibited (i.e., payments between them must be made in Russian roubles), although the law does make some exceptions. Residents may use foreign currency to set the price of a contract, but payment must be made in roubles. Payments in foreign currency are generally permitted between non- residents without restrictions (the purchase and sale of securities between non-residents is also permitted although Russian securities and anti-monopoly regulations may apply).

34 Doing business in Russia Currency control the essential terms (i.e., amount, • Foreign currency and cheques currency and interest rate) remain (including traveller’s cheques) in restrictions for Russian unchanged foreign currency may be purchased residents and sold only through banks that • Russian residents must notify the have obtained a special licence to Russian currency control rules include tax authorities of the opening of carry out operations involving foreign three key requirements: (i) cash received overseas bank accounts with foreign currencies by residents from export transactions banks and other non-Russian financial must be repatriated to Russia; (ii) institutions. They are also required to • Individuals must declare currency accounts opened with foreign banks file notices on the opening or closing in the event that they take it out of by Russian residents are subject to of such accounts and to submit Russia in excess of certain thresholds. restrictions, and (iii) transactions entered regular account activity reports for into by residents with non-residents must such accounts (legal entities on a The operation of an overseas bank be reported to local banks. quarterly basis and individuals on an account by a Russian resident is subject At the same time, there are no limits annual basis) to the tax authorities. to significant restrictions – a resident may receive money in such an account on exchanging foreign currency for This requirement does not apply to only in a limited number of cases. For companies and individuals; a foreign Russian nationals who spend more individuals, these include: investor is not required to have a than 183 days in a calendar year capital account; capital injections and outside of Russia or when transaction • the minimum deposit required to open dividend distributions are not restricted; activity and the remaining balance an account no approval from a currency control of the Russian national’s account • salary and other payments made by authority is required for any operation. (opened with a bank/other financial a non-resident under an employment institution in a jurisdiction expressly contract in connection with the The main requirements for operations referred to by law) does not exceed performance by the resident of between residents and non-residents are. RUB 600,000 (approx. US$ 8,296) employment duties outside Russia • Residents must repatriate rouble • Residents must file contracts with • interest on the balance of such (with certain exceptions) and foreign non-residents and other supporting accounts currency proceeds from export documents (such as amendments to • cash deposits transactions and recover currency contracts, acceptance certificates and • cash from currency exchange paid to a foreign party under import so on) for registration to a Russian transactions using funds on the transactions that were not completed. bank which handles payments under account The repatriation obligation also a transaction. Registration is not applies to the repayment of loans required for import transactions and • pensions, stipends, alimony and other (irrespective of the loan currency) loans with a value below RUB 3 million social payments granted by residents to non-residents, (approx. US$41,482) or for export • insurance payments made by non- although it does not impact loans transactions with a value below RUB 6 resident insurers granted before April 2018 for which million (approx. US$ 82,965) • funds repayable to resident

Doing business in Russia 35 individuals, including funds Liability for violation Examples of violations of Russian transferred in error and money currency control rules: refunded to a resident individual for of currency law • A foreign contractor does not pay its goods purchased from a non-resident The penalties for violating currency Russian supplier on time, or does not and returned or for paid services regulations can be severe. The deliver goods to its Russian customer provided by such non-resident Administrative Offences Code states that unlawful currency operations and does not return advance payments • proceeds from sales of precious and non-compliance with currency for those goods on time (i.e. the metals (held in foreign accounts) if repatriation limitations are subject to an Russian resident is unable to comply such proceeds are credited to bank administrative fine of from 75% to 100% with the repatriation obligation) accounts with foreign banks by reason of the amount of the non-compliant • A Russian resident has entered into a of legal requirements in the relevant operations. Moreover, for certain currency forward transaction, swap jurisdiction offences, additional criminal liability or option with a party other than a • Amounts received by a resident may be imposed on the executives of Russian bank. individual from non-residents may the offending legal entity, including In view of the above, in any situations be credited without restrictions to imprisonment. Non-compliance by where a Russian entity is involved in any accounts held with EAEU banks Russian banks with currency control debt forgiveness, net-off or other similar or with banks of a country that regulations may result in the revocation operation with a foreign company, it is automatically exchanges financial of their licences. However, only Russian strongly recommended that currency account information with Russia currency residents are liable for such offences. control be given due attention in advance of entering into any substantial transactions.

36 Doing business in Russia Competition law

Merger control test, which must be met simultaneously The Federal Antimonopoly Service (FAS) in order for a transaction to be subject is the Russian competition authority Russian law requires certain to merger control. involved in most merger control transactions involving Russian and procedures. Sometimes the competition foreign companies, as well as assets The transaction test is met if the authority performs these functions located in Russia, to be pre-approved transaction itself meets specific criteria, alone, while at other times different by Russian public authorities before the such as the acquisition of more than authorities are involved in the process deal can be closed. These pre-approval 25/50/75% of the shares in a Russian as well, such as the Bank of Russia regimes may be subdivided into the company, or the acquisition of more (for financial institutions) or the Russian following groups: than 20% of a seller’s assets, or the signing of a joint venture agreement Government (for foreign investments • Competition sector between competitors. in strategic companies). • Natural monopolies sector The parties test is met if the parties The specific role of each authority depends on the sector-specific • Financial institutions sector involved in or undertakings relevant to the transaction meet specific financial regulations applicable to each • Foreign investments sector criteria or other relevant requirements, transaction. For instance, the competition authority may be the only A particular transaction may fall within such as the total book asset value of the regulator making the final decision on a the scope of one or several sector- acquirer, the target and their groups transaction, or it may be one of several specific regulations at the same time, (typically RUB 7 billion combined or approx. US$ 97 million), or their total authorities each making its own decision and sometimes the respective pre- turnover during the last financial year on the transaction, or it may act as an approvals must be obtained in a specific (typically RUB 10 billion combined intermediary between the parties seeking order for clearance to take full effect. or approx. US$ 138 million) or pre-approval and a different public The merger control rules are complex significant turnover in Russia (typically authority. The sector-specific regulations and tightly intertwined with one another, RUB 1 billion or approx. US$ 13,8 define the exact range of authorities but generally cover the following million), or competition between the involved in the merger control process types of transaction: (a) acquisition parties to a joint venture agreement. and their respective roles. of shares/participating interests, (b) It is worth noting that transactions While rules for financial markets acquisition of control, (c) acquisition effected outside of Russia, also known are outlined in the section entitled of assets, (d) corporate restructurings as foreign-to-foreign transactions, are “The Financial System” above, Russian (incorporations, mergers, spin-offs, caught within the scope of merger law also sets special rules for foreign etc.), and (e) joint ventures. control and may be subject to pre- investments in particular areas of The above transactions are subject to approval by Russian public authorities. the Russian economy which the state merger control if certain financial and/ The sector-specific regulations define views as having strategic significance or business-related thresholds are met. which thresholds must be met in each and, therefore, requiring a special These thresholds can be defined as (a) particular case for a transaction to be protection regime. There is a list of the transaction test and (b) the parties subject to merger control. over 40 types of activity (sectors)

Doing business in Russia 37 with strategic significance. Foremost during the past few years, and recent the financial industry. In some instances, among them are the environmental cases demonstrate the regulators’ intent dominance is presumed regardless of sector, the nuclear industry, military to broaden the scope of permitted the market share, such as in the natural equipment and industrial explosives, remedies as much as possible. More monopolies sector. Where dominance the aviation and space sectors, mass often than not, a transaction would be is presumed, Russian competition law media, natural monopolies, etc. The approved with remedies instead of being enables the respective undertaking to law limits or prescribes a special regime prohibited altogether. prove the absence of dominance despite for the acquisition by foreign investors meeting the formal market share of control over Russian companies Abuse of dominance threshold or engaging in a particular which carry on activities in the above- type of business. mentioned strategic sectors. Russian competition law provides for certain restrictions applicable To prevent undue behaviour of dominant The timeline for the review of a merger to undertakings having substantial undertakings, Russian competition law control application may vary depending influence in the market. Where defines numerous types of action such on the sector-specific regulations such influence enables one or more undertakings may not perform, such as: applicable. The parties seeking pre- undertaking to determine the terms (a) predatory and excessive pricing, (b) approval should consider the timeline of circulation of products in the tying and bundling, (c) discriminating while preparing for the transaction: relevant market, or to eliminate other and imposing unfair conditions, (d) sometimes, the review may take up to undertakings from the relevant market, setting different prices for the same a year before a final decision is made. or to create market entry barriers, products without justification, etc. Such However, for the most common merger such undertakings may be considered behaviour is illegal only if it does or control procedures it usually takes the dominant. may lead to restriction of competition, regulators 1 to 3 months to review and or to the infringement of interests of a make the final decision. The preparation Dominance is generally presumed third party concerning business or of where an undertaking holds a market of a formal merger control application consumers at large. share in excess of 50%. Dominance takes time, and it is normally prudent may be established by the competition Specific rules aimed at the prevention for the parties involved to factor in 2-4 authority where an undertaking holds of abuse of dominance, also known as weeks for this exercise. a market share between 35% and 50%. non-discriminatory access rules, may be Russian law enables regulators to Dominance may also be established additionally established by a federal law approve transactions subject to for undertakings with a market or the Russian Government. These rules performance by the parties involved share between 8% and 35%, but only may be introduced not only following or their affiliates of certain mandatory if collective dominance is present. a formal abuse of dominance case by actions, such as divestiture of assets, Collective dominance implies that the competition authority, but also if or execution of certain business several undertakings have a decisive there is substantial risk of a dominant decisions with the regulator’s consent influence on the market, and their joint undertaking misbehaving. The rules may only, or regular reporting to the market share must exceed either 50% provide for particular contract terms a regulator. Regulators usually impose or 70% depending on the quantity of dominant undertaking must observe, these mandatory rules, also known those undertakings. In addition, other public disclosure of information relevant as remedies, if major international federal laws may provide for and the to entering into contracts with such companies are involved in a particular Russian Government may introduce undertaking, a detailed procedure for transaction. It is worth noting that special criteria of dominance in distinct applying to a dominant undertaking to remedies have become more complex sectors, such as the telecom sector or enter a contract, etc.

38 Doing business in Russia Anti-competitive agreements, concerted actions and illegal coordination Russian competition law prohibits agreements involving undertakings or public authorities which may restrict competition. These agreements may be divided into the following categories for convenience: • Horizontal agreements • Vertical agreements • Other agreements • Agreements with public authorities

Cartels Horizontal agreements, also known as cartels, involve undertakings competing in the same market. Competition between undertakings is established not only based on the respective undertakings’ sales activities, but also Russian competition law provides for abuse of dominance are in compliance on their purchasing of products in the certain exemptions from the above with competition law provided that the same market. A cartel may be present prohibitions, which may vary in each following conditions are simultaneously where no formal contract has been individual case. Generally, the use of met: (a) competition in the relevant made as competition law broadly defines intellectual property is outside the scope market cannot be eliminated, (b) the an agreement as an arrangement made of the dominance-related provisions restrictions imposed on third parties in writing or orally. of competition law, and undertakings are aligned with the objective of such Not all agreements between competitors may freely acquire or dispose of their actions, and (c) such actions (i) may are illegal. Russian competition law intellectual property as they see fit. or actually do lead to an improvement defines a wide variety of consequences However, limiting trade in goods through of the manufacturing process or sale a cartel must actually or potentially commercial contracts for the use of of products, promote economic and lead to in order to be considered intellectual property may still breach technological advancement or increase anti-competitive, such as (a) price or Russian competition law and is strongly competitive advantages of Russian incentive fixing, (b) price manipulation opposed by the competition authority. products, or (ii) provide customers in tenders, (c) market allocation, (d) Dominant undertakings may also claim with advantages proportionate to those refusal to deal with specific customers/ that some actions formally considered acquired by the dominant undertaking. suppliers, and (e) output restriction.

Doing business in Russia 39 A cartel is prohibited per se, which are permissible in vertical agreements Competition law also expressly prohibits means that adverse impact on by default, also known as general certain specific agreements limiting competition is presumed and need block exemptions, provided that competition in certain industries, such not be established by the competition certain market-related criteria are met as the power supply sector. Other authority. The mere conclusion of a by the parties to such agreements. agreements limiting competition may cartel that meets either of the above Unlike cartels, vertical agreements are be considered illegal if they may or do criteria is illegal regardless of its actual considered illegal only if they may or do lead to restriction of competition, and implementation. In some instances, have an adverse effect on competition, competition law does not prescribe Russian competition law permits cartels and merely reaching a formally anti- a definitive set of anti-competitive considered joint ventures, but the competitive vertical agreement does not consequences such agreements must permissibility of such agreements is constitute a violation of competition law. entail. Such agreements can benefit considered by the competition authority from permissibility criteria provided for on a case-by-case basis. Other agreements in competition law, sometimes including Other agreements between those applicable to vertical agreements. Vertical agreements undertakings limiting competition are Vertical agreements involve also prohibited by competition law. Agreements with public authorities undertakings at different levels of These include all agreements that do Agreements between business entities the supply chain, i.e., where one not formally fall within the definition and public authorities, or between undertaking supplies products and the of horizontal or vertical agreements. different public authorities, may also other purchases such products. Vertical agreements are prohibited if they may or do lead to resale price fixing or a prohibition on dealing in competing goods. These restrictions are limited in that maximum resale price fixing is permissible by default and a prohibition on dealing in competing goods is permissible for resellers trading under a supplier’s trademark or other means of individualization. Besides the above, competition law permits vertical agreements between undertakings with low market shares or acting under franchising agreements. There are also legal means of proving the permissibility of vertical agreements even if they technically conflict with competition law, such as the promotion of Russian products worldwide and the provision of comparable benefits to consumers. The Russian Government has also defined a set of conditions that

40 Doing business in Russia sometimes restrict competition. Concerted practices, like vertical and Unfair competition Such anti-competitive agreements other agreements, can benefit from Russian competition law prohibits are prohibited and, as with other anti- permissibility criteria provided for in unfair competition, i.e., actions of competitive agreements described above, competition law. competition law does not prescribe undertakings (a) aimed at acquiring a definitive set of anti-competitive Coordination competitive advantages, (b) in violation of applicable laws, normal business consequences such agreements Coordination of business activities practices or requirements of good must entail. This category includes, of undertakings by a third party is faith, rationality and fairness, and (c) inter alia, agreements pertaining to prohibited if it leads to the restriction that have or may cause damage to public procurement tenders which of competition. Coordination is defined competing undertakings or hurt their the competition authority oversees. as the orchestration of undertakings’ business reputation. More often than not, anti-competitive actions by a third party which neither agreements between procuring belongs to the same group as the It is within the discretion of the authorities and bidders lead to criminal coordinated entities, nor operates in the competition authority to decide investigations into alleged corruption by market where the undertakings’ actions whether a particular action represents criminal enforcement authorities, along are being coordinated. unfair competition, as competition with administrative investigations by the law defines such acts rather broadly. competition authority. As with concerted practices, However, some types of action, such as coordination must actually lead to the distribution of false, inaccurate or Concerted practices restriction of competition in order to distorted information about products be considered illegal. Coordination, Concerted practices of business entities or businesses, inaccurate comparison like concerted practices and other or public authorities which lead to of products or misappropriation of restriction of competition are prohibited agreements, can benefit from intellectual property, are expressly by Russian competition law. Concerted permissibility criteria provided for in provided for in competition law. practices are defined as actions of competition law. undertakings in the relevant market that (a) achieve goals beneficial to Exceptions State aid their participants, (b) are known to There are several exceptions to the Russian competition law imposes the participants in advance due to a above prohibitions. For instance, the certain requirements on state aid, public announcement by either of the use of intellectual property rights is not i.e., the provision of specific privileges participants, and (c) are caused by covered by the above prohibitions at to undertakings over other market actions of the participants and are not all. The agreements and other actions players by governmental and municipal related to market processes affecting all outlined above involving companies authorities through the transfer of market players. under common control or involving property or by granting preferences Actions performed pursuant to the parent companies and subsidiaries and guarantees. Russian competition agreements do not fall within the scope thereof fall outside the scope of law establishes a special procedure of concerted practices and are covered the above prohibitions. Lastly, any for granting state aid, which involves by agreement-related provisions of restrictions provided for in agreements obtaining pre-approval by the competition law. Unlike agreements, reviewed and approved by the competition authority for the provision concerted practices must actually competition authority under a special of preferences. lead to restriction of competition pre-approval procedure are not subject in order to be considered illegal. to the above restrictions either.

Doing business in Russia 41 Violation of the applicable procedure supply of food, (d) maximum deferred These rules are quite similar to those may result in the competition authority payment terms, and (e) a prohibition outlined in Russian competition law, initiating a formal case against the on combining the supply of food and namely anti-competitive agreements, relevant public authority. If held liable, additional related services in supply illegal coordination, abuse of the relevant public authority may be agreements. dominance, and unfair competition. required to terminate the preferences. The competition authority oversees However, there are several exceptions: As with agreements involving procuring compliance with trade law. While the competition rules of the Union do authorities, state aid provided in breach not necessarily aimed at protecting not prohibit concerted practices and do of competition law leads to criminal competition in the food market, the not cover merger control, state aid or investigations against public officials by above trade rules are rigorously public procurement tenders. criminal enforcement authorities as well enforced by the authority due to the The competition rules are enforced by as administrative investigations by the sensitive nature of food pricing for the Eurasian Economic Commission, a competition authority. consumers. Failure to comply with the supranational enforcement authority requirements often leads not only to a overseeing compliance with competition Trade law formal investigation and administrative rules within the Union. Unlike national proceedings, but also to a public Russian law lays down specific competition authorities, the Commission announcement of the violation by requirements applicable to the sale of enforces competition rules on cross- the competition authority. This may food. Undertakings engaged in retail border markets, i.e., markets covering entail significant reputational risks for and wholesale trade in food are subject the territory of several member states. undertakings along with substantial to a set of prohibitions similar to those Distinct additional criteria apply administrative fines and an order outlined in Russian competition law, depending on the type of alleged to bring commercial contracts into albeit some restrictions are of a purely violation to establish the jurisdiction of compliance with Russian trade law. technical nature aimed at preventing the Commission over each individual excessive pricing of food sold to case. consumers. The Eurasian Economic Decisions of the Commission may be The key restrictions applicable to Union challenged in the Court of the Union, retailers and suppliers of food are as Russia has since 2015 been a member a separate supranational authority follows: (a) mandatory public disclosure of the Eurasian Economic Union, a overseeing, among other matters, of material terms of contracts for regional international organization compliance of the Commission’s the supply or acquisition of food and aimed at the promotion of economic decisions with Union legislation. If a criteria for the selection of business relations and the harmonization of the petitioner is unhappy with a ruling made partners, (b) limitation of the total national legislation of Russia, Belarus, by the Court, a formal appeal may be value of bonuses payable to retailers Kazakhstan, Kyrgyzstan and Armenia filed with the Court’s Appeals Chamber. for purchase volumes, promotion, (the current members). Among other Rulings of the Appeals Chamber are packaging and processing of food and matters, the Union has adopted a final and are not subject to further for services rendered by retailers to separate set of competition rules which revision or challenge. suppliers, (c) prohibition of bonuses, must be observed by the member states, incentives or other payments for entry their public authorities and undertakings or anything not directly related to the operating within the Union.

42 Doing business in Russia Licensing

Permits for certain activities Under Russian law, certain types of activity may be carried out only by a person who has obtained the relevant licence or other type of permission. Licences allow recipients to engage in certain activity on a permanent basis (typically with a lifetime licence). Various statutes regulate licensing requirements. The key federal law is the Licensing Law, which contains uniform licensing rules and covers a number of industries such as the production of pharmaceuticals, air, sea, car or rail passenger carriage, the collection, processing and utilization of waste, commercial security services, and so on. There are a number of industry-specific laws with particular licensing rules for such areas as the production of alcoholic products, banking, insurance, the sale of electricity, and others. Licences are issued by the state authorities which are competent to regulate a particular industry Another type of permission is an authorization certificate for a particular activity issued by a self-regulatory organization (SRO) competent under the law to authorize activity in a specific sector. Membership of an SRO substitutes the licensing regime in certain areas such as audit services,

Doing business in Russia 43 professional appraisals,cadastral them to share liability. Unlike licences facility or a permit (licence) for access surveying and construction activities, issued by state authorities, some laws to the subsurface for the exploration and generally, apart from the SRO regulating access to SROs expressly or production of minerals. The issue certificate, no other licences or allow foreign legal entities to join of a permit may be accompanied by certificates are required to carry out the Russian SROs. additional terms and conditions: to activity concerned. complete construction by a specific Meanwhile, a permit is a type of deadline, to register a hazardous In order to obtain a certificate, a person permission which is required for a facility in a special state register and must join the SRO and comply with certain activity limited by time, for insure risks related to its operation, or its requirements, i.e., SROs serve as instance, a permit for the construction to comply with the requirements of a professional clubs in the industry which of a particular building, a permit for subsurface licence as described in more control their members and enable the operation of a particular hazardous detail below.

Licences for subsurface access A person who plans to extract minerals must obtain a licence from the state: all mineral resources located in the territory of Russia or its continental shelf and lying beneath the surface are deemed to be the property of the state. Exploration or production of any mineral requires a state licence and only the owner of a land plot may extract common minerals such as sand, gravel, limestone, clay, chalk, etc. on that land plot for personal, domestic and other non-business-related needs without a licence. A licence is granted to a specific person for a specific underground area to search for, explore or extract a specific mineral over a specific period of time. The licence typically contains a number of terms and conditions which the licensee must meet, such as the performance of a set amount of exploration work, the building of certain infrastructure or the extraction of a set quantity of minerals.

44 Doing business in Russia A licence may be transferred to another violations that occurred prior to its • These requirements also apply to person only in certain cases specified ownership. Nevertheless, there is a risk new facilities starting from 1 January in the law. In practice, therefore, most of inheriting environmental liability if 2019 and facilities under capital licences are transferred together with the environmental violation resulted reconstruction from 2020: it will not their holders. in environmental damage and such be possible to launch these facilities damage continues to exist after the into operation without a CEP. change in ownership of the asset. In this Failure to obtain a CEP or to implement Environmental permits case, the environmental damage may obligatory best available technology Under Russian law, any activity that be treated as a continuing violation and results in increased environmental fees may have an adverse impact on the the current owner may be held liable for (100 times the amount). There are environment is subject to (a) the past violations (particularly if it is not certain state support measures allowing issuance of a special permit or a licence, possible to allocate liability for damage). financing and tax incentives to be (b) the establishment of limits with In such cases, the current owner may obtained for the implementation of best respect to the amount of such impact/ have the right to claim recourse against available technologies and the fulfilment pollution, (c) the payment of a fine for the previous owner, subject to any of environmental obligations. negative impact, and (d) the imposition contractual arrangements they might of a liability in case of violation. have. Recycling requirements Environmental permits allow an entity As a result of the entry into force of to conduct activities that may have a recent amendments to environmental The concept of extended producer negative impact on the environment. laws, all production and other industrial responsibility (“EPR”) covers a broad They consist of permits for the general facilities having a negative impact upon range of consumer goods (electronics, use of natural resources (e.g., a water the environment are divided into four motor oils, clothes, tires, kitchenware, use agreement) and permits for specific categories (I, II, III, IV) depending on etc.) as well as paper, glass, plastic, negative impact on the environment the level of such impact. Any entities metal, and wooden packaging. performing activity at facilities of (e.g. water or air pollution). Producers/importers are required to category I (those having a significant arrange the collection and utilization The Environmental Protection Law negative impact and falling within fields (recycling, regeneration or recovery) of has a “pay-to-pollute” provision that requiring the implementation of best waste from used goods in line with the requires a person to obtain a permit available technology) are obliged to: for an adverse environmental impact utilization targets for the relevant goods • obtain by 1 January 2025 an and packaging, otherwise they have to caused by its activities and to pay a fee integrated ecological permit (so- for that permit. In addition to paying pay a quasi-tax called an eco-fee. They called “complex ecological permit” must also submit certain mandatory the pay-to-pollute fees, a person must or “CEP”), which replaces various also remediate any environmental reports by 1 April of each calendar different ecological permits (for most year; the eco-fee calculated based on damage caused by its activities “dirty” production facilities the time those reports is due by 15 April. All in excess of the permitted limit limit for submitting an application for these obligations apply to all goods and (regardless of the amount of pay-to- a CEP is 31 December 2022), and must be fulfilled yearly. Goods imported pollute fees it has paid). • implement the best available for personal use and exports of waste A person acquiring land or facilities will technology approved for the relevant products out of Russia are not subject generally not be liable for environmental industry to EPR.

Doing business in Russia 45 Data Protection and Privacy

Personal data protection is regulated in Russia by the Personal Data Law. In addition, in 2013 Russia became a party to the European Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data.

Personal data is defined by the Personal Russian data protection laws apply to • The consequences of non-compliance Data Law as any information relating all data operators and third parties with the requirements of the Personal to a directly or indirectly identified or acting under the authorization of data Data Law include (i) restrictions on a identifiable individual (data subject). operators. company’s operations (as described The definition is general and does not below), and (ii) fines imposed on The main obligations imposed on data provide a list of data that may be classed company officers and the company operators to ensure personal data is as personal data. Thus, what constitutes itself (the most severe fines are for handled properly include the following: personal data must be assessed on a violation of localization requirements). case-by-case basis. The Personal Data • Defining the categories of personal Roskomnadzor may demand the Law also provides for special categories data, the purposes of data processing blocking or destruction of illegally of personal data (data on an individual’s and the processing period obtained personal data or may ban race, nationality, political views, religious • Obtaining the data subject’s the illegal processing of personal data or philosophical beliefs, state of health, consent for data processing (unless and take administrative action against intimate life, etc.) and biometric otherwise provided by law), which persons guilty of violating the Personal personal data. Such personal data may be implied, explicit or in writing Data Law. Roskomnadzor may also receives special treatment. depending on the case limit access to information processed The Personal Data Law applies to all in breach of the Personal Data Law. For • Appointing a personal data officer, personal data processing operations this purpose, Roskomnadzor maintains adopting data protection policies performed within Russia. Furthermore, a dedicated register of violators of the (other required documents) and recent law enforcement practice rights of data subjects. taking other appropriate security includes cases where the Russian data measures as required by law protection authority (Roskomnadzor) has intervened to protect the rights • Locating databases with personal data of Russian data subjects in cases of of Russian citizens in the territory of personal data processing abroad. For Russia (“localization requirement”) example, Roskomnadzor successfully • Notifying Roskomnadzor of personal blocked several websites hosted abroad data processing (unless otherwise which contained Russian citizens’ provided by law) personal data.

46 Doing business in Russia Regulation of the Digital Sphere

In 2019 the Russian parliament passed two federal laws implementing significant changes in the digital sphere.

The Digital Rights Law defines such Utility digital rights are limited to the Only an investee that is a public JSC terms as digital rights, smart contracts following: may raise more than RUB 1 billion and big data agreements: (approx. US$ 13.8 million) per calendar • the right to demand the transfer of year and only individuals who have • digital rights are contractual and other a particular thing (other than property the status of individual entrepreneurs rights which are determined according subject to state registration) or qualified investors or who invest by to the rules of the information system • the right to demand the transfer of entering into agreements with a public • smart contracts are “self-executing exclusive rights or licensing rights for IP JSC regarding utility digital rights may agreements” where the obligations invest more than RUB 600,000 (approx. • the right to demand the performance of the parties are performed US$ 8,296) per calendar year. of work or services automatically upon the occurrence of certain events • big data agreements are agreements on the collection and provision of large blocks of non-personalized data Investment platforms (crowdfunding) The Investment Platforms Law (Federal Law No. 259-FZ dated 2 August 2019) regulates investments through investment platforms (crowdfunding), which may be made only in the following ways: • provision of a loan • sale and purchase of securities (through private subscription), or • sale and purchase of utility digital rights

Doing business in Russia 47 The Investment Platforms Law The Bank of Russia intends that Digital financial assets establishes the legal framework for the financial marketplaces should also be activities of an investment platform available to small and medium-sized (tokens) and related operator. Such activities may be carried businesses (and not only to individual information systems on in Russia only by legal entities that consumers). The Digital Financial Assets Law were established under the laws of There is no limit on the types of (Federal Law No. 259-FZ dated the Russian Federation and have been financial transactions that may 31 July 2020), which came into effect included in a specific register maintained be performed through a financial in January 2021, introduces a new by the Bank of Russia. marketplace. Currently, there are type of digital rights in Russia — digital several registered financial platforms financial assets (along with utility Financial platforms in Russia covering the following digital rights, as mentioned above), financial products: bank deposits, and establishes the legal framework (marketplaces) insurance policies (compulsory third- for owning and transacting with them. The Financial Platforms Law (Federal party car insurance), OTC bonds, and “Digital financial asset” is a generic Law No. 211-FZ dated 20 July 2020) investment fund units. Activities of a term similar to the term “token” used in regulates the activities of operators of financial platform operator in Russia the crypto sector. financial platforms (marketplaces) that may be carried on only by legal entities Digital financial assets may certify: enable individual consumers to enter that were established under the laws into certain financial transactions in of the Russian Federation and have • monetary claims electronic form via those platforms. been included in a specific register • the ability to exercise rights Various financial institutions may join a maintained by the Bank of Russia. attached to securities financial platform.

48 Doing business in Russia • the right to demand the transfer (i) types of digital financial assets that In order to ensure judicial protection of securities may be purchased only by qualified of their cryptocurrency rights, Russian investors; and (ii) types of digital legal entities, representative offices • interests in the capital of a non-public financial assets for which acquisition by and branches of foreign legal entities in joint stock company (i.e., shares in unqualified investors must be limited to Russia, and individuals who are present such companies may be issued as a certain amount of investment (RUB in Russia for 183 days or more in a digital financial assets). 600,000 (approx. US$ 8,296). period of 12 consecutive months must Activities of operators of information report their cryptocurrency holdings systems in which digital financial assets Cryptocurrency and transactions to the Russian tax are issued and activities of digital The Digital Financial Assets Law authorities. There is currently a bill financial asset exchange operators also defines cryptocurrency and according to which such reporting may be carried on only by legal entities regulates the circulation of such would only be required if the amount that were established under the laws of currency. In Russia it is permitted exceeds RUB 600,000 (approx. US$ the Russian Federation and have been for cryptocurrency to be issued and 8,296). included in a specific register maintained transferred from one holder to another by the Bank of Russia. (and it is permitted to organize such Any user of an information system issue and transfer), but it is prohibited may purchase digital financial assets. to accept cryptocurrency as payment However, the Bank of Russia prescribes: for goods, works, services, etc.

Doing business in Russia 49 Sanctions and Restrictive Measures

Since 2014, a number of countries, including the US, EU member states, Australia, Canada, Japan and Switzerland, have implemented certain sanctions against Russia. These mainly consist of asset freezes, travel bans and various restrictions on dealings with sanctioned persons (individuals and entities).

In response, Russia banned imports of a wide range of agricultural products, raw materials and food products, including meat, fish, seafood, vegetables, fruit, milk, dairy products (as well as many processed foods) from the US, the EU, Australia, Canada, and Norway. The list was subsequently extended to include Albania, Montenegro, Iceland, Lichtenstein and Ukraine. In spring 2018, a bill was submitted for preliminary review by the Russian parliament which would impose criminal liability (with a maximum penalty of up to 4 years’ imprisonment) for the restriction of or refusal to enter into ordinary business operations or transactions in order to comply with restrictive measures imposed by foreign states, unions of foreign states or international organizations. However, as of the end of 2019 the bill had not progressed any further.

50 Doing business in Russia How can EY help?

At EY Law we have developed client-focused legal services which we offer in close collaboration with other service lines to provide our clients with high-quality, multi-disciplinary advice in a cost-competitive manner. Our services cover the areas outlined below and many more

Company law: Comprehensive turnkey services for IP: • Construction and EPC

• Day-to-day advice to companies of • Brand protection strategy development • Brownfield and greenfield development all legal forms on any corporate and and implementation (including • Legal due diligence of land plots, commercial legal matters registration of “non-standard” buildings and premises trademarks) • Effective planning and implementation • Leases support for corporate reorganizations • IP asset management system implementation (including identification • Real estate private equity and • Domestic and cross-border corporate and review of IP rights) investment funds transactions, including mergers, acquisitions and joint ventures, as well • IP rights due diligence, including • Regulatory requirements as equity investments and change of compliance with open-source licences • Support with registration of title control transactions to real estate Effective solutions for HNWIs: • Support and advice on devising and • Green buildings implementing corporate compliance • Top holding structures for business programs and private assets (setting up and • Hospitality • Corporate legal secretarial services restructuring) • PPP & Concession • Structuring of personal investments Corporate governance (JVs, LP/GP structures, debt financing) Assistance with implementation of infrastructure and PPP projects • Succession planning Commercial law in the following areas: • Family law advice (prenuptial • IP/IT M&A support agreements and division of assets) • Transport (roads, highway maintenance, • Restrictions applicable to Russian airports, ports, railways) Shareholder controversy residents • Social infrastructure (educational • Reporting requirements of Russian institutions, courts, prisons and social Antimonopoly compliance: residents services) • Sale and lease of residential real estate • Agreements with provisions that may • Healthcare restrict competition • Currency control advice • Conventional and renewable electricity • Activities resulting in restriction of generation competition Full-scope legal support with all real estate related issues: • Waste and wastewater treatment • Improper pricing of goods or services • Real estate transactions • PPP secondary market (sale of project, • Limitation of access to goods or services re-negotiation of agreement, disputes, on a certain market or segments thereof • Real estate investment and financing etc.)

Doing business in Russia 51 3Tax System

52 Doing business in Russia Russian taxes are regulated by the Russian Tax rates Tax Code. The list of Russian taxes, levies Tax rates on corporate income and capital gains are summarized below: and social contributions includes:

• Federal taxes, levies and social contributions – Profits tax 20% (a) VAT, excise duties, personal income tax, Capital gains tax 20% (b) profits tax, mineral extraction tax, water tax, Profits tax for CFCs 20% (c) levies for the use of fauna and for the use of aquatic biological resources, state duty, and Branch remittance tax n/a (d) tax on additional income from hydrocarbon Withholding tax extraction. The Tax Code also establishes Dividends 0%/5%/13%/15%/ (e) social contributions, which are likewise Interest on certain types of state and municipal securities federal payments and mortgage-backed bonds and certain income from 0%/9%/15% (f) • Regional taxes — corporate property tax, certificates of participation in a mortgage pool gaming tax, transport tax Other interest paid to foreign companies 20%/30% (g) • Local taxes — land tax, personal property Income from the rental or sublease of ships and aircraft and/ tax, the trade levy. or means of transport and containers used in international 10% traffic Regional and local legislatures do not Rental income derived from property used in Russia 20% have the right to introduce taxes or levies Royalties from patents, know-how, etc. paid to foreign not provided for in the Tax Code. Local 20% companies governments are permitted to set: Income from the sale of Russian immovable property or • tax rates (within the limits set by the shares (and derivatives thereof) of qualifying property-rich 20% Tax Code) companies Payments of other similar Russian-source income to foreign • tax reliefs 20%(h) companies • procedures and time limits for the payment of taxes

The three-tier taxation system described above means that taxpayers registered in different regions or municipalities may have different tax burdens.

The Tax Code also prescribes special tax regimes under which a taxpayer may pay one special tax in place of others.

Special tax regimes include the simplified tax, the unified agricultural tax, the taxation system for production sharing agreements, and others.

Doing business in Russia 53 For some categories of taxpayers (e) The following tax rates apply to stake (interest) of not less than (participants in special investment dividends: 15% in the charter/pooled capital/ contracts, residents of special economic fund of the entity paying the 1) 0% for (i) dividends received by zones, entities operating in the fields of dividends or depositary receipts RLEs on investments meeting education or healthcare, and others), conferring the right to receive certain conditions (please see reduced rates of profits tax may be dividends amounting to at least the “Dividend income” section available under special rules subject to 15% of total dividends paid by the on page 63). The rate if the certain conditions being met. entity. More detailed information conditions are not met is 13%; is given in the “Deoffshorization (ii) dividends received by an (a) The basic profits tax rate comprises measures” section on page 100 2% (3% in 2017-2024) payable to international holding company the federal budget and 18% (17% in if, on the day the decision to 2) 5% for dividends received by 2017-2024) payable to the regional pay the dividends is made, the foreign persons in the form of budget. Until 1 January 2019, international holding company dividends on shares (interests) in regional authorities could reduce has continuously owned for not international holding companies their share of profits tax by 4.5 less than 365 calendar days a that are public companies on the percentage points and the reliefs so granted could remain in force until 1 January 2023. From 1 January 2019, reduced rates may only be granted for certain categories of taxpayers in cases specifically provided for in the Tax Code, such as residents of special economic zones and participants in regional investment projects.

(b) Capital gains of Russian companies are subject to profits tax at 20% of the gain. In certain circumstances, however, the 20% rate applies to gross income (see “Capital gains and losses” on page 63).

(с) Profits of CFCs are determined by the controlling persons. More detailed information is given in the “Deoffshorization measures” section on page 100.

(d) There is no branch remittance tax in Russia.

54 Doing business in Russia day of the company’s decision of those securities to the Russian subsurface site within which to pay the dividends (subject depositaries. a new offshore hydrocarbon to certain conditions). More deposit is situated or within detailed information is given in (h) Items of “active” income such which the prospecting for, the “Deoffshorization measures” as income from sales of goods evaluation and/or exploration section on page 100 or other property (except for of a new offshore hydrocarbon Russian immovable property or deposit is planned – 20% 3) 15% for dividends received shares and related derivatives of by a foreign entity on shares property-rich companies) and from 6) participants in regional in Russian companies and the performance of work and the investment projects – 0% dividends from another form of rendering of services in Russia are payable to the federal budget, participation in an entity’s capital generally exempt from withholding 10% payable to the regional tax in Russia. budget (f) Interest on certain types of state and municipal securities and (i) The standard penalty is 20% (which 7) participants in a free economic mortgage-backed bonds, state may be increased to 40% in the case zone – 0% of a deliberate violation). Transfer securities of member states of the 8) residents of priority socio- pricing legislation establishes a 40% Union State, state securities of economic development penalty (see the “Transfer pricing” regional governments of the Russian areas – 0% payable to the section on page 116). Federation and municipal securities federal budget, 5% and 10% and bonds of Russian entities payable to the regional budget (excluding bonds of foreign entities The above withholding tax rates apply treated as tax residents of the to payments to FLEs that do not 9) entities that provide social Russian Federation) that are traded operate in Russia through a permanent services – 0% establishment. on the organized securities market 10) participants in the Magadan at the dates on which interest (j) The following rates apply for Province special economic income on them is recognised, are particular categories of taxpayers: zone – 0% denominated in roubles and were issued in the period from 1 January 1) entities engaged in educational 11) tourism and recreation 2017 to 31 December 2021, as well and/or medical activities – 0% operators in the Far Eastern Federal District – 0% as income derived from certificates 2) residents of special economic of participation in a mortgage pool, zones – 2% payable to the 12) regional operators in the area is subject to tax at reduced rates. federal budget of municipal solid waste – 0% payable to the federal budget (g) A “punitive” withholding tax rate of 3) residents of the Kaliningrad 30% may be applied to interest and Province special economic 13) museums, theatres and dividends paid on Russian securities zone – 0%, 10% libraries founded by regions or (including ADRs and GDRs for municipalities – 0% 4) agricultural goods producers Russian securities) held through and fishing organizations – 0% 14) participants in special foreign nominee accounts with investment contracts – 0% Russian depositaries in the event 5) operators of a new offshore of a failure to provide summary hydrocarbon deposit and 15) participants in the Skolkovo information on the beneficial owners holders of licences to use a innovation centre project – 0%

Doing business in Russia 55 Penalties for late payment Penalties for non-compliance of the Central Bank key interest rate and tax filing violations Non-compliance with tax registration effective in the first 30 calendar days requirements may lead to tax, of the delay in payment and 1/150 The Tax Code prescribes various fines administrative and (in a worst-case of the key interest rate effective from for violations of the tax payment, tax scenario) even criminal liability. Below is the 31st calendar day of the delay filing, tax accounting and CFC rules. a list of the main administrative and tax onwards Non-filing or late filing of returns incurs law sanctions for non-compliance with Responsible officers may also face fines prescribed by the Tax Code and by tax registration requirements: administrative penalties for the violation the Administrative Offences Code. • non-compliance with tax registration of (i) registration requirements – up to requirements: a fine of RUB 10,000 RUB 3,000 (approx. US$ 41), and (ii) Non-payment or underpayment of tax (approx. US$ 138) and/or a fine of tax compliance obligations as outlined incurs interest penalties calculated as 10% of all income received over the above – RUB 500 (approx. US$ 7). the product of the amount of arrears, period in which activities were carried Furthermore, if business activities 1/300 or 1/150 (depending on how on without tax registration, but not less carried on without state registration or many days payment is late) of the Bank than RUB 40,000 (approx. US$ 553) not in compliance with state registration of Russia key interest rate and the rules result in substantial detriment due number of calendar days late. • failure to file a tax declaration on time: to non-compliance with tax registration a fine of 5% of the unpaid tax, but not requirements, the responsible The Tax Code sets the fine for failure more than 30% of that amount and not representatives may face criminal to file or late filing of a tax return for less than RUB 1,000 (approx. US$ 14) liability. For the sake of completeness, a tax period at 5% of the amount of the transfer pricing fine of 40% of declarable tax not paid on time for each • non-payment of tax: a fine of 20% to unpaid tax should also be mentioned full or partial month of the delay. The 40% of the unpaid amount and late here. fine may not be less than RUB 1,000 payment interest charged at 1/300 (approx. US$ 14) or more than 30% of the amount of declarable tax not paid on time. Under the Administrative Offences Code, failure to submit a tax return on time incurs a warning or an administrative fine on executive officers of RUB 300-500 (approx. US$ 4.1-7).

The fine for the late filing of returns for advance tax payments for a reporting period is set by the Tax Code at RUB 200 (approx. US$ 2.7). The fines set by the Administrative Offences Code in this case are the same as for the late filing of a return for a tax period as a whole.

56 Doing business in Russia Corporate Profits Tax

Taxpayers have voluntarily declared themselves Tax base tax residents of the Russian Federation Taxpayers for profits tax purposes The tax base for profits tax purposes if, as at the date on which they declare are (i) Russian companies (RLEs), (ii) is taxable profit expressed in monetary themselves as such, their activities foreign companies (FLEs) that carry on terms. For Russian entities, profit means have not given rise to a permanent activities in Russia through permanent income received minus deductible establishment in the Russian Federation. establishments and/or receive income expenses, which are subject to a range from sources in Russia, and (iii) of rules. For more details see the “Tax- consolidated groups of taxpayers. Russian legal entities deductible expenses” section below. The definition of “permanent Russian entities are defined as legal The law also lays down numerous special establishment” is similar though not entities formed in accordance with the provisions relating to the treatment of identical to the definition of the same laws of the Russian Federation. Foreign particular income and expense items, term in the Model Treaty published by the entities classed as Russian tax residents which give rise to differences between Organization for Economic Co-operation are also treated as Russian entities for accounting and tax records. and Development (OECD). For more profits tax purposes. details, see the “PE risk for profits of an Russian legal entities and foreign legal Taxable income FLE attributable to its Russian business” entities classed as Russian tax residents Gross income includes income from section on page 69. are taxed on their worldwide income. sales of goods (work and services), Foreign entities classed as tax residents whether internally produced or bought- Foreign legal entities are deemed to be of Russia are also liable to pay profits tax. in, revenue from the sale of property Russian tax residents if their place of rights and non-sales income such as management is the Russian Federation, income in the form of interest received Tax year except as otherwise provided by a under loan agreements, income from The tax period is the calendar year double taxation treaty. leased properties, dividends and other (from 1 January to 31 December of the income. relevant year). The law does not allow Rates for the tax period to be changed. The standard rate of profits tax is 20%. As a rule, taxpayers use the accrual- basis method to determine income. The Where a company was established This rate is split into two components cash-basis method may only be used if between 1 and 31 December of a paid to different budgets: average revenue from sales over four calendar year, its first tax period will Federal 2% (3% in the period consecutive quarters amounts to less be the period from the date of its 2017-2024) than RUB 1,000,000 ex VAT (approx. establishment until 31 December of the US$ 13,827) per quarter. Certain types following calendar year. Regional 18% (17% in the period 2017-2024) of businesses may not apply the cash- The above rules do not apply to the basis method at all (banks, etc.). determination of the first tax period Special rates prescribed by law are set for profits tax for foreign entities that out in the “Tax rates” section above.

Doing business in Russia 57 Exempt income set of financial documents, and additional 3) The tax benefit was obtained supporting documents may be required. from sources unrelated to real The Tax Code provides a list of income entrepreneurial or other economic that is not taxable for profits tax Thus, expenses may potentially be activity (e.g., from claiming purposes. challenged by the tax authorities even if the conditions listed above are technically expenses for bogus services). Exemptions are commonly claimed met. For more details see the “Unjustified None of the following constitute for funds received by an RLE without tax benefit” section below. automatic grounds for denying a tax consideration (i) from its parent (an benefit as unjustified: entity or individual), provided that the Unjustified tax benefit parent owns more than 50% of the • Accounting source documents RLE’s capital, or (ii) in the form of a The basic principles of the unjustified tax are signed by an unknown or contribution to assets in accordance benefit concept were first formulated by unauthorized person. the Plenum of the Supreme Arbitration with civil law. Applying this relief • The taxpayer’s counterparty is in Court of the Russian Federation and are requires compliance with a number of breach of tax legislation. now enshrined in the Russian tax system. special rules, including consideration • The taxpayer could have achieved the of provisions of civil law. It is important A tax benefit is a reduction in tax liability same economic effect by entering into for such operations to be analysed in resulting from a reduction of the tax alternative transactions not prohibited advance for all potential tax implications. base, or the receipt of a tax credit or tax by law. exemption, or the application of a lower Tax-deductible expenses tax rate, or the acquisition of a right to a Interest tax refund or credit. The Tax Code allows the deduction of The deductibility of interest is subject expenses incurred by a taxpayer subject to Russian tax authorities and courts to arm’s-length and thin capitalization the following conditions: (i) the expenses may regard a tax benefit obtained by tests. are documented, (ii) the expenses are a taxpayer as unjustified and deny the From 1 January 2015, taxpayers are reasonable and economically justified, (iii) benefit on that basis (e.g., disallow allowed to deduct debt interest in full the expenses were incurred in carrying expenses claimed for tax purposes). based on the actual rate provided that on activities aimed at the receipt of A tax benefit will be treated as the debt liability did not arise from a income. The Tax Code also lays down a list unjustified if: controlled transaction. of expenses that are classified as non- 1) the taxpayer’s underlying deductible. If a transaction is classified as a controlled transactions are recorded not in The tax authorities are fairly thorough accordance with their real economic transaction under transfer pricing rules, about analysing a taxpayer’s expenses substance (i.e., the taxpayer has the lender is entitled to recognise interest for compliance with the above conditions, misrepresented facts regarding such income based on the actual rate as long especially the reasonableness and transactions for tax or financial as the rate is above the lower limit of documentation criteria, which are most accounting purposes). the range of permissible values. The frequently at the centre of disputes borrower has the right to expense interest 2) The taxpayer has reported calculated at the actual rate provided that between tax authorities and taxpayers. transactions that lack economic the rate is below the upper limit of the The Tax Code does not provide a specific substance or other reasonable range of permissible values. list of documents needed to support business purpose. Obtaining a tax expenses incurred. For example, for some benefit may not be accepted as the If the debt arises from a controlled expenses it may not suffice to provide a main purpose of the transaction. transaction and the agreed interest

58 Doing business in Russia rate is outside the range of permissible • ►for debt obligations arranged in company, or owns an interest in the values, then the resulting income foreign currencies: Russian company via a direct ownership (expense) must be recognised at the chain where each preceding person’s rate determined by applying transfer Euros from EURIBOR plus 4% to direct interest in each successive entity pricing rules. EURIBOR plus 7% (from 0% is more than 50%; b) a person (Russian to EURIBOR plus 7% for the or foreign) that is related to the foreign The ranges of permissible values are as period from 01.01.2020 to companies referred to in the previous follows: 31.12.2021) item; c) persons referred to in the Chinese yuan from SHIBOR plus 4% to previous two items if they act as a surety • ►for a debt obligation arranged in SHIBOR plus 7% (from 0% roubles: to SHIBOR plus 7% for the or guarantor, or otherwise undertake to guarantee the fulfillment of the Russian — from 75 to 125 per cent (from period from 01.01.2020 to 31.12.2021) company’s debt obligation. 0 to 180 per cent for domestic transactions and from 75 to 180 per Pounds from GPB LIBOR plus 4% to A Russian company should not be cent for cross-border transactions sterling GPB LIBOR plus 7% (from 0% subject to thin capitalization rules if: a) to GPB LIBOR plus 7% for the the debt is owed to a bank unrelated in the period from 01.01.2020 to period from 01.01.2020 to 31.12.2021 – Article 269(1.2) 31.12.2021) to the Russian company, or to a (1) of the Tax Code) of the key rate person acting as a surety, guarantor, Swiss francs from CHF/JPY LIBOR plus 2% of the Central Bank of the Russian or otherwise undertaking to fulfill or Japanese to CHF/JPY LIBOR plus 5% Federation (4.25% as of 1 January yen (from 0% to CHF/JPY LIBOR the taxpayer’s debt obligation; b) no 2021) plus 5% for the period from payments have been made towards the 01.01.2020 to 31.12.2021) debt since the origination date, and the debt has not been terminated. US dollar US$ LIBOR plus 4% to US$ and other LIBOR plus 7% (from 0% to Where a Russian company’s debt is not currencies US$ LIBOR plus 7% for the classified as a controlled transaction period from 01.01.2020 to 31.12.2021) under the Russian Tax Code, it may still be ruled by a court to be controlled if it According to the provisions of Federal is established that the beneficial owner Law No. 374-FZ of 23.11.2020, of the payments made towards the debt which introduced extended ranges of is an entity or an affiliate of an entity permissible interest rate values for the that controls the debtor. period from 1 January 2020 to 31 The debt-to-equity ratio above which December 2021, the extended ranges restrictions apply is generally 3:1, but apply to legal relations arising starting 12.5:1 for banks and leasing businesses. from 1 January 2020. Excess interest, which is the amount From 1 January 2019, thin of interest on loans in excess of the capitalization rules apply to debt 3:1 or 12.5:1 ratio, is non-deductible obligations of Russian companies and is treated as a dividend paid to arising from their relationships with: the organization in relation to which a) a foreign person (individual or controlled indebtedness exists and is company) if that person owns, directly subject to 15% withholding tax unless the or indirectly, at least 25% in the Russian applicable tax treaty reduces tax rate.

Doing business in Russia 59 Depreciation The reducing-balance method cannot hydrocarbon extraction activities at a be applied to certain long-lived assets new offshore hydrocarbon deposit may Depreciable or amortizable assets are or assets of a licence-holder or operator be depreciated at up to three times the fixed and intangible assets with a useful used exclusively in carrying out usual rate. In the last case, a change in life of more than 12 months and a hydrocarbon extraction activities at a the use of an asset can trigger a claw- historical cost of more than RUB 100,000 new offshore hydrocarbon deposit. back of the accelerated depreciation (approx. US$ 1,383). Taxpayers are deducted if the tax book value exceeds allowed to pool assets into 10 groups Fixed assets classified as highly energy- 20% of the historical cost when it begins depending on the type of asset and their efficient facilities and assets that to be used in activities not connected useful life, and to apply depreciation were entered in accounting records with hydrocarbon extraction at a new rates to the assets within each pool. before 1 January 2014 and operate offshore hydrocarbon deposit. Taxpayers may choose between straight- in an aggressive environment and/ line and reducing-balance depreciation or on a multi-shift basis can be tax- An asset cannot be subject to methods and must apply the same depreciated at up to twice the normal accelerated depreciation on more than method to all depreciable assets. The tax depreciation rate. one of the above bases at a time. exact depreciation groups are determined by a governmental decree that sets out Fixed assets used only in carrying Taxpayers which incur capital the allocation of various types of assets. out scientific and technical activities, expenditures have the right to expense Most production equipment is subject to assets which are the subject of a an “accelerated capital allowance” depreciation over a period from 7 to 10 leasing agreement and assets of a calculated on the historical cost of years, while buildings are depreciated licence-holder or operator which fixed assets. The accelerated capital over more than 30 years. are used exclusively in carrying out allowance is generally 10% of the

60 Doing business in Russia historical cost of the fixed asset, while to the extent allowed by the relevant From 1 January 2021: for assets belonging to the third to regional law. • Where an investment tax credit was seventh depreciation groups (assets The amount of the credit applicable applied to a part of the value of an with a useful life of from 3 to 20 years) in a given period will generally be no asset, income may be reduced when it is 30%. The deduction applies to the the asset is sold. A deduction may be acquisition of fixed assets and to the more than 90% (or less, if so provided by the relevant regional law) of the made for the amount of the asset’s extension, retrofitting, reconstruction, net book value corresponding to the modernization, retooling, and partial amount of expenditures incurred for the acquisition, creation, reconstruction, part of the historical cost to which the dismantling of fixed assets. The credit was not applied. accelerated capital allowance must be modernization, etc. of fixed assets reversed and included in the profits tax (except for expenses associated • It is now permitted to carry forward base if the fixed assets are sold to a with the decommissioning of fixed not only the balance of an investment related party less than five years after assets). credit (i.e., expenses that reduce they were brought into use. payment to the regional budget), but The investment tax credit is applicable also expenses that reduce tax payable Companies that carry on activity in to fixed assets with a useful life of more to the federal budget. the area of information technology than 3 years (except for buildings, • Where an entity ceases to apply a are allowed to treat expenses for the installations and transmission facilities credit to an asset, it may depreciate acquisition of electronic and computer with a useful life of more than subsequent expenditure on extending, equipment as material expenses and 20 years). retrofitting and upgrading the asset. deduct them in full when the equipment A taxpayer that has exercised the is placed into use rather than through • Regions may introduce an investment right to apply the investment tax depreciation (subject to certain credit for R&D costs. credit in relation to a fixed asset conditions). does not have the right to charge The investment tax credit is also limited Intangible assets are subject to depreciation on and/or apply an to a maximum amount equal to the amortization over the useful lives set accelerated depreciation allowance in product of the tax base determined by the taxpayer based on the type relation to that asset. under the normal rules (without and characteristics of a given asset; applying the investment tax credit otherwise, the amortization term is In addition, the Tax Code places a provisions) and the difference between fixed at 10 years. restriction on the disposal of fixed the standard tax rate for tax payable assets on which an investment tax to the regional government (which is To apply the benefits mentioned credit is claimed. In the event that 18% (17% in 2017-2024) but may be in this section, taxpayers must a fixed asset in relation to which a reduced by a regional law) and a rate of meet certain conditions and have taxpayer has exercised the right to 5% (or another rate decided on by the documents supporting the use of apply the investment tax credit is sold region concerned). the benefits. or otherwise disposed of (other than decommissioned) before the expiry As a general rule, an investment tax Investment tax credit of its useful life, the amount of tax credit claim in excess of the maximum amount may be used in subsequent In the period from 2018 to 2027 previously deducted in respect of that periods, unless otherwise provided in a inclusively, taxpayers are eligible for an fixed asset must be restored and paid regional law. investment tax credit that is deducted and corresponding penalties must be from their regional income tax liability. paid for the entire period over which the In addition, taxpayers using an The tax credit may be claimed only deduction was applied. investment tax credit are generally

Doing business in Russia 61 entitled to deduct the remaining 10% of Advertising expenses for mass Loss carry-forward investment from their federal tax liability. media advertising (TV, radio and Taxpayers have the right to carry telecommunications networks), exterior The Tax Code specifies a number of forward prior year losses in calculating advertising (billboards, illuminated categories of taxpayers that do not profits tax. signs), participation in exhibitions and have the right to apply the investment In reporting periods from 1 January tax credit (for instance, companies fairs, the maintenance of showrooms 2017 to 31 December 2021, the tax that are participants in regional and the preparation of advertising base for the current reporting/tax period investment projects, residents of special brochures and catalogues are fully tax- may be reduced by losses that arose economic zones, participants in a free deductible. Expenses for prizes awarded from 1 January 2007 onwards without economic zone, residents of a priority during advertising campaigns and any time limitations. However, the tax socio-economic development area, expenses for other types of advertising base may not be reduced by more than and foreign companies classed as tax are deductible up to a cap equal to 1% of 50% in any one reporting/tax period. residents of Russia). the taxpayer’s sales revenue. The Tax Code also imposes a Starting from 2020, the Tax Code has Representational expenses are tax- requirement to retain supporting been amended to include additional deductible up to an amount equal to documents for losses incurred. types of expenditure eligible for 4% of payroll expenses for the relevant Taxpayers are obliged to retain such investment tax credit where provided accounting/tax period. documents for the entire period over for in a regional law (expenditure Expenses in the form of premiums paid which the tax base is reduced. on building infrastructure facilities under voluntary personal insurance and donations to support state and Special rules apply to losses on agreements that require the insurers municipal cultural institutions). securities transactions and losses of to pay medical expenses for insured operators and licence-holders arising As of 1 January 2021 investment tax workers are deductible up to an amount from activities related to new offshore credit was available in a number regions, equal to 6% of payroll expenses. hydrocarbon deposits. There are including Moscow, the Moscow Region, Eligible R&D expenses are generally also various special rules governing Saint Petersburg, the Leningrad region, the treatment of losses in particular the Kaluga Region, the Lipetsk Region, deductible irrespective of whether or not circumstances (such as reorganizations). the Ryazan Region, the Rostov Region, the research yielded a positive result. the Krasnodar Region, the Kamchatka Certain listed R&D expenses are Tax losses may not be carried back Region, and many others. deductible at cost plus a 50% uplift. or surrendered to related companies. A change in ownership of a Russian As stated in the “Tax-deductible company does not restrict the future Expenses subject to expenses” section above, the Tax Code relief available for losses arising prior to special rules sets out a list of expenses that are the change in ownership. non-deductible by default. The most The Tax Code establishes a list of commonly encountered of these are Where a taxpayer ceases activities expenses that are deductible within charitable expenses, material assistance owing to re-organization, the successor certain limits, including, for example, to employees, tax fines, and payments entity has the right to reduce the certain types of advertising expenses, to employees that are not provided for tax base, subject to the rules and representational expenses, voluntary in an employment agreement and/or conditions laid down in the Tax Code, medical insurance expenses, and others. by the amount of losses made by the required by Russian law.

62 Doing business in Russia re-organized entities prior to the re- the rate of 15% (the tax rate may be This provision does not generally organization. This provision does not reduced under a double tax treaty). apply to dividends received by foreign apply if it is discovered as a result of a Tax withheld on dividends received by companies classed as tax residents tax inspection that the principal purpose a Russian tax resident from another of Russia (a transitional period from of the re-organization was to enable the Russian tax resident may be offset 1 January 2021 to 31 December 2023 tax base of the successor entity to be against the tax that the recipient would applies to a foreign company that reduced by the amount of losses made normally withhold on dividends paid to voluntarily declares itself a Russian tax by the re-organized entities prior to the Russian tax residents. resident (given several conditions are re-organization. met)). If dividends are received from Dividends received by Russian legal shareholdings in a foreign legal entity, entities on strategic shareholdings are additional criteria must be met (the exempt from tax (a 0% tax rate applies). Dividend income foreign entity must not be located in Dividends are considered to have been Dividends received by Russian tax a jurisdiction on the Russian Finance received from a strategic shareholding resident entities are subject to Ministry’s list of offshore jurisdictions). if, as at the date of the decision to pay withholding tax at the rate of 13%. the dividends, the recipient has held Dividends received by a multinational Dividends received by a foreign entity at least a 50% interest in the payer for (international holding) company which is that is not a Russian tax resident from more than 365 consecutive days. resident in a special administrative district a Russian tax resident are taxable at (“Multinational Company”) attract a rate of 0% if, as at the date of the decision to pay the dividends, the recipient has owned at least 15% of the payer’s capital for more than 365 consecutive days. Dividends on shareholdings in a foreign company are also subject to the requirement that the foreign company must not be on the Russian Finance Ministry’s list of offshore jurisdictions. Subject to certain conditions, a reduced 5% withholding tax rate will be available until 1 January 2029 for dividends paid by a Multinational Company in favour of its foreign shareholders.

Capital gains and losses Capital gains are generally included in taxable income and taxed at the regular rates, except for capital gains realized by Russian tax residents on the disposal of certain shares or participating interests in Russian tax residents that have been

Doing business in Russia 63 held for more than five consecutive of 0% if all the following conditions are charter capital of the Multinational years. The disposal of shares attracts simultaneously met with respect to the Company within 365 calendar a rate of 0% if the shares satisfy one or shares/participating interests: days before or after the date of the more of the following conditions: registration of the company as a • The shares/participating interests in Multinational Company or acquired • They are not traded on a regulated the Russian or foreign organization by the company as a result of securities market have been continuously owned for at reorganization within 365 calendar • They are shares in a Russian tax least 365 calendar days as at the date days before or after the date of the resident whose total assets do not of disposal and constitute a holding registration of the company as a derive more than 50% of their value (stake) of not less than 15% Multinational Company from immovable property located in • The shares/participating interests are Russia Capital gains derived by a foreign in a tax resident entity whose total company without a tax presence in • They are shares in high-tech assets do not derive more than 50% of the Russian Federation from the sale (innovation) companies (this provision their value from immovable property of shares in a Russian tax resident has been suspended until 1 January located in the Russian Federation 2023) company whose assets derive more than • The shares/participating interests in a 50% of their value directly or indirectly Capital gains realized on shares by a Russian or foreign organization were from immovable property located in the Multinational Company attract a rate not contributed (transferred) to the Russian Federation are generally subject to tax in the Russian Federation at the regular rate of 20%. Capital gains on disposals of securities are subject to income tax at the standard tax rate. Specific rules on the computation of capital gains on quoted and unquoted securities apply to transactions classed as controlled transactions under the transfer pricing rules. Otherwise, the actual transaction price applies. There are distinct rules regarding the recognition of tax losses from sales of quoted and unquoted securities. Losses on disposals of quoted securities may be deducted from the general profits tax base. The tax bases for unquoted securities and unquoted derivatives are combined into a single tax base. Losses on sales of fixed assets and other property are generally deductible, subject to certain restrictions.

64 Doing business in Russia Tax reporting and • If the company is founded in the How can EY help? 15 period from 1 December to 31 payment December of a calendar year, the Taxpayers may opt to file profits tax first tax period for the company will The scope of tax compliance services for returns on a quarterly or monthly basis. Russian legal entities (preparation and be the period from the date of its submission of tax filings) includes: As a rule, the monthly option is chosen foundation until 31 December of the by large taxpayers whose businesses calendar year following the year of the Preparation of quarterly and annual tax filings, including: are subject to seasonal factors. With company’s foundation certain exceptions, taxpayers are • Quarterly profits tax returns and For information on the calculation and required to make monthly advance tax annual filing packages for Russian payments equal to one third of total payment of tax by a foreign company, legal entities advance payments for the preceding see the section entitled “Foreign • Tax statements concerning income quarter. Alternatively, taxpayers may companies operating via a branch or received by Russian legal entities choose to pay tax by the 28th of each representative office”. and tax withheld • Quarterly VAT returns month based on profits actually earned Tax agents that pay passive types of in the preceding month if they opt for income (such as dividends, interest and • Prepayment calculations and annual monthly filing. The final return for the tax returns for corporate property tax royalties) to foreign entities which are and other regional and local taxes year and tax liability are based on actual subject to withholding tax must submit • Preparation of tax ledgers and results. Final returns are due on 28 a tax statement to the tax authorities calculation of tax payments March following the end of the tax year. on a quarterly basis detailing amounts • Tax reconciliations with the tax Significant penalties are imposed for of income paid to foreign entities and authorities, receipt of reconciliation failure to file returns by this deadline, amounts of taxes withheld. The amount certificates, statements of which cannot be extended. Russian tax of tax due must be remitted to the settlements with the budget and law does not allow for tax filing and budget not later than the working day certificates of the fulfilment of tax obligations payment deadlines to be postponed. after the day on which the income is When a company is founded, the paid. The tax statement for a reporting Preparation and submission to the tax authorities of explanations relating to following rules apply regarding the period (quarter) must be submitted tax returns first tax period: to the tax authorities not later than the 28th of the month following the • If the company is founded in reporting period that has ended. The Review of CIT returns on a quarterly the period from 1 January to final tax statement for the tax period and annual basis 30 November of a calendar year, (calendar year) must be submitted Whether a company prepares tax filings the first tax period for the company not later than 28 March of the year in-house or uses third-party services, it will be the period from the date following that tax period. helps to have a tax expert take a fresh of its foundation until 31 December look in order to identify tax risks or of that calendar year potential tax assets. We offer tax return review services which may be performed either before or after a company files its tax returns. The review will enable the client to amend its tax return and file an updated version as well as providing tax recommendations based on current law, 15 The comments in this section relate to Russian legal entities registered with the Russian tax authorities. Information on tax reporting and payment for foreign entities is presented in the section entitled “Foreign practice and industry-specific factors. companies operating via a branch or representative office”.

Doing business in Russia 65 Russian companies with a presence accounting data concerning income and autonomous subdivision or other place in multiple locations must register a expenses. The tax accounting system of activity of that entity through which subdivision and file a special profits must be organized by the taxpayer the entity carries on business in Russia. tax return in each tax district in which independently, ensuring the consistent A permanent establishment of a foreign they have fixed workplaces. They must application of tax accounting rules. entity is considered to have been formed also apportion taxable income among Tax accounting procedures must be from the moment when business begins the head office and the subdivisions in formally established in a taxpayer’s tax to be regularly carried on through a different locations. The apportionment accounting policy. division of that entity. should be based on (i) the net value of Since tax accounting rules differ both A particular case in which a foreign fixed assets according to tax records and from Russian accounting standards and entity is deemed to have a permanent (ii) at the taxpayer’s option, either the international standards, tax records establishment in Russia is when it carries number of employees or total payroll. may be fairly substantial, especially on activities in Russia on a construction If a Russian company has multiple for large companies (for example, in site. A definition of the term subdivisions in one district, it may areas such as depreciation, interest on “construction site” is given for profits designate one of them as responsible obligations and supporting documents tax purposes with rules established for for filing the profits tax return for all of for expenses). For more details, please determining the period of existence of a them. refer to the “Tax-deductible expenses” construction site, including cases of the section. If a taxpayer owns foreign companies temporary suspension and subsequent that are classed as controlled foreign resumption of work. companies, it must complete a special Foreign companies Where a foreign entity is a resident of section of the profits tax return (for operating through a state with which the Russian Federation more details see the “Deoffshorization has a current tax treaty, the provisions measures” section on page 100). branch or representative of the relevant treaty have priority in office (FLEs) determining whether a permanent Where organizations had no taxable establishment exists. items for taxes to which they are subject The tax treatment of foreign entities or had no cash flow during a reporting/ operating in Russia depends on whether In the case of a construction site a tax period, they have the right to file their activities give rise to a PE and their treaty may establish a grace period for a unified (simplified) tax return. The tax status. profits tax purposes. Under tax treaties, simplified tax return must be filed Tax status of a representative activities on a construction site or a not later than the 20th of the month office: how not to miss changes construction and installation project of following the quarter, half-year period, a foreign entity give rise to a permanent Profits tax must be paid when a nine-month period and calendar year establishment if the period of operation permanent establishment arises in that has ended. specified in the treaty is exceeded. Russia. The fact that a foreign entity carries on For profits tax purposes, a permanent Tax accounting activities of a preparatory and auxiliary establishment of a foreign entity in Where accounting ledgers contain nature in the territory of the Russian the Russian Federation is understood insufficient information to determine the Federation, where the attributes of to mean a branch, a representative profits tax base, taxpayers are required a permanent establishment are not office, a division, a bureau, an office, an to maintain separate tax ledgers. The present, is not regarded as giving rise to agency or another other economically tax base is calculated based on tax a permanent establishment.

66 Doing business in Russia Where the activities of a company do not give rise to a permanent How can EY help? establishment, the company still has an obligation to file returns with the tax The scope of tax compliance services Preparation and provision to the tax for representative offices and branches authorities of explanations relating to tax authorities. of foreign companies (preparation and returns It often happens that representative submission of tax filings) includes: offices/branches incorrectly determine Preparation of quarterly and annual tax Tax support during the liquidation or their tax status, which can lead filings, including: reorganization of representative offices to serious tax consequences and or branches of foreign entities, which may difficulties in doing business. • Quarterly profits tax returns and annual also form part of comprehensive legal and filing packages for foreign entities tax support services A change in the tax status of a foreign • Tax statements for income received by company operating in Russia through foreign entities and tax withheld Whether a company prepares tax filings a representative office/branch may be in-house or uses third-party services, it • Quarterly VAT returns helps to have a tax expert take a fresh look triggered by changes in the company’s in order to identify tax risks or potential tax business, organizational structure • Prepayment calculations and annual tax returns for corporate property tax and assets. We offer tax return review services and functions, which may affect the other regional and local taxes which may be performed either before or initial determination of the foreign after a company files its tax returns. The company’s tax obligations when it • Preparation of tax ledgers and review will enable the client to amend its enters the Russian market and opens a calculation of tax payments tax return and file an updated version as representative office/branch. • Tax reconciliations with the tax well as providing tax recommendations authorities, receipt of reconciliation based on current law, practice and It is essential to bear in mind that certificates, statements of settlements industry-specific factors. the tax status of each subdivision is with the budget and certificates of the determined individually. A company may fulfilment of tax obligations simultaneously have a representative office and a branch, each of which may have a different tax status. Tax compliance that permanent establishment minus If a company operates in Russia through requirements expenses incurred by the permanent a representative office/branch, in order establishment. Income of the permanent to determine its tax status it must Determination of the tax base establishment that is taxable in the analyse such key points as the type of and object of taxation. Russian Federation is determined Income and expenses activity carried on in Russia through the based on functions performed, assets representative office/branch relative Profits tax for foreign companies used and economic/commercial risks to the core activity of the parent operating in Russia via a PE is assumed in the Russian Federation. For company, the source of financing of the administered in largely the same way other foreign entities it is defined as representative office/branch, whether as profits tax for Russian companies. income received from sources in the activities have been carried out for However, there are a number of Russian Federation. the benefit of third parties, including differences which are described below. Where a foreign entity has more than companies of the same group, and other For foreign entities operating in Russia one division in Russia whose activities factors. Otherwise, the company may face via a permanent establishment, profit give rise to a permanent establishment, substantial tax consequences and fines. is defined as income received through the tax base and the amount of tax

Doing business in Russia 67 must be calculated separately for For profits tax purposes, a foreign entity of third parties which give rise to a each division. Losses arising from the operating via a PE in Russia may reduce permanent establishment and does not activities of one PE cannot generally income received from sales of goods receive remuneration in respect of those reduce taxable profit from the activities (work, services) and property rights and activities, the tax base is determined of others. There are two exceptions. income from the possession, use and/ as equal to 20 per cent of the amount One is where an FLE carries out or disposal of property by the amount of expenses incurred by the permanent activities through multiple PEs within of expenses incurred by that PE in establishment in connection with those the framework of a unified production connection with the receipt of that income. activities. process or in other similar cases, for The rules governing the recognition example when constructing a single Tax reporting and payment of expenses for profits tax purposes requirements object, such as a bridge, pipeline or road, are generally the same as for Russian spanning multiple tax districts. Such an entities. Foreign entities file a profits tax return FLE may be able to obtain approval to using a special form which differs from The special rules governing the calculate profits tax for a group of such the form used by Russian entities. In deduction of expenses apply in the PEs as a whole provided that all the addition to the profits tax return, foreign case of foreign entities, but there are divisions included in the group apply the entities must file an annual statement some differences, e.g., expenses may same accounting policies for taxation of activities with the tax authority. It is be allocated from the parent office purposes. The other exception applies important to note that different regions subject to certain conditions, the thin may establish their own requirements only to FLEs which are operators of capitalization rules do not apply, and relating to the composition of the new offshore hydrocarbon deposits and various other differences. allows profits tax to be calculated on the annual reports. In Moscow, for example, aggregate result of activities at multiple Where a foreign entity carries on in representative offices/branches must locations relating to the same deposit Russia activities of a preparatory and/ also file an explanatory note to the subject to certain conditions. or auxiliary nature for the benefit statement of activities.

68 Doing business in Russia Another distinction with regard to the Penalties for non-compliance In order to mitigate the risk, it is filing of returns by foreign companies is important that none of the functions For more details regarding penalties the fact that Moscow, for example, has a relating to the activities of the FLE in for non-compliance please refer to the dedicated inspectorate to which returns Russia are carried out from the premises “Penalties for late payment and tax filing are filed by all foreign companies of a branch in Russia. Alternatively, violations” section (See page 56). registered in Moscow, regardless of their functions performed from Russia registered address. should fall within the scope of auxiliary PE risk for profits of an and preparatory activities. It may be For foreign companies operating in difficult to distinguish between activities Russia via a branch/representative FLE attributable to its that are, and are not, preparatory or office, the law prescribes only quarterly Russian business auxiliary in nature. Based on current payments of profits tax and only Russian PE risk is essentially the risk that case law, it may be concluded that quarterly returns (on a cumulative a foreign legal entity may be considered the decisive criterion here is whether basis). There is no monthly filing option as generating profit that is taxable in an activity that is carried on forms an for such companies. Russia as a result of carrying on business essential and significant part of the Please see the compliance calendar in activities on a regular basis through activities of the enterprise as a whole. the Appendix 6. a fixed place of business in Russia or In any case, if the general purpose through a dependent agent. Where of a given activity is identical to the activity of a foreign legal entity triggers a Interaction with the tax general purpose of the enterprise as a PE in Russia, profits attributable to that authorities whole, the activity in question cannot PE (rather than the entire worldwide Most tax filing and other communication/ be considered preparatory or auxiliary. income of the foreign legal entity) will be correspondence with the Russian tax All business decisions of the FLE subject to Russian tax. authorities takes place electronically (via should be taken outside Russia and any authorized operators). It is common for The definition of a PE may be found in activities undertaken by the branch in the tax authorities to request information Russian domestic tax legislation and Russia should be limited to preparatory and documents in relation to positions respective double tax treaties. Russia and auxiliary activities only. This may taken in tax returns, e.g.: has ratified the MLI and it is expected also be supported by documents such that Russian PE rules will be applied with as internal regulations, policies and • explanations on losses incurred MLI modifications from 2021. procedures. • differences between figures in profits Both the model DTT and the Tax Code A Russian PE triggered by the tax and VAT declarations provide for two tests, either of which dependent agent test should be • documents and calculations may trigger a PE of a foreign entity in analysed to determine the existence of supporting head office allocations Russia: formal or informal authorities granted by • The fixed place of business test (i.e., • clarifications and documents the FLE to Russia-based individuals or branch, representative office, other substantiating the use of tax benefits Russian legal entities. Such authorities place of business, etc.); and are usually granted under a power of Failure to accept or respond to • The dependent agent test (i.e., attorney or an agreement. Activities of electronically delivered requests from a person who, on the basis of fully owned subsidiaries may in certain tax authorities within the set time contractual relations with the foreign circumstances be viewed as dependent limit may result in the suspension of company, represents its interests in agent activities, so it is important to operations on bank accounts. Russia, etc.). examine these.

Doing business in Russia 69 Real Estate Transaction Costs 4and Taxes

70 Doing business in Russia There are generally two ways of acquiring a real estate asset: direct purchase of the asset (asset deal) or purchase of shares in a company that owns the asset (directly or indirectly) (share deal). Historically, share deals prevailed over asset deals for tax planning reasons. Nowadays, however, asset deals are also being considered in view of the changing tax environment in Russia.

Sale of real estate via Sale of real estate via that documents supporting those costs an asset deal a share deal are possessed by the tax agent at the time when income is paid to the foreign If the seller is a Russian taxpayer Capital gains on the sale of shares or company. (Russian enterprises, foreign legal participating interests in a company entities that are Russian tax residents whose assets derive more than 50% of In the case of a share deal, historical and foreign legal entities operating their value directly or indirectly from risks of the seller (including tax risks) through a permanent establishment), the immovable property located in the remain with the target company and are seller will be obliged to pay 20% Russian Russian Federation (“property-rich therefore transferred from the seller to profits tax. companies”) are generally included in the buyer. The sale of commercial real estate is taxable income and taxed at standard subject to 20% Russian VAT. The sale of rates. The sale of shares or participating residential premises is not subject to VAT. interests is not subject to Russian VAT. How can EY help? The buyer pays VAT to the seller and the Capital losses on the disposal of a seller pays it to the state. At the same When acquiring or selling real estate in participating interest are deductible. time, the buyer has the right to reclaim Russia, whether via a share deal or an VAT either through a refund or through Capital losses on the disposal of quoted asset deal. it is important to give careful consideration to potential profits tax, VAT a credit against future tax obligations shares are also deductible, while losses and WHT implications and risks. Timely (provided that the general criteria for the on the disposal of unquoted shares review and proactive preparation are deduction of VAT are met). are deductible only against profit from transactions involving other unquoted therefore essential for any deal. If the seller is a foreign company without shares. We are happy to assist companies in: a tax presence in the Russian Federation and the buyer is a Russian taxpayer, the Capital gains derived by a foreign • Analysing a potential sale-purchase buyer will be obliged to withhold and pay company without a tax presence in the transaction from a tax perspective Russian Federation from the sale of profits tax and VAT (if applicable) on • Providing recommendations for the payment to the seller. Income of the property-rich companies are subject reducing potential tax implications foreign company may be reduced by the to tax at the standard 20% rate. A and risks acquisition cost of the asset and incidental buyer which is a Russian taxpayer • Assisting in structuring the acquisition costs of disposal, provided that documents will be obliged to withhold and pay of real estate assets supporting those costs are possessed by profits tax on the payment to the the tax agent at the time when income is • Conducting a pre-sale tax “health- seller. Income of a foreign company check” paid to the foreign company. may be reduced by the acquisition cost of shares and participating interests • Reviewing sale-purchase documents In the case of an asset deal, historical risks from a tax perspective of the seller (including tax risks) should (subject to transfer pricing rules) and not, in general, be transferred to the buyer. incidental costs of disposal, provided

Doing business in Russia 71 5Tax Control

72 Doing business in Russia Tax audits The period that may be covered by the Contesting a report/decision audit is the 3 years preceding the year on a tax audit Tax control measures in Russia include in which the decision to conduct the on- tax audits (on-site and in-house) and tax After receiving a report on a tax audit site tax audit was issued. monitoring. (whether on-site or in-house), the In the process of the on-site tax audit, taxpayer has a calendar month to file Their general purpose is to check the tax authority makes a thorough objections to the report, which will be compliance with tax law, including analysis of the company’s activities to taken into account in the making of the checking that taxes, levies and check that taxes, levies and insurance final decision based on the results of the insurance contributions have been contributions have been correctly tax audit. The objections must be filed correctly calculated and paid. calculated and timely paid. with the tax authority which conducted the audit. In-house tax audit The tax authority may carry out various In an in-house tax audit, the tax tax control procedures in the course of In some cases, a tax authority may, authority examines only the tax return an on-site tax audit, such as demanding after receiving objections, carry out filed by the taxpayer. (and seizing) documents, interviewing additional tax control measures with a The in-house tax audit takes place on witnesses, engaging an expert (specialist view to gathering additional evidence the tax authority’s premises and does or translator) and inspecting premises. and updating its position. Additional tax control measures must be performed by not require a separate decision to be The standard duration of an on-site the tax authority within 1 month. made to carry it out. tax audit is 2 months, but allowing for An in-house tax audit takes 3 months, extensions and suspensions, it may take If, after considering the objections, except for audits of VAT returns, which up to 15 months. the tax authority issues a decision with which the taxpayer disagrees, take 2 months. In 2020, the Federal Tax Once the on-site audit has ended the taxpayer may appeal against it to Service launched a pilot project whereby (regardless of whether or not violations a higher tax authority under a pre- in-house tax audits of VAT returns are have been found), a statement of litigation procedure. carried out within 1 month. An in-house completion of the on-site tax audit is tax audit of foreign entities that provide drawn up, and then a tax audit report is For this purpose, appellate and general electronic services takes up to 6 months. issued. administrative appeal procedures are If the results of the audit show violations Individual tax control measures prescribed. of tax law, a tax audit report is drawn The appellate procedure is used to up, otherwise no summary document is In January 2015 tax monitoring challenge decisions that have not yet prepared. appeared as a new form of tax control in entered into force. The appellate appeal Russia. It replaces in-house and on-site is filed with the higher tax authority On-site tax audit tax audits with an online arrangement (through the tax authority that made An on-site tax audit may be conducted based on remote access to a taxpayer’s the decision) within a calendar month in relation to more than one tax at once information systems and its financial of the decision being received. and is carried out on the basis of a and tax statements (see page 77 for decision of the head of the tax authority. more details). An appellate appeal suspends the entry It may take place on the premises of the into force of a decision on an audit. entity being audited.

Doing business in Russia 73 How can EY help?

We offer an integrated approach to the resolution of tax disputes which involves supporting the client through all stages of the process, from the identification and evaluation of potential tax risks that might lead to a tax dispute to administrative and/or judicial procedures for the settlement of a dispute.

At the stage of identifying and evaluating At the stage of contesting the results of a tax At the stage of contesting the tax tax risks and preparing for a tax audit, we: audit at the pre-litigation stage, we: authority’s decision in court, we:

• examine the company’s documents, • represent the company’s interests • analyse the tax authority’s decision databases and tax records in communicating with the tax authority based on the results of the tax audit and on reaching agreements the decision issued by the tax authority • identify potential tax risk areas on the appeal • assess identified tax risks for materiality • analyse the tax audit report and relevant and the likelihood of challenges from the company documents • identify weaknesses in the evidence used by the tax authority and formulate tax authorities • check the accuracy of the tax authority’s arguments to support the taxpayer’s calculations and help prepare an • prepare recommendations for position eliminating/mitigating identified tax risks alternative calculation • formulate the legal position for the • prepare a “defence file” for the company • formulate a legal position in response company’s defence and devise a to the challenges presented against the litigation strategy At the stage of support during company a tax audit, we: • prepare and present all required • prepare written objections to the tax documents in the hearing • analyse demands/requests received by audit report the company from the tax authorities to • if necessary, prepare and file a petition • represent the company’s interests during provide documents for interim measures the examination of tax audit materials by • formulate proposals as to the range of the head of the tax authority • represent the company’s interests in documents and the content and form of litigation in any instance of arbitration • represent the company’s interests in explanations to be provided to the tax courts authority the course of additional tax control measures conducted by the tax authority • check the set of documents prepared for the tax authority to check that it is in • provide all necessary assistance order in securing a deferral (instalment plan) for the payment of taxes, penalties • represent the company’s interests and fines charged as a result of the in dealings with the inspectors, tax audit including during interviews/surveys of the company’s employees, expert • prepare an appeal to the higher tax examinations, document seizures and authority and, if appropriate, to the other tax control procedures Federal Tax Service • assess and, if necessary, file appeals against actions/omissions of tax officials

74 Doing business in Russia The period allowed for the consideration of an appellate appeal is generally a calendar month from the day on which it is received. The general procedure is used when challenging a decision that has already entered into force. Such an appeal may be filed within the higher authority within a year from the date of the decision on an audit and will likewise be considered within a calendar month after it is received. If an appellate/general appeal does not yield the desired outcome, the taxpayer may appeal to the Federal Tax Service and/or to a court. The filing of an appeal with the Federal Tax Service may take place within 3 months after the date of the higher tax authority’s decision on the appellate/ general appeal and is the taxpayer’s right. It is essential to point out that a court appeal may be filed only after the appellate/general pre-litigation appeal process. The time allowed to file a petition with a court is 3 months from been established at federal level whose main activity is mineral the date on which the taxpayer learned along with lower-level interdistrict tax extraction. inspectorates. of the higher tax authority’s decision on The following criteria are used to define its appeal. The criteria on which this specialization major taxpayers: financial and economic is based are the make-up of performance indicators for the reporting organizations, the areas of business in year from an organization’s financial Administration of major which they operate and potential tax and tax statements, indications of taxpayers risks that typically affect particular relationships with other entities and the sectors of the economy. A new system for the administration taxpayer’s influence on the economic of major taxpayers took effect from At present, for instance, there are performance of related entities, the 2019. As a result of reforms in the interregional inspectorates which possession of a special permit (licence) administration of taxpayers, specialized administer transnational companies, to carry on a particular activity, and the interregional tax inspectorates have financial companies, and companies conduct of tax monitoring.

Doing business in Russia 75 Digital tax control • improving the efficiency of the tax Since VAT returns contain transaction- control function (combating tax fraud) by-transaction information, ACS VAT-2 Automated Information System enables the following to be identified: (AIS) Tax-3 Automated Control System (ACS) VAT-2 • breaches of control ratios set by AIS Tax-3 is a unified information system the Federal Tax Service within that automates various functions of the ACS VAT-2 is a component of AIS Tax-3 a single VAT return (the control ratios tax authorities, including the collection, and constitutes an automated system are public, and every taxpayer may processing, storage and analysis of for checking VAT returns submitted to check whether its figures comply information. The main goals of the the tax authorities in xml format and with them) system are: generating requests for clarification of discrepancies found. The system allows • mismatches between data in the • simplification of communication VAT returns filed by the taxpayer and its taxpayer’s VAT return and data between taxpayers and tax authorities counterparties to be cross-checked by in a VAT return submitted by its • automation of tax administration comparing data from purchase and sales counterparty procedures (including tax registration, ledgers and journals of VAT invoices • gaps in the supply chain caused by processing of tax returns, and tracking received and issued in automatic missing traders (companies that 16 of cashflows) mode . receive unjustified tax benefits by receiving input VAT credits while not paying output VAT) In case of any discrepancies, the system automatically generates and sends requests for clarifications to the taxpayer in xml format. Responses to such requests must likewise be sent in xml format. ACS VAT-2 also allows the tax authorities to perform automated “risk-based control procedures” that assign a particular level of risk to each taxpayer — from red (high risk) to green (low risk). The classification serves as a basis for planning future tax audits.

12 Transactional VAT reporting, whereby information on every incoming and outgoing VAT invoice for a given period must be included in the VAT return.

76 Doing business in Russia Tax Monitoring Increase in the number of TM participants Following the publication of the OECD study, “Co-operative Compliance – A 7800 Framework”, in 2013, Russia introduced a Co-operative Compliance regime known as Tax Monitoring (TM) as a pilot program in 2013 and established corresponding regulations in its law in 209 2016. From a starting point of just 5 pilot companies (EY Russia was one 95 of those first five participants), the 44 number of participants has risen to 209 The number of TM participants number of The 26 companies in 2021. They include some 21 7 of the largest Russian-headquartered state and private corporations and international investors from major 2016 2017 2018 2019 2020 2021 2025 industries (Oil & Gas, Energy, Banking, Transport, Telecom, FMCG, Retail, Trading, Manufacturing etc.). Russia’s Taxpayer Tax authorities Federal Tax Service has a strategy to develop this regime (the strategic plan Option 1 Provision information in electronic form for the development of tax monitoring was approved by a government order) Receipt of documents and aims to attract the majority of major and information taxpayers to the regime by 2025. Primary documents Tax registers Participation in the regime is voluntary for companies and subject to their Option 2 Granting of direct access to the accounting system meeting quantitative thresholds for revenue (over RUB 1bn), assets (over Remote access to ERP RUB 1bn) and taxes paid (profits tax, via a secure communication channel excise duty, mineral extraction tax and Primary documents ERP VAT totalling at least RUB 100m) based on the Russian statutory accounting Option 3 Granting of access to the Data Mart P&L statement and balance sheet for the preceding year. The Federal Tax Access to Data Mart Service plans to change the quantitative instead of ERP thresholds in order to expand the ERP range of potential participants in tax monitoring (it is estimated that 7,800 Data Mart Receopt of additional documents and companies may apply for the regime in information via request 2025). Primary documents

Doing business in Russia 77 An applicant is required to prepare • Importantly, tax monitoring applies Participation in TM constitutes public and file quarterly reports relating to prospectively, and joining the regime and official recognition of a company the Tax Control Framework (TCF) in does not automatically “close” as a trusted and responsible taxpayer a format prescribed by the Federal preceding tax years. Thus, taxpayers and is an important step in building Tax Service. It must also implement may expect “traditional” tax audits trust with the tax authorities. Despite electronic information exchange with to close prior periods in the first 1-2 the additional costs associated with the tax authorities using one of three years after joining the regime, as well the implementation of electronic options (organization of direct access as transfer pricing audits during the information exchange with the tax to the accounting/ERP IT system, entire period of tax monitoring. authorities and Tax Control Framework installation of special software in the reporting, the number of participants The application must be submitted form of a tax data mart, or the default in the regime is rapidly expanding every to the tax inspectorate no later than option – electronic exchange via year with Russian and international 1 September of the year preceding telecommunications channels) (these investors looking for tax certainty and transition to the regime together with options will be cancelled in 2024). transparency. the following set of documents: The key benefits for companies that have signed up for tax monitoring over • Tax accounting policies How can EY help? the traditional form of tax control are: • Information on corporate structure and shareholders EY has vast experience in assisting • Release from traditional tax audits companies from different industries (both in-house and on-site), except for • Regulations on information exchange with the process of transitioning transfer pricing audits • Tax Control Framework policy to the tax monitoring regime. Our services include: • “Fast close” of the tax period – the tax • Special reporting forms for the Tax inspectorate finalizes audit procedures Control Framework in a format to be • Analysis of a company’s readiness for transition to tax monitoring by 1 October of the year following the prescribed by the Federal Tax Service reporting year with limited grounds to (including Risk Control Matrix, TCF • Development of measures open it up maturity assessment, etc.) to improve internal processes, controls and IT systems • Possibility to obtain a “reasoned The tax inspectorate must analyse opinion” from the tax authorities (very • Preparation of the required set the documents and issue a decision similar to the international “private of documentation on whether to admit the company letter ruling” concept) for a particular to the regime by 1 November. Tax • Assistance with the implementation tax position taken in a tax return or monitoring starts from 1 January of of a Tax Data Mart agree on the tax treatment of an the year following the year in which • Assistance in conducting negotiations expected transaction. When acting on the application was submitted and with the tax authorities and the the basis of a reasoned opinion from the considered. Federal Tax Service tax authorities, a company is protected from fines and interest that would apply under the traditional regime

78 Doing business in Russia Hot trends The tax authorities pay particular leads to adverse tax consequences (non- attention to cross-border transactions. deductibility of interest expenses and In order to increase the efficiency of tax They analyse the status of the beneficial reclassification of interest payments as control measures, tax authorities apply a owner of income for the purposes dividends). risk-based approach. In practical terms, of assessing the applicability of the this means that the tax authorities do The Russian GAAR rules are also provisions of double tax treaties. not examine the entirety of a taxpayer’s designed to combat “technical business activities and tax obligations, Contracts for the provision of companies” (mala fide counterparties) but rather focus on the most high-risk intercompany services within MNEs which are used by mala fide taxpayers areas or transactions. are closely scrutinized by the tax as a means of securing VAT refunds authorities. This involves checking that and claiming expenses for profits tax Current trends in case law are as follows: services were actually provided and purposes. The provisions of the GAAR (General that they are properly documented and Anti-Avoidance Rule) (and specifically economically justified. Article 54.1 of the Tax Code, which Transactions associated with intra- came into effect on 19 August 2017) group financing are also subjected to are being increasingly used in Russia. rigorous scrutiny. In some cases, the The provisions are being implemented, tax authorities reclassify loans from inter alia, in the context of domestic law foreign entities as investments, which enforcement practice.

Doing business in Russia 79 Value Added Tax 6(VAT)

80 Doing business in Russia Taxpayers Taxable operations Generally, the place of supply of services not covered by special VAT Taxpayers for VAT purposes are any VAT applies to the following rules is defined as the supplier’s place individual entrepreneurs or legal entities transactions: of activity. However, there is a limited (including foreign legal entities) that • Supplies of goods (work and services) list of services that are deemed to be make taxable supplies of goods (works in the territory of Russia and supplied at the customer’s place of and services) and/or property rights in territories under Russian jurisdiction activity, including, inter alia, the transfer the territory of Russia and territories or licensing of intangible property, under Russian jurisdiction in the course • The transfer of property rights services involving the development, of their business activities or that bring • The transfer of goods (work and adaptation or modification of computer goods into the territory of Russia and services) in the territory of Russia programmes, consulting, legal, territories under Russian jurisdiction. for own requirements, expenses for accounting, audit, advertising and The territory of Russia and territories which are not deductible for profits marketing services, the provision of under Russian jurisdiction means the tax purposes personnel secondment services (where territory of Russia and artificial islands, the staff work in Russia), the renting of • The performance of construction, installations and structures over which movable property (with the exception of installation and assembly works for Russia exercises jurisdiction. land motor vehicles) and certain other own consumption types of services. • The importation of goods into the In addition, Russian law specifically Registration territory of Russia and territories designates certain other services that under Russian jurisdiction General tax registration in Russia covers are deemed to be provided in Russia. all taxes, including VAT. There is no The transfer of goods (work and These include services (work) directly separate VAT registration except for the services) without consideration is connected with immovable or movable VAT registration required for foreign treated as a sale for VAT purposes. property situated in Russia, services legal entities that provide electronic actually rendered in Russia in the sphere services to Russian customers (see the of culture, art, education, tourism, “VAT on e-services” section below). Place of supply of goods leisure or sport, certain types of Such VAT registration does not per se and services transportation services, and others. trigger a permanent establishment of For VAT purposes goods are deemed the foreign company in Russia. to be supplied in Russia if either (i) Russian tax law does not provide for the goods are situated in the territory Rates voluntary tax registration or group of Russia or territories under Russian VAT is levied at the standard rate of VAT registration. jurisdiction and are not shipped or 20% on taxable supplies, which include transported or (ii) the goods are most domestic sales of goods, work and situated in the territory of Russia or services. Certain basic food products, territories under Russian jurisdiction children’s goods, medical devices, at the moment when shipment or medicines, newspapers and magazines transportation begins. attract a reduced rate of 10%.

Doing business in Russia 81 A zero VAT rate is applicable to certain Non-taxable supplies Databases (hereinafter, “the Register”). supplies, including: Among the conditions required for Certain transactions occurring in Russia software and databases to be included • Exports of goods are not subject to VAT by reason of the in the Register and benefit from the VAT application of VAT exemptions (these • The performance of certain types of exemption are that the exclusive rights differ from zero-rated supplies in that work and services related to exports to the software or database must be a VAT exemption does not allow for and imports of goods owned by a Russian legal entity (with no the deduction of related input VAT). more than 50% foreign direct or indirect • Goods (work, services) supplied for The list of VAT-exempt transactions participation) and that payments official use by diplomatic missions is exhaustive and includes, inter alia, received from non-Russian entities for the provision of financial, insurance, • Work and services directly connected the software or database should not educational, cultural or medical services, with the transportation of goods exceed 30% of revenue for the calendar the supply of certain medical equipment placed under the customs transit year. Caution must be taken with respect and prosthetics and the supply of procedure which is carried out by to payments received in 2020 and the equipment for disabled persons. Russian taxpayers within the territory beginning of 2021, since the law does of Russia A VAT exemption also applies to not provide clear guidelines on the the granting of exclusive rights over applicability of the VAT exemption in The application of the zero VAT rate inventions, utility models, industrial such cases, meaning that clarifications for certain types of supplies is subject designs, software, databases, integrated from tax regulatory bodies should be to a requirement to collect supporting circuit topographies and production relied upon. documents and submit them with a VAT secrets (know-how) and the granting return to the Russian tax authorities Furthermore, with effect from 1 January of rights to use the above-mentioned within a set time limit. If the required 2021 a VAT exemption is no longer items under a licence agreement. The documents are not submitted on time, available for the provision of exclusive exemption does not cover trademark the standard VAT rate will apply. (license) rights to software or databases royalties. if they are used for advertising on the The supply of electronic services by Effective from 1 January 2021, Internet, to post offers for the purchase foreign legal entities and the sale of the scope of the VAT exemption for an enterprise as a whole as an asset (sale) of goods (works, services) or the provision of exclusive (license) complex are subject to a special VAT property rights on the Internet, to rights to software and databases was rate of 16.67% applicable to the VAT- search for information about potential significantly narrowed. Specifically, a inclusive value of the transaction (which buyers (sellers) or to conclude new requirement must now be met for is simply the same as a 20% rate applied transactions. such transactions to be VAT exempt, to the VAT-exclusive value). namely that the software or databases Certain activities aimed at the in respect of which rights are transferred development and modernization of must have been included in the Unified innovative products and technologies Register of Russian Software and are also VAT-exempt.

82 Doing business in Russia Time of supply VAT paid on imported goods and VAT How can EY help? paid by a customer acting as a tax agent The point at which VAT becomes due upon acquiring goods (work, services) is called the “time of supply.” For In view of the changes made to the VAT from a foreign legal entity (see the section exemption rules from 1 January 2021, taxpayers, the time of supply is the entitled “Withholding of VAT on purchases we would be glad to assist businesses earlier of the following dates: from foreign legal entities” below). that may be affected by the changes in taking the following preparatory steps: • The day on which goods (work and Starting from 1 July 2019, an exception services) or property rights are to the above general rule entered into 1. Assessing whether the company’s dispatched (transferred) force. Specifically, taxpayers became software and databases may be included in the Unified Register • The day on which payment or partial entitled to recover input VAT on goods of Russian Software and Databases payment is received in respect of (work, services) used in the provision of for VAT purposes, future supplies of goods (work and services not deemed to be supplied in services) or transfer of property rights Russia based on the applicable place of 2. Reviewing VAT clauses included in supply rules. There are no restrictions existing agreements with Russian In the case of the supply of electronic relating to the business sector or customers in order to check VAT services by foreign legal entities, the obligations, location of the purchasers of so-called time of supply is the last day of the “exported” services. The new regime 3. Reviewing VAT calculation and quarter during which payment for the does not, however, extend to services invoicing procedures as well services is received. classed as VAT-exempt supplies as as reporting obligations if the established in Russian tax law. company previously applied a VAT exemption to its contracts, Calculation of VAT Input VAT recovery is permitted only 4. Developing a strategy for the VAT due is calculated as the VAT base for tax-registered persons that make transition period (2020 – beginning (in most cases the value of the supply) taxable supplies in Russia. Russian tax of 2021) and for managing cashflows multiplied by the applicable VAT rate. law does not allow foreign entities to with Russian customers in light of the The taxpayer may reduce VAT payable recover input VAT incurred as result new rules, by the amount of input VAT incurred of purchases in Russia, including when the foreign entities are VAT-registered 5. Communicating with Russian on purchases of goods (work, services) clients about the change from VAT if the general criteria for input VAT in Russia as suppliers of electronic exemption to VAT charging and the recovery are met. services. Thus, any Russian VAT charged possible use of an alternative tax to a customer that is not tax-registered payment mechanism. in Russia would represent an additional Recovery of VAT by cost for the customer. taxpayers If a taxpayer carries out both non- VAT charged by suppliers (input VAT) VATable (or VAT-exempt) and taxable is generally recoverable by the buyer supplies, it is obliged to account for as long as the underlying costs relate those operations separately. Input VAT to its taxable business activity and VAT directly related to taxable supplies is invoices properly drawn up by suppliers recoverable in full, while amounts of are in place. Input tax includes VAT input VAT directly related to VAT-exempt charged on goods (works and services) supplies is not recoverable and should and property rights supplied in Russia, be expensed for profits tax purposes.

Doing business in Russia 83 Input VAT that cannot be directly Tax reporting and attributed to taxable or non-VATable How can EY help? supplies (such as VAT on G&A expenses) payment must be apportioned. If certain In view of the legislative changes Taxpayers file VAT returns on a regarding the deduction of input VAT, now purchased goods (works and services) quarterly basis (by the 25th day of the is a good time for international groups of month following the calendar quarter) in are used in the production and/or companies with Russian subsidiaries to sale of both taxable and non-VATable check that services provided by Russian electronic form via telecommunications supplies, the associated input VAT may entities are correctly treated from a channels. Payments of VAT to the be recovered pro rata to the share of Russian VAT perspective. With taxpayers Russian budget must be made in equal taxable supplies in total sales revenue. gaining the right to deduct input VAT on instalments by the 25th day of each certain non-VATable services, we expect of the three months following the tax If input VAT on supplies exceeds the the Russian tax authorities to pay closer period that has ended. amount of output VAT, the difference attention to the substance of functions may be reimbursed to the taxpayer performed in Russia and whether they Branches of a legal entity do not have either through a refund or by means are correctly treated for VAT purposes. to compute and pay VAT. All VAT The issue is especially critical for Russian of an offset against the taxpayer’s compliance may be centrally managed. subsidiaries of international groups which future obligations to the state (future are financed through service agreements Foreign suppliers of e-services which are payments of VAT, other federal taxes and do not have much VAT on output registered with the Russian tax authorities or accrued tax fines). A VAT refund transactions: the introduction of the for VAT purposes are obliged to file position triggers an in-house tax audit changes will place these companies in a quarterly VAT returns via the official within three months after the submission VAT refund position, which could trigger website of the Russian tax authorities an in-depth tax audit. date of the VAT return. In certain cases, and pay VAT in full by the 25th day of the VAT reimbursement (offset or refund) In view of the above, we would be glad month following a calendar quarter. may be granted to taxpayers before the to assist in: completion of an in-house tax audit if • Analysing services supplied under (i) the taxpayers have existed for more cross-border agreements and Imported goods than three years and their total gross identifying elements that might be Imported goods are subject to import tax paid for the three previous calendar treated as non-VATable in Russia VAT levied at the customs border. VAT years amounted to not less than RUB 2 • Reviewing whether services are billion (approx. US$ 27,654,867) and on imports is generally collected at correctly treated as non-VATable in customs and is payable by the entity (ii) the taxpayers have submitted a bank Russia guarantee to the tax authorities for the declaring the goods for import on the • Updating internal accounting policies basis of the total value of the goods, reimbursement amount. to implement legislative changes including import duty and excise duty A Russian legal entity or individual • Reviewing potential for the (where applicable). entrepreneur that purchases electronic restructuring of intra-group relations services from a foreign legal entity has to manage Russian VAT implications. In practice, import contracts may the right to recover VAT charged by the provide for not only the importation of supplier. To exercise the right to recover goods but also the provision of services VAT, the Russian customer must have (TIN) and code of reason for registration related to those goods. Different VAT (1) an agreement and/or a settlement of the supplier and (2) documents for treatments might be applicable in such document with a separately specified the transfer of payment, including VAT, cases, i.e., the whole contract value VAT amount, VAT identification number to the supplier. may be treated as VATable at customs

84 Doing business in Russia or the value of goods may be treated as VAT on e-services VATable while the VAT status of services How can EY help? For Russian VAT purposes, electronic may need to be determined separately. services are defined as services Contracts covering both the importation In practice, the above-mentioned rules provided via an information and governing VAT on e-services affect not of goods and the provision of services telecommunications network, including only companies of the IT sector, but must therefore be drafted carefully. the Internet, on an automated basis also a wide range of companies that Certain goods are exempt from import with the aid of information technologies. provide services classified as electronic services as incidental activities as well as VAT. For example, certain kinds of Electronic services include, inter alia: companies that share software/database manufacturing equipment (including • The provision of rights to use IT solutions with other companies within related spare parts) for which no computer programmes via the the same group (intra-group supplies). equivalents are made in Russia are exempt Internet Companies must therefore take proactive from import VAT. See the “Customs” steps to ensure that they are in line section on page 108 for further • The provision of online advertising with the Russian VAT rules relating to information on import VAT exemption. services e-services. • The provision of services involving the In view of the above, we are happy Withholding of VAT posting of offers to purchase goods to assist companies in: on purchases from foreign and property rights on the Internet • Analysing services provided to legal entities • Hosting and storage services Russian customers to determine whether they should be treated as When Russian legal entities purchase • The provision of rights to use e-services goods (work and services) from foreign educational and informational • Examining the applicability of VAT legal entities that are not registered for materials exemptions for particular e-services tax purposes in Russia and the place of supply of the goods (work, services) is Electronic services provided to Russian • The VAT registration process in Russia in Russia, the tax base is determined by customers (both B2C and B2B supplies) the buyer acting as a tax agent. The tax are subject to VAT in Russia. Foreign • VAT compliance in Russia, including agent must withhold and pay VAT on legal entities that provide e-services are the preparation and submission of VAT returns and potential the payment made to the foreign legal required to register for VAT purposes in Russia, charge and pay VAT on communication with the tax entity. authorities such supplies and fulfil VAT reporting The general rule does not apply to obligations. The withholding mechanism • Reviewing potential for restructuring purchases of electronic services from is not applicable in this case. the supply of e-services to Russian foreign legal entities, as in this case customers or changing business or the suppliers are responsible for the In addition to the general rules, financial models to manage Russian VAT implications collection and payment of VAT. parties may follow the official (though non-binding) guidance issued by the To address the above-mentioned Federal Tax Service to the effect that, withholding mechanism, foreign if a service provider did not charge a suppliers usually gross up fees for Russian customer VAT and the latter Russian VAT so that they receive the full acted as a tax agent (voluntarily) and amount of consideration after VAT has paid VAT, the tax authorities would not been withheld. have grounds to require the foreign

Doing business in Russia 85 company to pay VAT again, nor would VAT and the EAEU they be able to require the customer to recalculate its tax obligations (VAT As mentioned above, the legislation charged and VAT reclaimed). Thus, of the Eurasian Economic Union of if both parties agree, the Russian Russia, Belarus, Kazakhstan, Armenia customer may continue to voluntarily and Kyrgyzstan (the EAEU) created act as a tax agent and pay VAT on a united customs territory for its electronic services. However, even if member states. The EAEU’s legislation VAT is paid by the Russian customer, establishes special VAT rules for the foreign supplier is still required to transactions between entities in VAT register and submit a quarterly different EAEU member states. Exports nil VAT return. The foreign supplier of goods from one member state to still bears responsibility in case of another are subject to zero-rate VAT. the non-payment of VAT and must, if In order to apply the zero VAT rate for requested by the tax authorities, provide exports a taxpayer must submit relevant documents proving that VAT was paid by documents certified by the seal of the the Russian customer. tax authority of the member state into which the goods were imported. A foreign legal entity is not required to register if it provides e-services Imports of goods from one member through intermediaries (either state to another are subject to import Russian or foreign legal entities) that VAT in the other member state. The participate in settlements directly with taxpayer is obliged to submit a separate Russian customers and have agency, VAT return for goods imported from commission or other similar agreements another EAEU country. with the foreign legal entities that As regards the taxation of electronic provide the e-services. In this case, the services, EAEU legislation does not intermediaries must fulfil the relevant regulate how such services should VAT obligations. be taxed when supplied to customers Once VAT-registered in Russia, a foreign located within EAEU. However, certain supplier must account for and pay VAT member states are considering on all supplies of goods (work, non- implementing the same VAT regime electronic services) subject to VAT in as is currently applied in Russia. Russia.

86 Doing business in Russia Doing business in Russia 87 Corporate 7property tax

88 Doing business in Russia Taxpayers under a concession agreement). immovable property, taxpayers may face problems in determining their property Corporate property tax is paid by the If property is not recorded in the official tax liabilities, resulting in potential following taxpayers: cadastral valuation report as of 1 tax risks (or tax overpayments). We January of the tax period (year), the • RLEs have extensive experience in providing property tax base for that property in assistance in relation to these matters • FLEs that carry on activities in Russia that year must be determined based on and would be happy to offer you our through a PE or own immovable net book value under the old rules. If support. property in Russia immovable property without a cadastral valuation is owned by an FLE and the Tax base property is not related to the activity Tax rate of a PE in Russia, the tax base for that The rate of corporate property tax for For RLEs and FLEs that carry on property is taken to be equal to zero. immovable property is determined by activities in Russia through a PE, regional authorities but cannot exceed: corporate property tax is levied on It should be noted that, owing to the immovable property which is recorded ambiguous definition of the term • 2.2% for property not taxed on the as fixed assets in their accounts “immovable property” in Russian cadastral value maintained under Russian accounting legislation, as well as frequently arising • 2% for property taxed on the principles. issues over the approach to the division of fixed assets into movable and cadastral value The tax base is the average annual value of the property, calculated on the basis of the net book value of fixed assets period by period (the first three months, six months and nine months of a year, and the calendar year). The tax base for certain types of property is determined as their cadastral value (administrative and business centres, residential and non-residential buildings, car parking spaces and garages, immovable property of an FLE that does not have a PE (or which is not related to the PE’s activities), construction-in-progress, and structures situated on land assigned for farming, gardening or individual housing construction). These types of property form part of the tax base even if they are not recorded as fixed assets in the taxpayer’s accounts (if the taxpayer is the owner of the property or the property was obtained by the taxpayer

Doing business in Russia 89 90 Doing business in Russia • 1.6%17 for public railways and related Corporate property tax paid by an RLE facilities (specified in the list approved outside Russia (on property located How can EY help? by the Russian Government) outside Russia) may be set off against corporate property tax paid in Russia on Owing to the ambiguity of the term • 0% for certain types of property “immovable property”, taxpayers the same property. To claim a set-off, specified in a list approved by the experience difficulties in classifying the taxpayer must submit a document Russian Government (e.g., trunk property and, accordingly, in the confirming the payment of property tax pipeline facilities, gas extraction calculation of the property tax base, abroad. which may lead to potential tax risks and/ facilities, helium production and or tax reserves (overpayments). Also, storage facilities, facilities provided for both federal and regional legislation in technical plans for the development provide various property tax reliefs that of mineral deposits) if certain Tax reporting should be properly considered when conditions are met18 Taxpayers are obliged to estimate and calculating tax. make advance payments of corporate Regional authorities may reduce property tax on a quarterly basis (for corporate property tax rates to 0%. We would be happy to assist with the the first, second and third quarters). following: After the end of the tax period, • Analysing the company’s existing taxpayers must pay the amount of tax Tax reliefs approach (and, if necessary, calculated for the period reduced by the developing a more appropriate Certain assets are excluded from the amount of advance payments made. approach) to classifying fixed assets tax base, including land plots and other A tax return must be submitted to the as movable or immovable property natural resource sites, nuclear plants, tax authorities annually by 30 March of • Providing relevant IT tools, e.g., to spacecraft, ships registered in the the year following the reporting year. automate the process of assigning tax Russian International Register of Vessels accounting characteristics to fixed Regional authorities set the deadlines and assets recognised as cultural assets (e.g., useful life, depreciation for tax and advance payments. Regional heritage assets. Certain regions provide group) in order to help determine the authorities are also permitted to abolish full exemptions from property tax to amount of deductible depreciation advance payments (in which case tax taxpayers involved in certain investment • Analysing applicable tax reliefs and must be paid on an annual basis). projects. assistance in securing those reliefs • Assistance with corporate property tax compliance • Other support relating to corporate property tax

17 The lower tax rate is set at a maximum level of 1.6% for 2020 and 2021. Rates could not exceed 1.3% in 2019 and 2018 and 1% in 2017. 18 The property must be located (in whole or in part) in the Republic of Sakha (Yakutia) or the Irkutsk or Amur regions and must have been commissioned not earlier than 1 January 2015. In addition, the property must be owned by a payer of mineral extraction tax.

Doing business in Russia 91 8Other Taxes

92 Doing business in Russia Excise duty with an average value of RUB 3 million The tax base is calculated using the (approx. US$ 41,482) or more is following methods: Excise duty is payable on domestic increased by multiplying the tax rate sales of certain goods produced in or • Based on the quantity of minerals by a coefficient of between 1.1 and 3 imported into Russia. The list of goods extracted. Applicable for oil, gas and depending on value and age. subject to excise duty includes alcohol, gas condensate. beer, tobacco, cars, motorcycles, The conditions for transport tax filing • Based on the value of minerals aeroplanes, petrol, diesel fuel, motor and payment are established by the extracted. Applicable for other oil and straight-run petrol. The rates authorities of the region in which the minerals. are ordinarily established in roubles vehicle is registered. However, the final per unit or as percentages of value and tax return must be filed and final tax The tax rates for oil, gas and gas vary significantly. Imported alcohol and paid by 1 February of the year following condensate are set as fixed rates based tobacco are cleared through customs the reporting year.19 on physical volume or quantity but only if they bear excise stamps. With are subject to variation in line with some exceptions, export sales are changes in global prices. There are tax exempt from excise duty. Excise duty is How can EY help? benefits in the form of tax holidays deductible for profits tax purposes. and coefficients that reduce the tax EY is happy to assist with analysis of rate (up to 0%) in order to encourage applicable tax risks and benefits and to the development of hard-to-recover oil Transport tax provide any other support relating to reserves, new offshore hydrocarbon transport tax. Transport tax applies to both RLEs and deposits and other designated FLEs if they have registered means of subsurface sites. Other commercial transport (in particular, cars, motorcycles, minerals are taxed on the basis of helicopters, yachts and sailing boats). The Mineral extraction tax the value of the extracted minerals. tax base is calculated based on engine In determining the value of minerals, Mineral extraction tax is paid by RLEs size, jet thrust, or type of vehicle. direct and indirect costs are taken into and FLEs that carry out mining on the account. To determine the calculated For most types of land vehicle, the basis of a license. value of an individual extracted mineral, tax rates established in the Tax Code Mineral extraction tax is levied on it is necessary to allocate from the total vary from RUB 1 to RUB 15 (approx. minerals extracted from the subsoil in amount of expenses a part of expenses US$ 0.01 to US$ 0.21) per horsepower the territory of the Russian Federation corresponding to the proportion that the of engine size. and outside the territory of the mineral in question makes up of the total Regional authorities are entitled to Russian Federation, as well as minerals quantity of extracted minerals. increase or reduce tax rates, but not recovered from waste (losses) resulting more than tenfold. Tax on motor cars from mining operations.

19 The obligation to file a transport tax return was abolished starting from 2021 (for the 2020 tax period).

Doing business in Russia 93 How can EY help? deemed income from the sale of hydrocarbons minus related • Analysis of the mining process and actual and deemed costs. The preparation of comments on the tax tax rate is set at 50% of the treatment of mining operations tax base. Companies that pay • Analysis and identification of provisions/documents that have additional income tax are also negative impact for the taxpayer liable to mineral extraction tax at • Development of a procedure for reduced rates. determining the calculated value of an extracted mineral • Development of recommendations on the formation of a ”defense Other taxes and file” for use in disputes with the tax authorities duties • Other support relating to mineral Other taxes payable by extraction tax companies include personal income tax, social contributions (see section on “Individuals” on Additional income page 142), land tax, water tax, tax on hydrocarbon gaming tax and various licensing production fees. Additional income tax is imposed on additional income received by How can EY help? companies that hold exploration and production licences EY is happy to assist with compliance and analysis of applicable tax risks and engage in hydrocarbon and benefits and to provide any other production at certain groups support with regard to the above- of subsurface sites. Additional mentioned taxes and licensing fees. income tax is determined as

94 Doing business in Russia Doing business in Russia 95 International 9Taxation Matters

96 Doing business in Russia Taxation of Russian- • Rental and lease payments relating to The repatriation of profits from an FLE’s assets used in Russia Russian PE to the head office is not source income of FLEs taxable. without a PE in Russia • Income from international transportation Payment of tax Withholding tax • Fines and penalties for the violation Withholding tax must be charged on The source taxation regime is relatively of contractual obligations by Russian income paid to an FLE each time such similar to OECD principles. Russian- entities and state bodies income is paid and must be remitted to source income that does not relate the state budget. to business activities carried on by an • Other similar income FLE in Russia through a PE is subject to profits tax in Russia at the source of payment. The payer of income is responsible for withholding and remitting the tax to the state.

Russian-source income Russian-source income includes the following: • Dividends and other forms of profit distribution from Russian entities • Interest income on all types of debt obligations, including profit-sharing and convertible bonds • Royalty payments, particularly Tax rates in respect of copyrights, patents, The withholding tax rate applicable to income paid to foreign companies depends trademarks, industrial designs and on the nature of the income: secret formulas or processes used within Russia Interest 20%(*) Income from the operation, maintenance or leasing of ships, aircraft or other 10% • Income from the sale of shares means of transport or containers in international traffic (participating interests) in Russian Dividends 15% entities if more than 50% of the assets of such entities consists of immovable Capital gains from the disposal of immovable property and capital gains from the disposal of shares (participating interest) in entities whose assets derive 20% property situated in Russia, and of more than 50% of their value from immovable property financial instruments derived from Rental income 20% such shares (participating interests), with the exception of quoted shares Royalties 20% Other types of income 20% • Gains from the sale of immovable property located in Russia * Interest on certain types of state and municipal securities and mortgage-backed bonds and income derived from certificates of participation in a mortgage pool are subject to tax at reduced rates.

Doing business in Russia 97 In the case of the payment of interest organizations, are, as at the date is paid to persons in relation to which income on Eurobonds, Russian on which the interest income is information was not provided to the tax borrowers are not required to act as tax paid, residents of states that have agent in the proper manner. agents if the following conditions are a double tax treaty with Russia, Dividends received by Russian simultaneously met: as confirmed by a tax residency organizations from Russian and foreign certificate. 1. The debt instruments in respect organizations are taxed at 13%. of which interest is paid arose The above exemption from tax agent The Tax Code contains participation in connection with the issuance functions also applies to: exemption provisions for dividends of Eurobonds (the Law uses the • Interest income on state securities of received by Russian organizations term “circulated bonds”) and this the Russian Federation, state securities from foreign organizations. A 0% rate connection is indicated in the of constituent entities of the Russian applies if the Russian organization relevant agreement and terms of Federation and municipal securities has continuously owned for at least issue of the Eurobonds and the 365 calendar days at least 50% of the prospectus, or the connection is • Income paid by Russian organizations capital of the organization paying the indicated by the actual movement of on circulated bonds issued by those dividends, and if the dividends are funds. organizations in accordance with the legislation of foreign states paid by a foreign organization, that 2. The Eurobonds have been listed and/ organization is not a resident of a state • Income paid by a Russian organization or admitted for trading on one or or jurisdiction included by the Ministry on the basis of guarantees or other more foreign exchanges, and rights of Finance in the list of offshore zones security arrangements relating to the in them are registered with foreign (see Appendix 4). debt obligation to foreign organizations depositary or clearing organizations, or on Eurobonds provided that such foreign exchanges and foreign depositary • Other income paid by a Russian Treaty relief and clearing organizations are organization and provided for under Double tax treaties, including those included in the list approved by the the terms of the respective debt concluded by the Russian Federation Central Bank in co-operation with the instrument or the terms of issue of and those to which the former USSR was Finance Ministry. Eurobonds (e.g., payments upon early a party, may provide relief in the form repurchase and/or redemption of of reduced or zero rates of withholding 3. Foreign organizations which are Eurobonds) tax. Tax treaties to which the former issuers of circulated bonds, or USSR was party are honoured by Russia foreign organizations which are A “punitive” tax rate of 30% is unless the other party to the treaty has authorized to receive interest established for income on securities renounced the treaty or it has been income payable on circulated bonds, (with the exception of income in the replaced by a new treaty. In the last or foreign organizations to which form of dividends) issued by Russian twenty years, Russia has entered into there have been ceded rights and organizations rights in which are many new treaties based on the OECD obligations in respect of issued recorded in a depositary account of a Model Convention and now has an circulated bonds whose issuer foreign nominee holder, a depositary extensive treaty network. As of 1 January is another foreign organization, account of a foreign authorized holder 2020, Russia has double tax treaties in and to which interest income on and/or a depositary programme force with more than 80 countries. debt obligations is paid by Russian depositary account where that income

98 Doing business in Russia A foreign company wishing to claim an MLI exemption from Russian withholding tax How can EY help? Russia ratified the Multilateral or a reduced rate based on a treaty must Convention to Implement Tax Treaty provide the Russian payer of the income In a highly globalized world it is important Related Measures to Prevent Base to be able to respond rapidly to changes with a tax residency certificate issued Erosion and Profit Shifting (MLI) in and trends and assess their impact as by a foreign tax authority confirming 2019. MLI entered into effect for 34 early as possible. New approaches to inter- that the company is a tax resident of national tax planning require businesses Russian tax treaties starting from the relevant treaty country. In addition, to re-evaluate their structures and 2021. The MLI makes a number of the tax agent must be provided with implement efficient global tax strategies amendments to the double tax treaties to manage risks. With their comprehen- confirmation that the recipient of the which it covers based on the positions of sive tax knowledge, our international tax income is the beneficial owner of the the signatory countries. Russia plans to experts have the resources and expertise income (See Appendix 3 for treaty needed to assist businesses with apply the MLI to over 70 treaties. withholding tax rates). cross-border tax challenges. As far as anti-abuse rules are concerned, We would be glad to provide corporate Russia has chosen to apply the principal income tax advice on all aspects of Foreign tax relief purpose test (the default test) together cross-border transactions, including: As previously indicated, RLEs are taxed with a simplified limitation on benefits provision (this provision will be applied • Structuring of foreign businesses in Russia on their worldwide income. investing in Russia and Russian only if the treaty partner has agreed to Therefore, both Russian and foreign- businesses investing abroad (holding, source income are taken into account do likewise). The principal purpose test trading, IP, financing, etc., structure when determining the tax base. provides that treaty benefits will not planning; exit tax planning; JV be applicable if obtaining the benefits structure planning and restructuring To avoid double taxation, amounts of tax was the principal purpose or one of the advice and assistance) paid in accordance with the legislation principal purposes of an arrangement or • Identification of cross-border tax of foreign countries by an RLE may be transaction. The simplified limitation on saving opportunities credited against Russian tax payable benefits provision only allows “qualified • Withholding tax advice and assistance by the RLE provided that proper persons” to receive treaty benefits - review of cross-border structures documentation is in place. The amount (exceptions are specified). Optional MLI from a withholding tax perspective of the tax credit may not exceed the provisions that are introduced for Russia (investment and ownership treaty amount of tax payable in Russia on the include a condition concerning the tests, beneficial ownership test, income taxed in the foreign jurisdiction. principal purpose test (PPT), limitation period for which ownership interests in a on benefits (LOB) test), assistance with Foreign tax on foreign-source dividends, company must have been held to claim withholding tax refunds, assistance however, may be credited against reduced rates of withholding tax on with withholding tax audits etc. Russian tax on dividends only if such dividends, rules governing the taxation • Tax residency and permanent credit relief is envisaged by an applicable of the “indirect sale” of immovable establishment matters double tax treaty (which is often the property and a number of rules • Cross-border tax controversy (tax case). For other types of income, a tax regarding permanent establishments. audits, permanent establishment credit is granted regardless of whether a matters, assistance with mutual treaty exists. agreement procedure (MAP), etc.) • Advice and assistance with EU DAC6 (Mandatory Disclosure Regime)- related matters.

Doing business in Russia 99 “Deoffshorization” 10Measures

100 Doing business in Russia Since 1 January 2015 Russia has company (together with spouses of the charter capital of each such applied tougher “deoffshorization” and minor-age children in the case foreign company measures aimed at combating tax of individuals) is greater than 10% if Retained profits of CFCs are assessable to: evasion and capital flight: the aggregate participating interest of all Russian tax resident persons in • corporate profits tax at the rate of • Controlled foreign company (CFC) that company (together with spouses 20% if the controlling person is a rules extending the scope of Russian and minor-age children in the case of Russian tax resident organization, or tax to profits of such companies individuals) is greater than 50% • personal income tax at the rate of 13% • The concept of Russian tax residence if the controlling person is a Russian for foreign companies based on the A person whose participating interest tax resident individual place of effective management test in a foreign company does not meet the above criteria but who exercises control If the CFC’s annual profits are less than • The beneficial ownership concept to over that company is also deemed to be RUB 10,000,000 (US$ 138,274), they limit the availability of treaty benefits a controlling person of that company. are not taxable in Russia. Russian residents are not deemed to The amount of Russian tax on profits of CFC rules be controlling persons of a CFC if they a CFC may be reduced by the amount participate in it: of foreign tax on those profits and the A controlled foreign company is a • through direct and/or indirect amount of Russian tax withheld by a foreign company that meets both the participation in Russian public Russian tax agent on Russian-source following criteria: companies income of the CFC. 1) the company is not a tax resident of • through direct and/or indirect Non-payment/underpayment of tax the Russian Federation participation in foreign companies owing to the failure to include a portion 2) the controlling person of the whose shares have been admitted for of CFC profits in the tax base incurs a company is an organization and/ trading on foreign stock exchanges fine of 20% of arrears, but not less than or individual recognised as a tax located in the territories of foreign RUB 100,000 (US$ 1,383) (Article resident of the Russian Federation states that are OECD members (other 129.5 of the Tax Code). than states that do not exchange tax A controlled foreign company may The CFC rules include a number information with Russia. The list also be a foreign unincorporated entity of exceptions whereby profits of a (“blacklist”) of such states is approved controlled by an organization and/or CFC are not taxable in the Russian by the Federal Tax Service – see individual recognised as a tax resident of Federation (while controlling persons Appendix 5), and provided that the the Russian Federation. remain taxable). CFCs covered by these following conditions are exceptions include: The following persons are recognised simultaneously met: as a controlling person of a foreign • non-commercial organizations that • the direct and/or indirect participating company: do not distribute profits among interest of the controlling person in shareholders/participants 1) an individual or legal entity with a each such foreign company does not • active foreign companies and active participating interest of more than exceed 50 per cent foreign holding or subholding 25% in that company • the proportion of ordinary shares companies (CFCs that are active 2) an individual or legal entity whose admitted for circulation on foreign foreign holding or subholding participating interest in that stock exchanges exceeds 25 per cent companies must not be residents

Doing business in Russia 101 of states included in the Finance other than those that do not exchange than 3 tax periods for persons applying Ministry’s “blacklist” of offshore tax information with Russia. The list of for the regime in 2020-2021). Profits jurisdictions – see Appendix 4) such states is approved by the Federal of CFCs covered by the new regime are • companies for which the effective Tax Service – see Appendix 5) not exempt from taxation in the hands of beneficiaries, once received. rate of tax on income (profits) for the In November 2020, a new law was period for which financial statements adopted introducing a special regime for for the financial year are prepared the taxation of CFC profits for Russian The concept of Russian amounts to not less than 75% of the tax resident individuals, to be applied tax residence for foreign weighted-average rate of Russian with regard to tax periods starting profits tax (the CFCs in question must 2020. The new regime for the taxation companies be tax residents of states with which of CFC profits allows a controlling person A foreign company may be treated as Russia has a double tax treaty, other to pay tax equal to approximately 5 a tax resident of Russia if its place of than those that do not exchange tax million roubles a year on all controlled management is in Russia. In this case, information with Russia. The list of foreign companies, irrespective of the the company will be taxable in Russia on such states is approved by the Federal number of CFCs, and frees taxpayers all of its income regardless of where it Tax Service – see Appendix 5) from the formal requirement to calculate arose (in Russia or elsewhere). and declare the profits of each CFC. • banks, insurance companies, issuers The place of management is considered The regime is applied based on an of quoted bonds (the CFCs in question to be in Russia if at least one of the application from a controlling person for must be tax residents of states with following conditions is met: which Russia has a double tax treaty, no fewer than 5 tax periods (or no fewer

102 Doing business in Russia • the company’s executive body The beneficial ownership and interest. It was proposed that a regularly carries on activities in withholding tax rate of 15% should be relation to the company from the concept established in Russia for dividends and Russian Federation to a greater extent As indicated above, in order to obtain interest paid from Russia to foreign than in any other state a tax exemption or reduced tax rate recipients. Should Russia’s treaty for income received from Russia under partners refuse to revise the relevant • the company’s senior executives the provisions of double tax treaties, a provisions of the treaties concerned, it carry on executive management foreign company must provide to the was stated that Russia may unilaterally of the foreign company primarily Russian tax agent not only a certificate withdraw from those treaties. within the Russian Federation of tax residence in the relevant foreign (executive management of an entity state, but also confirmation that it is The Ministry of Finance of Russia has is understood to mean the making of the beneficial owner of the income already sent letters to the finance decisions and the carrying on of other concerned. ministries of Cyprus, Luxembourg, the activities relating to the company’s Netherlands and Malta regarding changes day-to-day activities) The beneficial owner of income is the to the current rates under double tax person (unincorporated entity) that treaties (proposing withholding tax In debatable cases, the following has an independent right to use and/ rates of 15% for dividends and 15% for additional criteria are used in or dispose of the income by reason of interest). A Protocol amending the DTT recognising a foreign company as a direct and/or indirect participation in the between Russia and Cyprus was signed Russian tax resident: company or control over the company or on 8 September 2020, followed by • the company’s accounting or by reason of other circumstances. Protocols with Malta on 1 October 2020 management records are kept in the A beneficial owner of income may also and with Luxembourg on 6 November Russian Federation be a person in whose interests another 2020. The amendments to the DTTs with Cyprus and Malta provisionally • the company’s records management person has the right to dispose of the apply from 1 January 2021, while the takes place in the Russian Federation income. The functions performed and risks assumed by this or that person changes made by the Protocol with • day-to-day management of the (unincorporated entity) are taken into Luxembourg will enter into force on the company’s personnel takes place in account in determining the beneficial date of the later of notifications provided the Russian Federation owner of income. through diplomatic channels by the contracting states upon completion of Where a foreign company carries on In addition, the Tax Code provides for the necessary legal procedures and will activities using its own qualified staff a so-called “look-through” approach take effect in the calendar year following and assets in the state in which it is whereby income may in certain cases be the year of the entry into force of the resident and Russia has a tax treaty treated for tax purposes as if it was paid Protocol (in any case, not earlier than with that state, the company will be directly to the beneficial owner under a 2022). All three Protocols provide for considered to be managed from abroad double tax treaty/the Tax Code even if the standard withholding tax rates for and will not be deemed a Russian tax the immediate recipient of the income is dividends and interest to be raised to resident by default. another person. 15% (compared with 0%/5%/10%/15% for Under certain circumstances a foreign On 25 March 2020, the President of dividends and 0%/5% for interest before company may independently declare Russia announced a toughening of the the amendments), with a few exceptions itself a Russian tax resident. provisions of Russia’s tax treaties with a for certain categories of taxpayers number of foreign states insofar as they and certain types of income. At the concern withholding tax on dividends same time, the requirement for foreign

Doing business in Russia 103 recipients of dividend and interest income to prove their beneficial ownership status How can EY help? in order to take advantage of reduced tax rates under the DTTs remains unchanged. Deoffshorization law is a set of measures aimed at taxing income of foreign companies. As for the DTT with the Netherlands, in Changes made to the Tax Code in this regard include the introduction of controlled foreign company (CFC) rules, provisions allowing foreign organizations to be treated as Russian December 2020 the Russian Ministry tax residents, and beneficial ownership rules. This has made it necessary for many of Finance initiated procedures for the Russian groups with a presence abroad to substantially review their foreign structures denunciation of that DTT since the and implement new business processes and additional control procedures, as well as parties have not yet reached agreement considering ways to automate those processes and procedures. on the proposed amendments We have extensive experience of providing advisory services in relation to deoffshorization law and keep constant track of changes in this area. In particular, Special administrative we would be happy to help as follows: districts Since 2018 it has become possible to • Identifying which foreign companies/structures (funds, trusts, etc.) are covered register legal entities as international by the Russian CFC rules and which CFC regime (the regular regime or the new “fixed profit” regime) would be more preferable from a tax perspective companies in the territory of special administrative districts (SADs) in the • Correctly calculating tax on CFC profits and identifying ways in which it may be Kaliningrad Province (Oktyabrsky Island) legally reduced (for example, by deducting distributed dividends, crediting and the Primorye Region (Russky Island) foreign tax, exempting CFCs from taxation, etc.) with a view to obtaining tax and currency • Advising on obligations of controlling persons of CFCs to report on CFCs and helping privileges. International company status to prepare supporting documents may be acquired only by a foreign legal • Identifying risks of foreign companies of a Group being declared Russian tax residents, entity which is a commercial corporate providing recommendations on mitigating those risks and advising on possible entity and has decided to change its restructuring options status under the redomiciliation process prescribed by law, with the exception of • Making a timely and thorough assessment of the risks arising for your entity and banks, non-credit financial organizations, selecting the most appropriate response strategy in the light of recently adopted payment system operators and payment and planned amendments to tax treaties and tougher case law decisions infrastructure operators. One of the • Assessing the risks of foreign companies not meeting beneficial ownership criteria, conditions for a foreign company to be identifying “alternative” beneficial owners and preparing a “defence file” in case recognised as a resident of a SAD is that of challenges by the tax authorities. it must invest at least RUB 50 million We will help your business timely adapt to the new requirements and effectively manage (approx. US$ 691,372) in the territory tax risks in the context of the application of deoffshorization legislation. of the Russian Federation. If certain conditions are met, registration in a SAD has a number of tax benefits, such as tax relief for dividends received and income from the sale of shares/ownership interests, as well as CFC-related reliefs. These benefits are subject to conditions.

104 Doing business in Russia Doing business in Russia 105 Tax Treatment of Company 11Reorganizations

106 Doing business in Russia Reorganizations of companies (in the form of a merger, upstream merger (absorption), transformation, spin-off or demerger) in Russia are generally tax-neutral. A reorganization of companies should not give rise to any tax charge in Russia for the shareholders of the reorganized company or companies.

In addition, the reorganization of Russian companies does not give rise to any taxation for the resulting companies with respect to the assets, accounts receivable and obligations transferred by the reorganized company. Generally, there are no change of control limitations. If a taxpayer ceases its activity as a result of reorganization, the legal successor may use the loss carry-forwards transferred from the reorganized company, unless reducing the tax base of the successor entity by losses made by the predecessor entities prior to the reorganization was the principal purpose of the reorganization. A reorganization or liquidation may prompt a tax audit in respect of the three calendar years preceding the year in which the decision was made to carry out the audit, regardless of whether those years have been audited before.

Doing business in Russia 107 12Customs

108 Doing business in Russia Overview import operations), is directly applicable certain machinery and some other in Russia. The EAEU provides for the goods. Humanitarian aid, goods needed Customs regulation in Russia is generally free movement of goods within its for the relief of natural calamities, based on international standards and member countries. accidents and disasters and diplomatic Russian customs legislation contains some goods are exempt from import customs provisions that are similar to the provisions On 1 January 2018 the new Customs duties and import VAT. of the EU Customs Code. The Russian Code of the EAEU entered into force, Federation is a member of the World replacing the Customs Code of the Customs Organization, the International Customs Union. Current customs Convention on the Harmonized regulation within the EAEU is governed Export duties Commodity Description and Coding by the Customs Code of the EAEU and Export duties are set by the Government System (Brussels, 1983), the Convention international agreements between the of the Russian Federation on a narrow on Temporary Admission (Istanbul, 1990), member states. At the same time a range of goods, including tuna, natural the Convention on the Simplification and number of international agreements fuel, some types of wood, animal hides Harmonization of Customs Procedures were annulled, since their provisions and crops. (Kyoto, 1973) and many others. Russia have been incorporated into the joined the World Trade Organization in Customs Code of the EAEU. The August 2012. It should be noted that, implementation of the provisions of Customs value in practice, those conventions and WCO the Customs Code of the EAEU also Customs valuation in Russia is based documents constitute soft law in Russia. triggered amendments of other EAEU on GATT/WTO rules. The customs Acts of the EAEU Commission and other and the Russian customs law. value of imported goods is usually EAEU acts may have priority. determined as the value of the goods stated in the invoice plus certain other Import duties costs associated with the importation Eurasian Economic Imported goods are generally subject of the goods but not included in the Union of Russia, Belarus, to import customs duties and import transaction price. These additional costs Kazakhstan, Armenia and VAT. Certain categories of goods (such are typically the cost of delivery of the as alcohol, tobacco, personal cars, Kyrgyzstan goods to the border (e.g., transportation gasoline) are also subject to excise and insurance costs), royalties or Russia has formed the Eurasian duties (see “Other taxes” on page 92). other payments for use of intellectual Economic Union (EAEU) with Belarus, Generally, import customs duty rates property, the cost of materials provided Kazakhstan, Armenia and Kyrgyzstan. vary from 0% to 15% of the customs free of charge by the purchaser to the The EAEU represents the next stage value of goods. Import VAT is generally seller, etc. This method of calculation of of integration among those countries 20% (subject to certain exceptions) and the customs value of imported goods is following the creation of the Customs is calculated on the basis of the sum of called the transaction value method. Union and the Unified Economic Space. the customs value and import customs The unified customs legislation of the If the customs value cannot be duty. Import VAT paid by the importer EAEU, i.e. the Customs Code of the calculated using the transaction value may generally be offset against output EAEU, international agreements and method, other methods may be applied: VAT if general conditions for VAT decisions of the Customs Union/EAEU the method based on the transaction recovery are met. Commission, the Unified Customs Tariff value of identical or similar goods, and the unified system of non-tariff Current customs tariffs set 0% duty rates the deductive method, the computed measures (licensing requirements for for books, certain types of medicines, method or the fall-back method.

Doing business in Russia 109 Latest trends regarding customs of imported goods has been favourable, Release for domestic valuation the number of customs audits on this consumption issue is increasing. The customs value of goods supplied The customs procedure of release for in related-party transactions is closely domestic consumption is used when monitored by the customs authorities. Customs coding goods are imported into Russia without Since July 2019 it has been obligatory The Unified Customs Nomenclature the intention of their being re-exported. to indicate in the customs value of the EAEU is applicable in Russia. This is the most frequently used and declaration whether the transaction This nomenclature is based on the most straightforward procedure. Under value of imported goods is close to one Harmonized Commodity Description this procedure, after the payment of of the possible test values established and Coding System. Therefore, the first customs duty and import VAT and the by law. In practice, importers almost six digits of the commodity code should fulfilment of other necessary formalities, always indicate that the customs be identical in Russia and in the EU, the goods are considered to be in free value is close to one of the test values, although there are some differences in circulation in the EAEU. although they do not actually calculate practice. It is possible to obtain a binding them. Obviously, there must be decision on the classification of goods Bonded warehouse proper evidence for this claim , since from the customs authorities. When goods are imported under the the customs authorities may request bonded warehouse customs procedure, relevant supporting documents and the imported goods are kept in a special information. In order to prove that the Customs procedures warehouse under the supervision of the relationship between the importer and All cross-border transfers of goods customs authorities (customs bonded the supplier did not influence the price, and vehicles in Russia are carried out warehouse) until they are released the calculated test value must be equal under one of the customs procedures for free circulation (or under another or close to the transaction value of the prescribed by the customs legislation procedure) or are re-exported out of imported goods. of the EAEU. Each customs procedure Russia. The payment of customs duties Recent practice also demonstrates establishes different conditions for and import VAT is postponed until the that the customs authorities have clearance, which have a considerable goods are removed from the customs begun to include dividends paid by effect on tariff and non-tariff barriers for bonded warehouse. importers to related suppliers (i.e., import and export transactions. Below Goods kept in a customs bonded foreign founders) in customs value and is a summary of the main customs warehouse must remain in an to charge additional customs payments procedures. unchanged condition, i.e., it is prohibited accordingly. This may happen if the In 2021, the Eurasian Economic to manufacture, assemble or transform customs authorities decide that the Commission of the EAEU plans to goods stored in a customs bonded dividends in question are related to the prepare amendments to the Unified warehouse. imported goods and must be added to Customs Nomenclature of the EAEU and The period of storage of goods in a the customs value as a part of income the Unified Customs Tariff in connection customs warehouse may not exceed received from subsequent sales of with the adoption of the 2022 edition three years. After the storage period has the imported goods that is directly or of the HS Nomenclature, which includes expired, the goods must be placed under indirectly due to the seller. Although a total of 351 sets of amendments another customs procedure. If the goods recent case law on the legitimacy of covering a wide range of products. including dividends in the customs value are released for domestic consumption, customs duties and VAT must be paid. If

110 Doing business in Russia the goods are re-exported to a country are not refundable. If the goods are Thus, import customs duties apply outside the EAEU, no import customs eventually released for free circulation, to the finished goods. Raw materials duty or import VAT are due. the outstanding amount of customs imported for processing are exempt payments must be paid together with from import customs duties but Temporary importation late payment interest. are subject to import VAT. The procedure is applicable only to goods The temporary importation procedure This customs procedure is widely used included in the list established by the is a customs procedure under which the in practice, particularly in the case of Government. It is possible for the list use of goods in Russia is permitted with importation for leasing operations in to be extended on the application of full or partial exemption from import Russia. customs duties and import VAT. At the an interested party (parties). time goods are imported into Russia it Processing customs procedures 3. Outward Processing. The customs is intended that the goods will remain in There are three different processing procedure of processing of goods Russia for a limited period of time and customs procedures: outside Russia allows goods to will then be re-exported. be exported for processing and 1. Inward Processing. Under this The total period of temporary subsequently re-imported into Russia. customs procedure, companies importation may not exceed two years Import customs duties and import whose business involves the (there are some exceptions). VAT are due only on the value added processing of goods in Russia may, by the processing operations but not subject to certain conditions, import A full exemption is granted in limited cases on the value of the imported goods. goods into Russia for processing for certain goods. Typical examples of This customs procedure is useful for without the payment of import temporary importation with full exemption goods that need to be exported for customs duty and import VAT. A bank are imports of goods for an exhibition repair outside Russia. or for testing in Russia. Some types of guarantee may be required to secure vessels and aircraft are also granted full the payment of customs duties and exemption. Usually for these types of taxes which may become due in CIS free trade regime goods the period of temporary importation the event that the conditions of the may be shorter or longer than 2 years. customs procedure are violated. According to the free trade regime among CIS countries, goods originating A partial exemption is granted in other Once the goods have been processed and imported into Russia from one situations when full exemption is not into finished products, they must be of the CIS countries are exempt from applicable. Under a partial exemption, exported. If the finished products are customs duties. In order to qualify for this the importer has to pay customs released for free circulation in Russia, exemption, the goods must be imported payments in monthly instalments of 3% import customs duty and import VAT under a contract concluded between of the total amount calculated as if the must be paid on the value of the raw CIS residents and the goods must be goods were released for free circulation. materials together with late payment shipped directly from the territory of a CIS These amounts are not refunded if the interest. country. An additional requirement is that goods are re-exported. 2. Processing of goods for domestic the seller must be the owner of the goods. Once the temporary importation period consumption. Under this customs The origin of goods must be confirmed has expired, the goods may either be procedure, import customs duties by a special certificate of origin. VAT re-exported out of Russia or released are due only once the finished and excise duties (if applicable) are due. for free circulation in Russia. In the products are released for free As from 1 January 2016 the free trade first case, the customs payments made circulation on the Russian market. regime with Ukraine was suspended.

Doing business in Russia 111 Free trade with other Singapore. The FTA between the EAEU Tariff preferences for member states and the Republic of countries Singapore was signed on 1 October goods originating from Vietnam. On 29 May 2015, a Free 2019. It provides a free trade regime developing and/or least Trade Agreement (FTA) was signed for the importation into Singapore of developed countries between Vietnam and the EAEU. It is all goods originating in EAEU countries. Goods originating from developing the first FTA concluded by the EAEU The EAEU in turn plans to eliminate countries and imported into the EAEU with an external trade partner. The import customs duties for 40% of attract reduced customs duty rates agreement envisages the gradual Singapore’s trade nomenclature once equal to 75% of the duty rates of the bilateral reduction of import duty rates the Agreement enters into force. It is EAEU Common Customs Tariff. Goods for goods originating in EAEU countries expected that within 5-10 years up originating from least developed and Vietnam during the transitional to 87% of Singaporean goods will be countries and imported into the EAEU period, which will be 5-10 years exempted from customs duties. The attract a 0% import customs duty rate. depending on the type of goods. Agreement will enter into force after all In order to qualify for such preferential The agreement entered into force the relevant internal legal procedures treatment, the countries and the in October 2016. have been completed. goods must be included in a special list Iran. On 27 October 2019, the Interim Serbia. On 25 October 2019, the Free established by the EAEU. The goods must Agreement leading to the formation Trade Agreement between the EAEU also be shipped directly from developing/ of a free trade area between the EAEU and the Republic of Serbia was signed. least developed countries to the EAEU. states and the Islamic Republic of Iran There have already been bilateral FTAs The origin of goods must be confirmed by entered into force. Under the Agreement between Serbia and Russia, Kazakhstan a special certificate of origin. import customs duty rates between and Belarus. The new unified Agreement the EAEU countries and Iran will be will extend the preferential trade Import permissions reduced or eliminated on a limited range regime to Armenia and Kyrgyzstan. The There are numerous requirements of goods. Moreover, unjustified non- Agreement will enter into force 60 days to receive authorization documents tariff measures restricting trade must after the completion of internal legal before importing goods into Russia. not be applied to goods listed in the procedures by the EAEU member states These include licences, certificates and Agreement. The Agreement is valid for and Serbia. 3 years. The parties must conclude declarations of conformity, among others. a full-fledged FTA during this period. Currently there are also negotiations on The set of authorization documents the conclusion of FTAs with Egypt, India, required to be obtained for a specific Turkey, Republic of Korea, Israel. imported product depends on its customs code, description and characteristics. Some goods (e.g., medicines, shoes, etc.) are subject to mandatory marking before they are released in Russia.

112 Doing business in Russia Сategorization of companies In 2020, a new automatic system for categorizing companies engaged in foreign trade activities came into operation. The customs authorities divide companies into three groups: high, medium and low risk. Companies are assessed based on set criteria and conditions. The risk category determines the amount of customs control measures to be applied to the company’s shipments. If the company is classified as low risk, then only one delivery out of fifty will be subject to customs control.

Customs control According to customs legislation, the customs authorities carry out customs control not only at the time of the customs clearance of goods but also during a three-year period after goods have been released. During this post- entry control period, the customs authorities may request additional documents and explanations regarding customs valuation, tariff codes, etc. If the customs authorities identify mistakes, they may charge additional customs payments, late payment interest and, in some cases, fines.

Doing business in Russia 113 How can EY help?

In today’s global economy, moving goods internationally can be a complex and costly activity. More than ever before, effective management of global trade issues is crucial to maintaining a competitive advantage.

Our team of global trade professionals can help you to operate more effectively in moving goods around the world. We offer a wide range of services, including the following:

1. Management of import/export and • Analysis of how to apply the free • Assistance in confirming ‘Made in customs clearance processes: customs zone procedure when Russia’ status. importing goods to an priority • Assistance in selecting the optimal development zone and when selling 7. Review of compliance with customs customs procedure goods. legislation when performing import • Structuring of supplies where the and export operations: consignor and consignee are resident 4. Simplifications for AEOs • Review of the company’s foreign in different countries • Evaluation of whether a company economic activity function for • Analysis of customs consequences meets the AEO requirements based a certain period and opportunities to claim customs on an analysis of its current business • Customs compliance benefits and tariff preferences processes, identification of weaknesses • Health check. • Development of a step-by-step action and development of remedial plan for importing/exporting goods recommendations 8. Recovery of customs overpayments: from/into the EAEU • Assistance in obtaining AEO status, • Assistance in securing refunds of • Structuring of supplies in trade with including evaluation of qualification overpayments, including overpaid EAEU member states where goods are for that status import VAT imported from a third country 5. Classification of goods: • Assistance in amending customs 2. Management of customs payments: • Review of classification codes applied declarations. • Determination of customs value • Assistance in obtaining preliminary 9. Licensing and similar arrangements • Confirmation of customs value decisions on the classification (franchises, concessions): (calculation of test values, preparation of goods • Analysis of whether it is necessary to of responses to customs authorities’ • Analysis of customs risks that may include license fee payments in the enquiries) arise as a result of declaring incorrect customs value of imported goods • Dividends and transportation classification codes. • Assessment of customs risks that may deductions 6. Proof of origin: arise due to ineffective administration of the licensing structure 3. Customs procedures and • Analysis of compliance with the origin simplifications: criteria for the purposes of public • Confirmation of the market level of a license fee rate • Analysis of special simplifications, procurement in Russia and export to identification of potential practical the CIS • Advice on customs value issues difficulties in applying them and • Overview of the procedure for regarding the inclusion of VAT in the provision of recommendations on obtaining an ST-1 certificate amount of the license fee included in addressing those difficulties customs value

114 Doing business in Russia 10. Data Control and Analysis 12. Protection of intellectual 14. Assistance to companies in property: obtaining subsidies, benefits and Customs tool: a solution designed for the other government support: automated processing and checking of • Registering trademarks in the Customs customs declarations, which involves: Register of Intellectual Property • Development of appropriate support (TROIS) claims and discussion and approval • An automated review of customs thereof with the relevant federal declarations based on selected • TROIS administration and executive authorities parameters communication with the customs authorities • Development of a legal framework for • Generation of reports based on data claiming support from customs declarations • Assistance in the development of risk profiles for administration of parallel • Assessment of whether the proposed • Automatic identification of errors in imports. forms of support comply with WTO approaches used by different customs rules brokers based on selected criteria (for 13. Labelling and traceability: example, tariff classification of goods) • Assistance in obtaining subsidies on a • Analysis of business processes regular basis, preparation of required • Monitoring of expenses associated with documents and support in submitting customs broker services. • Assessment of the impact of Track & Trace operations on current them to the relevant federal executive 11. Appealing against actions/decisions business processes, including their authorities. of the customs authorities and timing administrative rulings to courts and • Analysis of additional Track & Trace higher customs authorities; practical operations and their incorporation assistance in dealing with the into the operations of company customs authorities departments • Support for companies in relation to • Estimation of additional labour costs administrative appeals for a company • Representation of companies in • Evaluation of options to automate arbitration courts in disputes with the Track & Trace operations. customs authorities.

Doing business in Russia 115 Transfer 13Pricing

116 Doing business in Russia Overview Russia adopted BEPS Action 13 • The parties to the transaction apply documentation requirements in different tax rates on profits derived Substantial transfer pricing (TP) November 2017 (which were introduced from that transaction regulations are contained in Articles by Federal Law No. 340-FZ of 27 105.1 to 105.25 of the Tax Code (which • One of the parties pays mineral November 2017 and have applied to were introduced by Federal Law № 227- extraction tax at ad valorem rates financial years starting on or after FZ of 18 July 2011 and have applied 1 January 2017, with the option to • One party applies or both parties since 1 January 2012). Even though commence country-by-country reporting apply a special tax regime (for Russia is not a member of the OECD, from FY 2016). example, the unified tax on imputed the Russian transfer pricing regulations income or the unified agricultural tax) are largely based on the principles laid down in the OECD Guidelines, although Scope of TP control • One of the parties is exempt from the Guidelines themselves do not have profits tax The Russian TP rules focus primarily on force of law. In practice, the law prevails related-party transactions, but certain • One of the parties is an operator or if there are any differences with the third-party transactions are also subject holder of a licence to develop a new OECD Guidelines. The Russian TP rules to TP control. Starting from 2019, a offshore deposit are driven by the arm’s length principle threshold of RUB 60 million (approx. and accord priority to the substance of a • One or both parties are residents of US$ 829,646) applies for cross- transaction over its form. the Skolkovo research centre border transactions to be classified as There is no system of rulings in Russia. controlled for transfer pricing purposes. • One or both parties apply an Private letters issued by the Federal Tax Besides related-party transactions, investment tax deduction for profits Service (FTS) or the Russian Ministry cross-border transactions between tax purposes of Finance at the request of taxpayers unrelated companies involving the sale • One of the parties pays tax on are not binding on the tax authorities or of global exchange-traded commodities additional income from hydrocarbon companies. and transactions in which any of extraction on income from the the parties belongs to a blacklisted Besides the above-mentioned articles transaction jurisdiction20 are subject to TP control of the Tax Code, the Russian Ministry with the same materiality limits. Where domestic transactions fall outside of Finance or the FTS regularly issue the scope of transfer pricing control, letters clarifying their position on the Starting from 1 January 2019, there is still a possibility that the local application of the arm’s-length principle a significant number of domestic tax authorities might review them from in general and in response to specific transactions were excluded from the perspective of the unjustified tax questions from taxpayers regarding the TP control in Russia. Related-party benefit concept. If this happens, the application of current regulations. These transactions remaining under TP control pricing approach in the transactions letters set out the formal position of the are those that exceed RUB 1 billion may be examined using TP methods. Ministry of Finance and the FTS but are (approx. US$ 13,827,433) per year and not legally binding on taxpayers. meet one of the following conditions:

20 Please refer to Appendix 5 for a list of these locations.

Doing business in Russia 117 Certain domestic transactions are not regarded as related parties is the 25% As part of the implementation subject to TP control: ownership threshold, i.e., if one party of BEPS Action 8 requirements directly or indirectly controls more addressing transfer pricing implications • Transactions between members of than 25% of the other party. There related to intangible assets, there a domestic consolidated group of are numerous other conditions, and is a list of functions and risks that taxpayers the courts can also declare companies must be taken into account when • Transactions where both parties and individuals to be related on any conducting a functional analysis in are registered in the same region of other grounds if it is proven that relation to intangibles. These relate Russia, neither party has economically the relationship between the parties to the development, enhancement, autonomous subdivisions in other influenced the conditions and results of maintenance, protection and exploitation regions of Russia or pays profits tax transactions. of intangibles (also known as DEMPE in other regions, neither party has tax functions and associated risks). The Tax losses and there are no other grounds TP methods Code also establishes the characteristics for the transaction to be deemed The Tax Code includes five methods of intangible assets that must be controlled similar to those used in international taken into account in assessing the comparability of related transactions • Transactions where two of the parties transfer pricing practice, including involving such assets: type of intangible are operators or licence holders comparable uncontrolled price (CUP), asset, exclusivity, conditions of legal in relation to a project involving resale minus, cost plus, transactional protection (existence and duration), hydrocarbon extraction activities at net margin and profit split. The CUP territorial extent of the right to use the the same field on Russia’s continental method has first priority, whereas the intangible asset, useful life, life cycle shelf profit split method is regarded as the method of last resort. The resale minus stage (development, enhancement, • Interbank credits (deposits) granted method has first priority for a routine exploitation), the rights and functions for up to 7 days distributor reselling goods to unrelated of the parties in connection with the increase in value of intangibles as a result • Transactions relating to military and customers. of their enhancement, and the possibility technical co-operation between Russia It is also permitted to use an of deriving income from the use of the and foreign countries independent valuation report for one-off intangible assets. • Transactions involving the provision transactions where none of the five of guarantees if all parties to the transfer pricing methods can be applied. Documentation transaction are Russian legal entities An interest rate is considered to be requirements which are not banks at arm’s length if it is within the safe • Transactions involving interest-free harbour ranges specified in the Tax Notification of controlled transactions loans between Russian related parties Code. The safe harbour ranges vary Information on controlled transactions depending on the currency of the loan must be submitted to the tax • Assignment of rights (cession) and whether it is a cross-border or a authorities on an annual basis using a by banks as part of bankruptcy domestic transaction. Safe harbours TP notification. The information must prevention measures and enforcement are stipulated for financial transactions be submitted no later than 20 May of of banking regulations by the Bank of (minimum and maximum interest rates). the year following the year in which Russia If the interest rate is outside the safe the controlled transactions took place. For the purposes of the Tax Code, the harbour, the taxpayer may carry out an All controlled transactions must be main criterion for two entities to be economic study to justify the rate. reported in the TP notification.

118 Doing business in Russia TP documentation data will be accepted only in the TP documentation is not required for The tax authorities may request TP absence of reliable information third-party transactions, transactions documentation proving that transfer within Russia. The transfer pricing where the prices conform to a prices are at arm’s length. That documentation must be submitted regulated price or a price prescribed by documentation must be submitted to in the local language. antimonopoly authorities, transactions the tax authorities within 30 business Symmetrical adjustments are available involving securities and derivatives days of the request being made by for domestic transactions. The right of traded on the organized securities the tax authorities, which may not other parties to a controlled transaction market and transactions covered by an be earlier than 1 June of the year to make symmetrical adjustments advance pricing agreement. following the reporting year. Broadly arises (1) where a decision of a federal BEPS Action 13 reporting speaking, Russian TP documentation tax authority to charge additional tax should contain information similar to has been complied with by a party to a Russia BEPS Action 13 documentation that recommended by the OECD TP controlled transaction which was subject has applied to financial years starting on Guidelines. A comparability analysis to tax assessment, OR (2) where a party or after 1 January 2017 with the option based on Russian data (also in line with to a controlled transaction has made a to file Country-by-Country (CbC) reports the search strategy prescribed in the Tax voluntary adjustment by recording it in commencing from the 2016 financial Code) is a must where the tested party the tax return and paid additional tax if year. A three-tier reporting system has is located in Russia. Foreign comparable applicable. been introduced which includes a Local

Doing business in Russia 119 File, a Master File and a CbC report. The • CbCR report. A CbC report must be be provided in the Russian language new reporting requirements apply to submitted no later than 12 months within 3 months of a request being multinational groups with consolidated after the end of the reporting financial received. The first master file may be revenue exceeding a certain threshold. year. Normally, a CbC report must be requested for financial reporting years The threshold references the CbC submitted by the UPE (or a designated commencing in 2017. The content reporting requirements in the surrogate parent entity) in its home of the master file must adhere to the jurisdiction of the ultimate parent entity location and then automatically requirements stated in the Russian (UPE). If the UPE is a Russian taxpayer, exchanged with the FTS. If Russia Tax Code and is broadly similar to that the threshold is set at RUB 50 billion does not activate automatic exchange specified in the OECD BEPS Action (approx. US$ 691 million). If the new with the UPE/surrogate entity’s 13 report, although there are some requirements apply to the group, the jurisdiction by the CbC report filing differences. following filings must be prepared: deadline, Russian members of the • Local file. TThe local file is also group will be required to file a CbC • CbC reporting notification. known as national TP documentation report with the Russian tax authorities A CbC reporting notification must be which has replaced traditional TP directly upon request. submitted by each Russian member documentation for cross-border of the qualifying multinational group • Master file. A master file may transactions of Russian members of within 8 months after the end of the be requested by the Russian tax qualifying groups. A local file may reporting financial year for the UPE. authorities from a Russian member be requested by the Russian tax The notification must adhere to the of a qualifying multinational group authorities after 1 June of the year requirements stated by the Tax Code after 12 months but not later than following the reporting calendar year. and be submitted using the XML 36 months from the last day of the An extension (31 December of the format established by the FTS. reporting financial period. It must year following the reporting calendar

120 Doing business in Russia year) is available for 2018 and 2019. Penalties Penalty relief The local file must be provided to the The Tax Code establishes a 40% (not Penalties will be imposed if a taxpayer’s tax authorities within 30 business less than RUB 30,000 (approx. US$ taxable income is adjusted as a result of days upon request. The local file must 415)) penalty in the event that a a TP audit. Penalties cannot be imposed be provided in the Russian language. taxpayer’s income is adjusted as a result if prices were established in accordance The content of the local file must of a TP audit (based on the amount of with an applicable advance pricing adhere to the requirements of the unpaid tax) and if the taxpayer did not agreement (APA) or if the taxpayer Russian Tax Code subject to certain provide appropriate TP documentation provided compliant TP documentation special considerations. The first local supporting the prices in a controlled supporting the prices in a controlled file may be requested for 2018. transaction. transaction. TP audits The fine for non-submission of a If an adjustment is made by the notification of controlled transactions is tax authority, the available dispute The FTS is entitled to conduct a TP RUB 5,000 (approx. US$ 69). resolution mechanism is through audit of controlled transactions. The litigation or Mutual Agreement general rule is that a TP audit may cover The Tax Code establishes the following Procedure (“MAP”). the three preceding calendar years. penalties in relation to CbC reporting: Controlled transactions may be audited • Failure to submit/late submission of or only once for a specific calendar year. submission of inaccurate information Advance pricing TP matters in controlled transactions in a CbC reporting notification may agreements are subject to special transfer pricing result in a penalty of RUB 50,000 The Tax Code allows for the conclusion audits, which are separate from general (approx. US$ 691) (applies for of an APA with the Russian tax tax audits and must be performed by the financial years starting in 2020) authorities. An APA is an arrangement FTS rather than local tax authorities. To • Failure to submit/late submission of or that determines, in advance of date, TP audits have focused mainly on submission of inaccurate information controlled transactions, an appropriate cross-border commodity transactions in a CbC report may result in a penalty set of criteria, e.g., TP method, and transactions involving low-tax of RUB 100,000 (approx. US$ 1,383) comparables and adjustments thereto, jurisdictions. Additional high-risk factors (applies for financial years starting in and critical assumptions as to future include intercompany service fees, 2020) events for the determination of the management fees, royalties and losses, TP for those transactions over a fixed as well as significant reductions in a • Failure to submit/late submission of a period. An APA may be unilateral tax base and deviations from industry- master file may result in a penalty of involving the FTS and a taxpayer or wide benchmarks. Some domestic RUB 100,000 (approx. US$ 1,383) multilateral involving the agreement transactions may also be regarded as (applies for financial years starting in of two or more tax administrations. high-risk if they involve entities resident 2020) Only Russian entities are eligible to in special economic zones, if they are • Failure to submit/late submission of conclude an APA, and they must also subject to advantageous tax regimes a local file may result in a penalty of be classed as major taxpayers. The Tax or if they involve loss-making entities. RUB 100,000 (approx. US$ 1,383) Code provides for the conclusion of Transactions that are viewed by the tax (applies for financial years starting in multilateral APAs when the transaction authorities as leading to the receipt of 2018) parties are located in a jurisdiction with an unjustified tax benefit may also be which Russia has a double tax treaty. scrutinized using the TP approach.

Doing business in Russia 121 A procedure establishing the process for managing bilateral and multilateral APAs came into effect from June 2018. The adoption of the procedure provides a practical framework for the conclusion» of APAs with the involvement of one or more foreign competent authorities. APAs are available for up to a three-year term. Russia is now considering changes to the current bilateral APA rules which, among other things, may allow the acceptance of TP methods used in a foreign jurisdiction and an extension of the time allowed for the tax authorities to consider an APA to 27 months plus time taken by the competent tax authorities of another state to respond to information requests from Russia as part of the applicable MAP.

Mutual Agreement procedure and what action is required the submission of a MAP request are and what documents need to be prescribed by the Ministry of Finance Procedure provided under the procedure. (Articles 142.7 to 142.8 of the Tax MAP is a government-to-government Code). Detailed rules on the application Despite the importance of the matters process of negotiation to resolve of MAP are laid down in a Ministry of it deals with, the MAP guidelines taxation matters which is described Finance order dated 11 June 2020 are not a regulatory act of the in Article 25 of the OECD Model Tax (entered into force in October 2020). Ministry of Finance, but rather a set Convention as well as in various double According to that order, Russian of recommendations, i.e. essentially tax treaties. In January 2019, the taxpayers are allowed to submit a MAP a “framework” document which a Russian Ministry of Finance issued request within three years from the competent authority is entitled, but MAP guidelines for taxpayers, setting date of receipt of a report on the results not obliged, to refer to in dealing out recommendations on initiating and of a tax audit, or a reasoned opinion with matters relating to the initiation conducting MAPs with the competent of a tax authority in the contextof tax and conduct of mutual agreement monitoring, or a report issued by the authorities of tax treaty partner states. procedures with competent authorities tax authority of a foreign state that is The document is largely based on the of tax treaty partner states. a party to the applicable DTT, which, standard MAP provisions contained in the taxpayer’s opinion, results in in Russian tax treaties, but includes From January 2020, the Tax Code taxation not in accordance with the DTT. a number of important technical includes a number of reference clauses The Ministry of Finance must review the clarifications, providing more detailed to the effect that the conduct of MAP application within 90 days and make guidance, for instance, on the rights is governed by the provisions of the a formal decision on whether or not it and obligations of persons who have the relevant double taxation treaty, while agrees to initiating MAP. right to initiate the mutual agreement the procedure and time limits for

122 Doing business in Russia How can EY help?

Transfer pricing compliance and implementation and building integrated Transfer pricing controversy documentation systems and processes across tax, business units and operations. Our flexible Tax authorities are focusing more closely on The tax authorities are focusing more widely approach can help you develop sustainable cross-border situations and transactions, and intensely on transfer pricing issues. practices to execute, monitor and report targeting transfer pricing and supply Documenting intercompany transactions is intercompany transactions. chains. EY assists clients in building the first line of defence when your transfer controversy strategies that help satisfy pricing practices are challenged. Whether Transfer pricing planning and operating their objectives. Such strategies often you choose to apply a globally centralized model effectiveness involve robust up-front planning, preventive approach or a decentralized approach (transfer pricing) controversy advice to your documentation needs, we have Our multidisciplinary operating model where needed, consideration of advance a dedicated team to support you in the effectiveness (OME) team works with (pricing) agreements (APA), audit defence transfer pricing documentation process. you on operating model design, business work followed by a domestic administrative restructuring, systems implications, transfer appeal, review of alternative dispute Transfer pricing implementation — pricing, direct and indirect tax, customs, resolution opportunities, preparation and intercompany effectiveness human resources, finance, and accounting. implementation of a request for competent We can help you build and implement the authority assistance under the mutual Operationalizing transfer pricing policies model that makes sense for your business, agreement procedure (MAP) article in a tax is a big challenge for many multinationals. improve your processes and manage the treaty, and assistance in litigation. EY has developed a structured and scalable cost of trade. framework for improving transfer pricing

Doing business in Russia 123 A procedure establishing the process right to initiate the mutual agreement a formal decision on whether or not it for managing bilateral and multilateral procedure and what action is required agrees to initiating MAP. APAs came into effect from June 2018. and what documents need to be The adoption of the procedure provides provided under the procedure. a practical framework for the conclusion Despite the importance of the matters it of APAs with the involvement of one or deals with, the MAP guidelines are not a Investmentmore foreign competent authorities. regulatory act of the Ministry of Finance, APAs are available for up to a three-year but rather a set of recommendations, term. Russia is now considering changes i.e. essentially a “framework” document to the current bilateral APA rules which, which a competent authority is entitled, among other things, may allow the but not obliged, to refer to in dealing Promotionacceptance of TP methods used in a with matters relating to the initiation foreign jurisdiction and an extension of and conduct of mutual agreement the time allowed for the tax authorities procedures with competent authorities to consider an APA to 27 months of tax treaty partner states. plus time taken by the competent tax Measuresauthorities of another state to respond From January 2020, the Tax Code to information requests from Russia as includes a number of reference clauses part of the applicable MAP. to the effect that the conduct of MAP is governed by the provisions of the relevant double taxation treaty, while Mutual Agreement the procedure and time limits for 14the submission of a MAP request are Procedure prescribed by the Ministry of Finance MAP is a government-to-government (Articles 142.7 to 142.8 of the Tax process of negotiation to resolve Code). Detailed rules on the application taxation matters which is described of MAP are laid down in a Ministry of in Article 25 of the OECD Model Tax Finance order dated 11 June 2020 Convention as well as in various double (entered into force in October 2020). tax treaties. In January 2019, the According to that order, Russian Russian Ministry of Finance issued taxpayers are allowed to submit a MAP MAP guidelines for taxpayers, setting request within three years from the out recommendations on initiating and date of receipt of a report on the results conducting MAPs with the competent of a tax audit, or a reasoned opinion authorities of tax treaty partner states. of a tax authority in the contextof tax The document is largely based on the monitoring, or a report issued by the standard MAP provisions contained tax authority of a foreign state that is a in Russian tax treaties, but includes party to the applicable DTT, which, in the a number of important technical taxpayer’s opinion, results in taxation clarifications, providing more detailed not in accordance with the DTT. The guidance, for instance, on the rights Ministry of Finance must review the and obligations of persons who have the application within 90 days and make

124 Doing business in Russia The Tax Code allows for special privileges as well as reduced rates of profits tax and corporate property tax to be set for participants in special investment contracts (SPICs), investment protection and promotion agreements (IPPAs) and regional investment projects (RIPs) and for residents of special economic zones (SEZs).

Special economic zones for residents of an SEZ with respect to or individual entrepreneur) agrees to activities carried on in the territory of implement or develop and implement a (SEZs) the SEZ, on condition that they maintain technology recognised by the Russian SEZs are defined as territorial areas separate records of income received/ Government as an advanced technology with a special regime for carrying on expenses incurred in connection with for the purpose of launching mass entrepreneurial activity and special activities inside and outside the SEZ. production of industrial products, and business incentives, including in SEZ residents are also exempt from the state, represented by the Russian particular certain tax and customs assets tax on assets recorded on their Federation, a Russian region or a privileges. Five types of zones are now balance sheet that were created or municipality, agrees to grant it various envisaged by the law: acquired for the purposes of carrying on benefits, including guaranteed stability • Industrial production SEZs activities in the SEZ, are used in the SEZ of business conditions, tax incentives within the framework of the agreement and reliefs. • Technology development SEZs on the creation of the SEZ and are A SPIC is concluded on a competitive • Tourism and recreation SEZs located in the territory of the SEZ. The selection basis through public or private exemption applies for 10 years from the • Port SEZs tenders (multiple winners possible). month following the month in which the In exceptional cases a SPIC may be • Specially regulated SEZs assets were registered. concluded without a tender by decision The rate of profits tax payable to the In certain cases, relief in respect of other of the Government or the President. federal budget for residents of an SEZ taxes may also be established for SEZ A SPIC may be concluded: is set at 2%, except for residents of residents. a technology development SEZ and • no later than 31 December 2030 While activities related to an SEZ are residents of tourism and recreation SEZs subject to separate accounting, it should • for effective periods: that have been combined into a cluster be noted that neither the Federal Tax by decision of the Russian Government, — up to 15 years, if the investment Service nor the Finance Ministry have for which the rate of tax payable to the amount is less than RUB 50bn (less yet established (or recommended) federal budget is set at 0%. than US$ 691 m) approaches to the organization of To enjoy the benefits of an SEZ, it is separate accounting. Taxpayers — up to 20 years, if the investment necessary to be a resident of the SEZ, must therefore develop their own amount is more than RUB 50bn i.e., to be registered in the territory of the methodology. We would be happy to (more than US$ 691 m) assist you in this matter. SEZ, conclude a special agreement with The effective period of a SPIC may the SEZ administrative bodies and fulfil be extended by the Government of certain conditions relating to activity and Special investment the Russian Federation if the investor level of investment in the SEZ. contracts (SPICs) is subject to sanctions imposed by a Regional laws may set a reduced rate of Under the new SPIC rules (so-called foreign state, state association and/or profits tax payable to the regional budget SPIC 2.0), the investor (a legal entity union of foreign states.

Doing business in Russia 125 A SPIC may be concluded only if with the procedure for the updating of 1) To the entire tax base provided incentive measures for SPIC participants that list by completing an application that income from sales of goods are laid down in regional legislation. with a description of its technology manufactured within the framework explaining what makes the technology of the SPIC accounts for at least 90% Under a SPIC, the Investor is obliged to advanced and relevant. of all taxable income (not including carry out an investment project involving income in the form of positive Under a SPIC, an investor may apply the implementation of a technology or exchange differences), or the development and implementation of a for the following non-tax support technology for the purpose of launching measures: 2) To the tax base relating to SPIC activities provided that separate the mass production of industrial • Subsidies intended solely for SPIC records are maintained of income products based on that technology participants (which must be included in the received/expenses incurred in Government-approved List of Advanced • Accelerated depreciation (under connection with SPIC activities and Technologies) in the territory of Russia a SPIC the investor may issue in connection with other activities. certificates to its customers / on the continental shelf of Russia / in The reduced rate is applicable starting confirming the possibility of applying the exclusive economic zone of Russia by in the tax period in which the first profit accelerated depreciation) investing its own or raised funds, is received from SPIC activities and • Granting of “made in Russia” status ending in the tax period in which the Public entities are obliged, within to the Investor’s products (an total amount of budget expenditure and the bounds of their powers and in accelerated and simplified procedure unreceived revenue attributable to the accordance with the terms of the SPIC, for obtaining the status of products application of SPIC incentives exceeds to guarantee the stability of business made in Russia) 50% of capital investments provided for conditions for the investor and to apply in the SPIC (or in which the taxpayer industry incentives provided for in the • Stabilization clause (stability of loses the status of participant in a SPIC in accordance with federal, regional business conditions for the investor) SPIC). This calculation is made using and municipal laws and regulations. • Other measures required for the the methodology specified in clause Under the SPIC regulations, a implementation of an investment 8 of part 2 of Article 18.3 of Federal technology is defined as: project (e.g., the granting of special Law No. 488-FZ of 31 December 2014 conditions for the lease of land plots “Concerning Industrial Policy in the • a combination of IP assets presented owned by the Russian Federation, Russian Federation”. in an objective form which may form regions of the Russian Federation or a basis for the production of products municipalities) As a rule, these provisions apply to and includes any combination of SPICs concluded from 1 January 2020 inventions, utility models, industrial Tax reliefs for SPIC investors onwards. There is a transitional provision samples, computer programmes and according to which, if certain conditions For participants in a SPIC, the rate of other IP assets protected by Chapter are met, the new provisions of the Tax profits tax payable to the federal budget IV of the Civil Code, Code concerning the application of may be reduced to 0%. The rate of tax reduced tax rates may also be applied by • non-protected IP assets, including payable to a regional budget is set by participants in SPICs concluded from 1 technical data and information a regional law and may likewise be January 2017 onwards which provide for reduced to 0%. Currently, an investor may have its a preferential rate to be applied to the tax technology included in the list of Commencing from 1 January 2020, base for SPIC activities on condition that advanced technologies in accordance these reduced tax rates apply: separate records are maintained. The law

126 Doing business in Russia does not lay down transitional provisions Russian Federation for the purpose reduced to 0%. A regional law may also for SPICs concluded before 1 January of launching mass production of set a reduced rate of tax payable to the 2017 or for those concluded after that industrial products in Russia/on the regional budget. date if the taxpayer proposes to use continental shelf of Russia/in the These reduced tax rates are effective for the 90% income ratio as the basis for exclusive economic zone of Russia a period that is dependent on the type applying the reduced rate of profits tax. • to achieve certain performance of organization and regional investment The Tax Code also imposes restrictions indicators during the effective period project and apply: on increasing and/or abolishing of the SPIC (production volumes 1. To the entire tax base provided reduced tax rates established for SPIC and sales, amount of tax payments, that income from sales of goods participants. number of jobs created, etc.) manufactured within the framework Regional laws may also set a reduced While activities related to a SPIC are of the RIP accounts for at least 90% rate of corporate property tax for SPIC subject to separate accounting, it should of all taxable income (not including participants in relation to assets created be noted that neither the Federal Tax income in the form of positive or acquired within the framework of a Service nor the Finance Ministry have exchange differences), or SPIC. yet established (or recommended) 2. To the tax base relating to RIP approaches to the organization of Investor obligations activities provided that separate separate accounting. Taxpayers records are maintained of income In order to apply tax reliefs, the SPIC must therefore develop their own received/expenses incurred in investor must: methodology. We would be happy to connection with RIP activities and in • not be a member of a consolidated assist you in this matter. connection with other activities group of taxpayers • not be a resident of any type of Regional investment Regional laws may also set a reduced special economic zone (SEZ) and/or rate of corporate property tax for RIP a resident of the Vladivostok free port projects (RIPs) participants in relation to assets created and/or a priority social and economic An RIP is an investment project that or acquired within the framework of a RIP. development area (PSEDA) is aimed at organizing the production of goods in the territory of a Russian Investor obligations • not be a participant (or a successor of region and is incentivized by tax reliefs To participate in an RIP investors must a participant) in a regional investment depending on the amount of capital meet the following requirements: project (RIP) investments: (i) at least RUB 50m • They must invest not less than RUB • not apply special tax regimes (approx. US$ 691,372 m) over a three- 50m (approx. US$ 691,372 m) over year period with tax benefits valid until Please note that there are no minimum a three-year period or not less than 1 January 2029, or (ii) at least RUB investment requirements for the RUB 500 m (approx. US$ 7 m) over a 500m (approx. US$ 7 m) over a five- conclusion of a SPIC. five-year period year period with tax benefits valid until When concluding a SPIC, the investor 1 January 2031. • The RIP must account for at least 90% assumes the following obligations: of the company’s income Available tax benefits • to implement or develop and • The investor must not be a resident of For participants in a regional investment implement a technology included an SEZ or a member of a consolidated project (RIP), the rate of profits tax in the list of advanced technologies group of taxpayers approved by the Government of the payable to the federal budget may be

Doing business in Russia 127 • The purpose of the RIP must not be Investment protection and only a constituent region, or (3) Russia, the extraction of oil or natural gas a constituent region and a municipality, and/or the refinement of oil, the promotion agreements under which: provision of vehicle-related services (IPPAs) • Russia and/or a constituent region or the manufacture of excisable goods In addition to RIPs and SPICs, another and/or a municipality undertake to (excluding cars and motorcycles), or special investment framework for guarantee the non-application of activities for which a profits tax rate of organizations that carry out investment decisions/acts of state authorities 0% is set projects in the territory of the Russian that worsen the conditions for doing While activities related to a RIP are subject Federation is the investment protection business, to separate accounting, it should be noted and promotion agreement (IPPA). • and the entity executing the project that neither the Federal Tax Service nor In accordance with Federal Law No. 69- has the right to demand the non- the Finance Ministry have yet established FZ of 01.04.2020 «On the Protection application of such decisions/acts (or recommended) approaches to the and Promotion of Capital Investments in organization of separate accounting. the Russian Federation» (hereinafter – Under Law No. 69-FZ, Russia and/or a Taxpayers must therefore develop their “Law No. 69-FZ”, “the Federal Law”), an municipality may participate in an IPPA own methodology. We would be happy to IPPA is an agreement between an entity only subject to the participation of a assist you in this matter. executing a project and (1) Russia and constituent region of Russia as a party a constituent region of Russia, or (2) to the IPPA.

128 Doing business in Russia It is important to note that IPPAs may An application to conclude an IPPA measures are available and how they be concluded only in relation to new must be accompanied by a business are granted, and other information. The investment projects. A new investment plan, a financial model and a number winner of the public project initiative project is a project in relation to which of other documents (such as the tender is the bidder that offers the best the entity executing the project made: applicant’s decision on approval of terms for the execution of the project, the capital expenditure budget, a • a decision on approval of the capital and specifically: (1) the highest amount construction permit (if applicable) and of capital investments, (2) the lowest expenditure budget prior to the a list of enabling and/or associated level of state support measures and (3) entry into force of the Federal Law infrastructure). the shortest timeframe for execution. but not earlier than 7 May 2018 Law No. 69-FZ does not allow for and submitted an application for the The time limit for consideration of an multiple winners. execution of the project not later than application is 30 working days from 31 December 2021 the date of submission, which may be The Federal Law does not specify extended to 45 working days if the • a decision on approval of the capital minimum and maximum timeframes for application includes a petition for a expenditure budget after the date of or amounts of capital investments under previously concluded agreement to be entry into force of the Federal Law an IPPA. However, the amount of capital recognised as a related agreement and/ and submitted an application for the investments has a direct bearing on or for the inclusion in the IPPA of a execution of the project not later than the effective period of the stabilization commitment by Russia and a constituent one calendar year after that decision clause and the period and extent of region not to allow the deterioration of was made state support measures. the financial indicators of the investment The Federal Law establishes a list project (if the investment project According to Law No. 69-FZ, an IPPA of sectors in which IPPAs cannot be involves capital investments in excess of must include: concluded. This includes the gaming RUB 300 billion). • a description of the investment project business, the manufacture of tobacco The Federal Law lays down a range of to be executed (including descriptions products, alcoholic products and liquid grounds for refusing to conclude an IPPA, of goods, work, services or results of fuel (excluding the manufacture of liquid including: (1) failure of an application intellectual activity, information on fuel from coal and at petroleum re- and accompanying documents to meet the anticipated volume thereof and refining plants), oil and gas extraction, legislative requirements, (2) failure of an relevant industrial and environmental including associated petroleum gas investment project to meet established requirements) (with the exception of gas liquefaction requirements (e.g., the project is not a • the stages of execution of the project, projects), wholesale and retail trade, the “new investment project”), (3) improper indicating the time limit for obtaining banking sector, and the construction submission of an application, and other required permits, registering rights, (modernization, reconstruction) of formal grounds. bringing facilities into operation and business centres, shopping malls and making capital investments residential buildings. In the case of a public project initiative for the conclusion of an IPPA, the • information on maximum acceptable Law No. 69-FZ prescribes two ways public entity prepares and publishes a deviations from the set parameters in which an IPPA may be concluded: a declaration concerning the execution for the investment project (no more private project initiative (instigated by of an investment project, giving key than 25 percent) the investor by means of an application) information about the investment and a public project initiative (instigated project, the amount of required capital • the effective period of the stabilization by a public entity by means of a tender). investments, what state support clause

Doing business in Russia 129 • the terms of related agreements, the amount of mandatory payments • an assessment has been made of including the timing and amounts of (including profits tax, corporate property options for financing costs relating subsidies and budget investments tax, transport tax, VAT, customs duties to enabling and/or associated and excise duties (in the case of cars and infrastructure needed for the execution Access to subsidies motorcycles)). of the investment project. The assessment involves comparing two Under Law No. 69-FZ, an IPPA allows for The maximum period of cost options: (a) the granting of support the receipt of state support measures reimbursement is 5 years for enabling in the form of reimbursement for costs measures to the entity executing the infrastructure and 10 years for project and (b) the creation of facilities incurred in relation to enabling and associated infrastructure. These using budget funds associated infrastructure. periods may be extended by one year if Associated infrastructure means contracts are concluded with small and Stabilization clause elements of transport, power, utility, medium-sized enterprises. The period The Federal Law contains detailed social and digital infrastructures that begins to run from the date on which regulations on the application of the are used both for the execution of cost reimbursement begins. stabilization clause. the investment project and for other The following requirements must The worsening of conditions is defined as: purposes, while enabling infrastructure simultaneously be met in order for state means facilities that are used solely for support to be granted: • increases in the time required for the execution of the investment project. compulsory procedures and/or in the • all property rights (including number of such procedures State support in the context of an IPPA intellectual property in some cases) is granted in relation to costs: • increases in payments required to that arose in the course of the execute the project • for the creation, modernization and/ execution of the investment project or reconstruction of enabling and/ and were required to be registered • additional requirements and or associated infrastructure (or for have been registered, immovable prohibitions reconstruction in the case of state- or facilities have been brought into use Specific provisions regarding the municipally owned facilities) and the company does not have any effective period of the stabilization outstanding mandatory payments clause are laid down for different types • for the payment of interest on credits of acts of state authorities. For example: and loans and coupon income on • cost reimbursement limits (maximum bonded loans raised for the creation/ budget expenditure) are observed • acts that increase rates of export construction, modernization and/ customs duties do not apply for the • it has been checked that investment or reconstruction of enabling and/or entire duration of the IPPA programmes of regulated entities and/ associated infrastructure needed for or, where applicable, programmes • acts that amend a decision to grant a the execution of the investment project for the development of particular state support measure and alter the (or for reconstruction in the case of sectors do not contain projects timing and (or) amount of the state state- or municipally owned facilities) relating to enabling and/or associated support measure do not apply for It is established in this respect that infrastructure. Law No. 69-FZ allows the effective period of state support the above-mentioned state support state support measures to be granted measures as specified in the IPPA measures may not amount to more than: in relation to infrastructure included in • acts that abolish grounds for the (1) 50 per cent of costs actually incurred investment programmes of regulated acquisition of rights to publicly owned for enabling infrastructure, (2) 100 per entities if they are funded wholly by land parcels or alter the way in which cent for associated infrastructure, (3) the entity executing the project rent is calculated for such land parcels

130 Doing business in Russia do not apply for 3 years after their An IPPA grants an investor the right to entry into force if the IPPA is in effect claim damages from a public entity in How can EY help? during that period the event of a breach of the stabilization In view of the above-mentioned measures clause. • acts that increase the rates or proposed by the government to encourage extend the assessment base used to Other key conditions investment activities we are happy to determine the amount of the charge assist companies with the following: Under Law No. 69-FZ, an investor is for negative environmental impact, required to prepare and submit reports the charge for the use of bodies of • Choosing the most appropriate region on the completion of a stage of the for investments based on various water, the recycling levy and the investment project not later than 1 March factors and/or the type of special environmental levy do not apply for 3 of the year following the year in which investment regime/investment years after their entry into force if the that stage was due to be completed. contract to use IPPA is in effect during that period • Preparation of the company’s An IPPA may be terminated on the It is also established that provisions of business plan for the conclusion tax laws apply to an entity executing initiative of a public entity without of an investment contract recourse to the courts in the following a project subject to the special • Support in preparing and concluding cases: considerations laid down in those laws. an investment contract with the • if capital investments are not made authorities (including collection, Stability is guaranteed only for those preparation and submission of activities of an investor that relate to • if certain legal conditions laid down necessary documents, preparation of an investment project. If the investor in the IPPA are not met within 2 a financial model, determination of has activities besides the investment years (with allowance for acceptable the potential period of application of project, it must keep separate records of deviations) tax benefits, communication with the authorities, analysis of the relevant products and other indicators. • if an offence is committed which draft investment contract) The Federal Law sets out a number has resulted in the suspension • Reviewing or developing a of exceptional cases in which the of the investor’s activities or the disqualification of its officers methodology for separate tax stabilization clause does not apply or accounting as necessary for the where the investor may select only Notably, an investor has the right to application of tax benefits relating to some acts that will not apply. transfer its rights and obligations under an investment contract The effective period of the stabilization an IPPA subject to the consent of the • Any further support relating to clause may not exceed: public entity and provided that the other investment contracts concluded. company meets the same requirements. • 6 years for investment projects with An investor also has the right to assign capital investments not exceeding losses suffered by the public entity. The RUB 5 billion monetary claims under an IPPA or to pledge them to any third party. amount of losses is determined using • 15 years if capital investments are a methodology to be approved by the In the event of a violation of the greater than RUB 5 billion but less government. than RUB 10 billion terms of a related agreement (such as an agreement on the granting of Should a dispute arise over the • 20 years if capital investments are a subsidy), money must be repaid execution of an investment project, above RUB 10 billion in the manner prescribed by budget the parties have the right to refer it for In some cases, the effective period may legislation. Violation of an IPPA gives review in accordance with arbitration/ be extended once by 6 years. rise to liability equal to the amount of mediation agreements.

Doing business in Russia 131 Offshore oil and gas 15developments

132 Doing business in Russia Special tax and customs regimes apply to certain offshore hydrocarbon How can EY help? development projects. Concepts such as “operator”, “offshore hydrocarbon We have extensive practical experience of advising on the development of tax accounting methodologies in relation to hydrocarbon exploration and development deposit” and “hydrocarbon extraction activities on the continental shelf21 and would be happy to assist with the following: activities” are now incorporated in the Tax Code and customs legislation, • assessing the tax burden on potential and existing projects for the development of allowing special profits tax, mineral hydrocarbon deposits on the continental shelf extraction tax and customs regimes to be • checking that all available tax reliefs are used and checking compliance with special tax established for qualifying activities. Such rules for activities involving hydrocarbon deposits on the continental shelf activities when performed by the holder of the relevant mineral licence or a • guidance on organizing separate records of income and expenses for profits tax purposes in relation to activities involving hydrocarbon deposits on the continental qualifying operator are subject to special shelf, as well as special accounting arrangements for other taxes and customs duties ring-fencing rules which prevent losses from other activities from reducing taxable income from a new offshore hydrocarbon deposit and limit the extent to which loses from one such deposit can reduce taxable income from others.

21 For reference: in 2014 EY was involved in a project to develop tax accounting procedures for 4 JVs of a major oil company in relation to activities on the shelf, including procedures for maintaining separate records.

Doing business in Russia 133 Financial reporting and 16auditing

134 Doing business in Russia Sources of accounting Most PBUs are based in large part on Differences between IFRS and IAS and IFRS. Some IFRSs, however, Russian accounting principles principles have no comparable PBU standard, and The major differences are as follows: Regulatory bodies responsible for some PBUs that are based on IFRS have overseeing Russian accounting not been updated for recent changes • Definition of reporting and functional principles include the Ministry of to the comparable IFRS. Therefore, the currency Finance, the Central Bank and the Russian accounting system continues • Supporting documents in prescribed Federal Tax Service. to differ from IFRS as well as from forms required for both accounting accounting principles generally accepted Accounting regulations for Russian and tax purposes legal entities are based on the Civil in the US (US GAAP). • The inflation concept is not Code, the Federal Law on Accounting, Financial accounting and reporting recognised the Federal Law on Consolidated are separate and distinct from tax Financial Statements, accounting accounting and reporting. Financial • There are no rules for business statutes (i.e., standards (PBUs)), and accounting and reporting are regulated combinations and purchase price other laws and accounting regulations by federal accounting standards (FSBUs) allocation (collectively making up Russian issued by the Ministry of Finance, • The goodwill concept is not properly accounting standards, or RAS). With the which provides guidance on accounting provided for and is not applied adoption in 2010 of the Federal Law matters. Also, several new FSBUs are on Consolidated Financial Statements, currently under development. • The fair value concept is applied International Financial Reporting rarely and is not fundamental to Standards (IFRS) were introduced in Basic concepts accounting guidelines; non-current Russian legislation for the purposes Applicable accounting concepts and assets and non-current liabilities are of consolidated financial reporting by principles include accruals, going stated at historical value with few certain companies (see next section for concern, prudence, completeness, exceptions further details). timeliness, relevance, substance • The impairment concept is not applied The Chart of Accounts for Bookkeeping over form, matching revenues and to fixed assets for the Financial and Economic Activities expenses, comparability, consistency • Differences in accounting for capital of Enterprises and the Instruction on and rationality. However, the application and reserves its Application describes bookkeeping of these principles may differ from methods in detail. practices common in other countries. For example, Russian accounting tends Accounting standard (PBU) No. 1/2008 in practice to focus on form rather than – Accounting Policies of an Organization substance; the laws are very specific as – allows for the development of to the documents required to support appropriate methods based on Russian a transaction, and this emphasis on accounting standards and IFRS where legal form may to some extent override accounting methods do not exist in the the application of other accounting current accounting legislation. principles.

Doing business in Russia 135 Applicability of IFRS for Where other federal laws require before their effective date. In practice, the preparation, presentation and/ the time period between the IASB consolidated financial or disclosure of consolidated financial issuing a new or amended standard statements of public statements or where the statutory and its endorsement in Russia is not companies in Russia documents of a company that does not significant, which allows Russian fall within the scope of Law No. 208-FZ companies to adopt IFRS standards and The Federal Law on Consolidated require the preparation, presentation amendments early. Financial Statements (Law No. 208- and/or disclosure of consolidated FZ) requires the mandatory application financial statements, those statements The IFRS endorsement process of IFRS for the preparation and must be prepared in accordance with involves an analysis of the Russian presentation of consolidated financial Law No. 208-FZ. language text of an IFRS, provided by statements by certain Russian entities, the IFRS Foundation, by the National including credit institutions, insurance Endorsement of IFRS in Russia Organization for Financial Accounting companies, listed companies, non-state and Reporting Standards (NOFA), Law No. 208-FZ states that IFRS and pension funds, management companies Interpretations of IFRS issued by the an independent, non-commercial of investment funds, mutual funds and IFRS Foundation and endorsed by the organization designated by the Russian non-state pension funds, and clearing Russian Government in consultation Ministry of Finance. NOFA carries out institutions. with the Central Bank are applicable an analysis of an individual IFRS’s In addition, pursuant to Law No. 208- in Russia. A decision to endorse an suitability for the Russian financial FZ, the Russian government issued a individual IFRS or Interpretation of an reporting system and advises the directive requiring certain state unitary IFRS in Russia is made with regard to Ministry of Finance whether it should enterprises and state-owned public that standard or interpretation as a be endorsed as issued by the IASB or joint stock companies to present their whole. If certain provisions of a standard whether certain requirements should be consolidated financial statements in or interpretation are considered “carved out” to meet the needs of the accordance with IFRS. unsuitable for application in Russia, financial reporting system in Russia. The the standard or interpretation will be Ministry of Finance, after consultation Russian entities that are otherwise adopted in Russia with the provisions in with the Russian Central Bank, makes within the scope of Law No. 208-FZ question “carved out”. the final decision on endorsement and but have no subsidiaries are also publication of the IFRS. required to present IFRS financial There is an IFRS endorsement process statements in addition to single-entity in Russia. Individual IFRS standards At the time of writing, the Ministry of financial statements prepared under (including interpretations) become Finance has endorsed, without any RAS22. Credit institutions and listed mandatory starting from the effective “carve-outs”, all IFRS standards effective companies are required to present date specified in the IFRS or from the from 1 January 2020. IFRS 17 — half-year interim consolidated financial date of its endorsement if this is later. Insurance Contracts — has also been statements under IFRS. IFRS standards may be voluntarily endorsed and is therefore available for applied after they are endorsed but early adoption by Russian companies.

22 Except for banks that hold only a basic license

136 Doing business in Russia Presentation of annual IFRS consolidated financial statements: deadlines and addressees Annual consolidated financial statements must be presented to the company’s participants (including shareholders) prior to a general meeting, but no later than 120 days from the end of the year for which the statements have been prepared. Annual consolidated financial statements must also be filed with the Central Bank. Interim consolidated financial statements must be presented to the company’s participants or shareholders, if such presentation is required by the company’s constituent documents, no later than 60 days from the end of the period for which the statements have been prepared. In cases provided by law such financial statements must also be filed with the Central Bank.

Audit or review of IFRS consolidated financial statements Annual IFRS consolidated financial statements are subject to mandatory audit. An audit opinion must be presented and published together with the consolidated financial statements. Interim IFRS consolidated financial statements for the first half of the reporting year which are legally required to be disclosed are subject to mandatory audit or review as prescribed by audit standards. An audit opinion or review report must be presented and disclosed together with the interim consolidated financial statements.

Doing business in Russia 137 Disclosure of IFRS consolidated • Other steps have been taken to make Significant accounting financial statements the financial statements available to concepts for investors Companies must disclose their annual any interested party Since the official endorsement of consolidated financial statements Certain types of organizations are also together with audit reports on those IFRS in Russia, consolidated financial required to disclose their interim IFRS statements of public companies have financial statements not later than 30 consolidated financial statements. days after the last date they must be been prepared under IFRS. Accounting A company must indicate on its official principles for specified accounts and presented to the company’s participants website where the consolidated or shareholders, unless legislation business transactions under PBU are financial statements are disclosed discussed below. requires otherwise. Consolidated financial if they are not disclosed on the statements are considered disclosed if: website itself. If consolidated financial Books and records • They have been placed on information statements together with related audit According to the general provisions of networks available to the general or review reports are disclosed in accounting standards, including the public (e.g., the Internet), and/or publicly available sources, they must Statute on Accounting and Reporting in remain available to interested parties • They have been published in mass Russia (PBU No. 4/99), the main aim of for three years from the date of their media available to those interested in accounting records is to provide full and initial disclosure. the financial statements, and/or accurate information on the activities

138 Doing business in Russia of an enterprise and its assets and assets and liabilities, other than advance • The most commonly used method liabilities. Financial statements are for payments, which are recorded in roubles is average cost. The cost of internal use by a company’s managers, but denominated in hard currency manufactured inventory must include shareholders and owners and external are revalued at the exchange rate on direct costs and allocated indirect use by investors, creditors and other the reporting date; if the parties have manufacturing costs. users. The Federal Law on Accounting agreed to use another exchange rate, requires an enterprise to refer to the that exchange rate should be used for Investments accounting legislation in defining its accounting purposes. Investments are initially recorded at accounting policies, which should the amount of actual expenditure. reflect the structure, industry and other Fixed assets Investments with determinable particular features of its operations, as Fixed assets are recorded at historical current market value must be revalued well as its accounting methods. cost and are depreciated using four to market value at least annually. The Federal Law on Accounting applies permitted methods, with the straight- Investments without determinable to all organizations located in Russia and line method being the most frequently current market value must be recorded to branches and representative offices used. The useful life of a fixed asset at cost and tested for impairment. of foreign companies, unless otherwise is determined at the acquisition date stipulated in international treaties to and is equal to the period of expected Bank transactions which Russia is a party. However, the use. Revaluations of fixed assets to A company’s cash balance with banks can Statute on Accounting and Reporting adjusted market value are allowed (but only reflect activity recorded by a bank. allows representative offices of foreign not required) once a year as at the end Since the bank statement and related companies to maintain their accounting of the reporting year. A company may supporting documents are the source for records in accordance with their home revalue groups of similar fixed assets entries in a company’s books, there is no country’s accounting regulations as long not more often than annually. Land and need to perform a reconciliation of the as they do not conflict with IFRS. natural resources are not subject to books to the bank statement. revaluation. Foreign currency transactions Tax liability Companies may apply different useful All bookkeeping entries must be lives for accounting and tax records. PBU No. 18 – Accounting for Deferred recorded in roubles, which is also Income Taxes – addresses accounting for the reporting currency, subject to Inventory deferred taxes and the identification of certain specific requirements, for Inventory is carried at cost. Inventory temporary and permanent differences activities outside of Russian Federation. should be written down at year end if between tax and book bases. Although Russia is not considered a the realizable value is lower than cost. Capital and reserves highly inflationary economy, due to The realizable value is measured without its inflationary past rouble amounts deduction of selling costs. Shareholders’ capital is the entire amount require analysis in order to better of capital authorized by a company’s understand the financial position and The permitted accounting methods for charter. Any uncontributed portion results of operations. For bookkeeping determining cost are: of registered shares is recorded as a purposes, foreign currency transactions • Average cost receivable from shareholders and included are converted to roubles using the in current assets. Treasury shares are • Specific identification exchange rate set by the Central Bank shown as a negative amount in the capital at the date of the transaction. Monetary • First-in, first-out (FIFO) and reserves section of the balance sheet.

Doing business in Russia 139 Companies may set up a reserve fund • A balance sheet including three • Disclosure of the company’s from retained earnings. The purpose of columns: for the current reporting environmental activity the reserve fund is to cover accumulated year and the two preceding years • Disclosure of innovations and losses or buy back the company’s • A statement of financial results modernization shares. JSCs must create such a reserve fund amounting to not less than 5% of • Appendices to the balance sheet and • Disclosure of risks associated with the the authorized capital. statement of financial results company’s activities

Net income The formats of the balance sheet, • Supplementary information statement of financial results and Quarterly financial reports where Although it is based on the accruals appendices are prescribed by PBU required to be prepared must include a method, Russian accounting can differ No. 4 –Accounting Statements of balance sheet and statement of financial from IFRS in regard to recognition of an Organization. Appendices to the results. revenue and expenses. financial statements must include the Financial statements cannot be revised following information: Reporting and filing requirements once they have been approved by • Cash flow statement The reporting year for all enterprises shareholders, and any material errors is from 1 January to 31 December. pertaining to prior periods for which • Statement of changes in shareholders’ For newly established legal entities, financial statements have already been equity the first accounting year is the period approved are retrospectively corrected • Notes to the financial statements from the date of their state registration in the financial statements for the until 31 December of the same year current period. • Summary of accounting policies in the notes to the financial statements or, for enterprises established after If a material error is found after year 1 October, until 31 December of end, but before approval by the annual • A description of all departures from the following year. Annual financial shareholders’ meeting, it is corrected in mandatory accounting requirements statements (balance sheet, statement the accounting records for December of when a fair presentation cannot be of financial results, appendices to the the year in which it occurred. achieved through their application balance sheet and statement of financial results) must be submitted to the tax For tax purposes, companies need to • Additional details on significant inspectorate within 90 days of the end resubmit previously filed tax returns to accounts (intangible assets, fixed of the reporting year. correct the effects of any past errors. assets, investments, debtors, creditors, shareholders’ equity, After that, annual financial statements revenues, cost and expenses) Disclosure, reporting and of most companies are available through • Disclosure of commitments, the state information resource for filing requirements contingencies, important subsequent financial statements. events, guarantees, related parties, Financial reports must be signed by the Disclosure requirements beneficial owners, earnings per share company’s general director. Participants All statements must be prepared in the and operating segment information in limited liability companies must Russian language and use roubles as the • Discussion and analysis of the approve the annual financial statements reporting currency. financial results, future plans and by 30 April following year end, The annual financial statements in risk management and of information shareholders of joint stock companies by Russia consist of the following: considered important by management 30 June following the year end.

140 Doing business in Russia Annual reports must be examined and the quarter. The quarterly reports • State and municipal unitary approved according to the company’s should also include interim and annual enterprises corporate charter. consolidated IFRS financial statements • Companies with income from where these are required by law to be Public companies, banks, insurance commercial activity and/or total presented and disclosed. companies and investment funds must assets exceeding a certain limit present their annual reports to the Audit requirements as at the end of the year preceding general public by 30 June after the the reporting period (currently, close of the fiscal year. Federal Law No. 307-FZ “On Auditing” income for the year >RUB 800 million prescribes criteria for compulsory (approx. US$ 11 million) and total All companies listed on the Russian Stock audits of: assets >RUB 400 million (approx. Exchange must submit quarterly financial • Organizations whose securities are US$ 5.5 million) reports (balance sheet, statement of admitted to organized trading financial results and required disclosures) • Other cases where federal laws require and additional information to the Central • Banks, insurance companies, stock an audit to be conducted Bank within 30 days of the close of exchanges and investment institutions

Doing business in Russia 141 17Individuals

142 Doing business in Russia Personal income tax

General Who is liable? provision allowing individuals who spent 183 or more days in Russia due to the Starting 2021, Russia applies a Payers of Russian personal income tax coronavirus pandemic to be considered progressive scale of personal income are defined as tax residents of Russia non-residents). tax rates for tax residents. The following and non-resident individuals who receive tax brackets apply depending on the income from Russian sources. The current position of the tax amount of the annual tax base: authorities is that both arrival and departure days count as full days in • RUR 1 — 5,000,000 (approx. 69,137) Definition of resident Russia for the purposes of the Russian — 13% tax For tax purposes, individuals are tax residency test. • RUR 5,000,001 and above - RUR considered resident if they are present in 650,000 tax is payable on the first Russia for 183 days or more in a period Object of taxation RUR 5,000,000 and a 15% rate of 12 consecutive months. However, the applies to the amount exceeding RUR current interpretation of the Ministry Russian tax residents are taxed in Russia 5,000,000. of Finance of the Russian Federation on their worldwide income, including and the tax authorities is to continue to undistributed profit of controlled foreign Income from the sale of property 23 assess an individual’s residency status companies (CFCs) . (except for securities), income equal to based on the number of days spent in a value of property received as gift and Individuals who are not tax residents are particular calendar year. Short-term leave taxable amounts of insurance payments taxed on their Russian-source income, (not exceeding 6 months) for medical and pensions are still taxable at a flat which includes but is not limited to the treatment or educational purposes or rate of 13% (the progressive scale does following: the performance of employment or not apply). other work-related duties at offshore • Remuneration for the performance The tax rate for Russian tax non- hydrocarbon fields may be treated as of employment duties, services and residents is 30% (15% for certain types presence in Russia in certain cases. activities in Russia (regardless of of income). where paid) Non-residents are those individuals who • Dividends and interest paid by a Please refer to the “Tax rates” section do not meet the aforementioned test. for information on certain specific types Russian organization A special provision was introduced for of income. • Insurance payouts made by a Russian 2020 allowing individuals who spent organization from 90 to 182 days in Russia in 2020 to be considered Russian tax residents • Income from the sale of property in based on an application submitted to the Russia and income from the sale of tax authorities. (However, there is no securities in Russia

23 The CFC rules are not covered in this document. Please contact us if you would like more information about those rules.

Doing business in Russia 143 Starting 1 January 2021, interest Type of income Flat tax rate income on deposits with Russian banks All types of income for which no other rate is specified, including salary and 13% up to annual income of RUR is taxable as follows: other income earned by tax-resident individuals; employment income earned 5,000,000 and 15% by any foreign individuals who qualify as “Highly Qualified Specialists” for • The tax-exempt limit is calculated as on income above immigration purposes, regardless of tax residency status* RUR 1 million x the Russian Central that threshold Bank refinancing rate as at 1 January Dividend income received by non-residents 15% of the tax year (the tax-exempt All taxable income (except for dividends, interest income on Russian bank accounts above the tax-exempt limits, and employment income received by amount for 2021 is 1 million x 4.25% 30% = RUR 42,500). individuals qualifying as Highly Qualified Specialists under the immigration rules) received by individuals who are not tax residents in Russia • The amount in excess of the tax- Certain prizes and deemed income from certain loans extended at a rate exempt limit is taxed at 13% (15%) for less than 2/3 of the refinancing rate for rouble loans or 9% for loans 35% both tax residents and non-residents. denominated in foreign currency** * In accordance with the current position of the Ministry of Finance, employment income of Highly Qualified Specialists Rouble accounts for which the interest (to which a 13% tax rate is applied) is limited to base salary/remuneration received under local employment or civil rate is below 1% for the whole period agreements, vacation payouts, bonuses and business trip-related expenses. The application of the 13% tax rate to and escrow accounts are not included in other income received by Highly Qualified Specialists may be challenged by the tax authorities.** ** Material gain is exempt from taxation if the following conditions are met: the tax calculation. — the borrowed (credit) funds in question were received by the individual from an organization or a private entrepreneur which (who) is not a related party of the taxpayer or with which (whom) the taxpayer has an Interest paid in currency on accounts employment relationship with Russian banks must be converted — the saving in question is not material assistance or a form of compensation into roubles at the exchange rate of the Russian Central bank current on the Example of the calculation of taxable income for most individuals Russian tax non- date of payment. Russian tax non- residents (except for Russian residents who qualify those qualifying Tax is calculated by the tax authorities Income earned by: tax as Highly Qualified as Highly Qualified residents Specialists for based on information provided by the Specialists for immigration purposes banks. immigration purposes) Interest income on foreign bank Employment income* 10,000 10,000 10,000* accounts is fully taxable for Russian tax Other income received in Russia*** 2,000 2,000 2,000 residents. Other income received outside Russia 200 n/a n/a Deductions *** n/a n/a Tax rates Taxable income 12,200 12,000 12,000 13% is applied to 10,000 Rates of 13%, 15%, 30% and 35% are (employment income) applicable based on the type of income Tax rates applicable 13% 30% and 30% is applied to and the taxpayer’s residency status. 2,000 (other income) received in Russia) Investment income received by tax Tax 1,586 3,600 1,900 residents of the Russian Federation * Employment income consists of compensation, whether received in cash or in kind, including but not limited in foreign currency is generally taxed to salary, bonuses and expatriate allowances. at 13% (15%), but special rules apply ** Rental income, capital gains, etc. to the calculation of such income. *** The Russian Tax Code prescribes the following categories of deductions from the taxable base: standard, social, property-related, investment and professional. Standard deductions are very insignificant and are Russian tax law requires income in relevant only to taxpayers with low income levels.

144 Doing business in Russia foreign currency, whether received in personal tax obligations are determined no technical requirement to do so. the Russian Federation or abroad, to be based on the tax residency of the In particular, this may be required in converted into roubles for tax purposes individual in the reporting calendar year, order to claim certain tax deductions using the Bank of Russia exchange which depends on a 183-day period that cannot be granted through rate in effect on the date on which of presence in Russia in a particular payroll or in order to claim a refund of the income was received (and on the reporting calendar year. excess tax withheld, for example due date on which expenses were actually to a change of tax residency status Any individual who has received income incurred, if applicable). This means that from non-resident to resident. subject to tax in Russia where tax was if $1,000 was invested in a particular not withheld at source (fully or partially) Annual tax returns are due no later than instrument when the exchange rate may be obliged to file a tax return (in 30 April (no extensions are available) was RUB 60 per 1 $, and then $1,000 some cases tax is payable based on a of the year following the reporting was withdrawn when the exchange rate tax notice issued by the tax authorities). (calendar) year. The corresponding was RUB 70/$, then an amount equal Individual filing obligations typically self-assessed tax in the declaration to RUB 10 000, is also taxable as it arise in one of the following situations: must be paid no later than 15 July of represents the benefit generated from that following year. Foreign nationals the difference in exchange rates. • A Russian tax resident has received permanently leaving Russia are required income from sources outside Russia to file a tax return one month prior to (including remuneration, dividends, Tax collection procedure their permanent departure and pay capital gains, interest income on a For most taxpayers, tax is payable any tax due within 15 days of filing the deposit with a foreign bank account, return. through withholding at source. Tax material benefit from a low-interest agents for the purposes of Russian loan from a related party, etc.) All tax payments must be made in personal income tax are Russian legal roubles and must be made from the • An individual wishes to claim an entities and permanent establishments individual taxpayer’s personal bank exemption/credit under a double of foreign legal entities from which, account or in cash via Sberbank. taxation treaty or as a result of relations with which, Currently it is possible for tax to be paid individuals receive income. Tax agents • An individual has received income by third parties. If the tax due is to be are required to withhold income tax from the sale of property or property settled from a foreign bank account, it is at source on payments in accordance rights (if the property was owned by essential to confirm with each individual with the individual’s resident status the individual for less than 3/5 years) bank in advance that it is able to process (or a special status), and remit the tax • An incorrect tax rate was applied by a payments in Russian roubles and that it withheld to the Russian tax authorities Russian tax agent when withholding tax has a correspondent relationship with on a monthly basis. Withholding applies the Russian banking system, otherwise to each payment through a tax agent. • An individual has received Russian- payment may be delayed. source income that was not subject to The withholding tax rate depends on withholding at source In some cases, annual income statements the tax residency status of an employee (income statement as part of the • An individual has received Russian- on each date of payment. For personal report 6-NDFL form) filed by tax agents source income from another individual income tax purposes tax residency (Russian companies or foreign companies under a civil agreement (e.g., a rental status is defined based on individual with a registered presence in Russia) to or sale agreement) presence in Russia for 183 days or more tax authorities may contain information in a period of 12 consecutive months • An individual may also file a tax return on amounts of taxes not withheld. In preceding the date of payment. Final on a voluntary basis where there is this scenario, the Russian tax authorities

Doing business in Russia 145 issue a notification with a request for the costs and expenses (including fees for institution; certain medical expenses individual to pay the amount of taxes not services related to the purchase or sale associated with expensive types of withheld by the tax agent. The payment of the securities). Tax is either withheld medical treatment, a list of which is deadline is 1 December of the year at source by the payer of income or paid established by the Government, are following the reporting year. In this case by the taxpayer upon filing a tax return. tax-deductible without limitation the individual would not need to submit a Losses from the sale of securities may • Pension insurance contributions to separate tax return to report the non- be offset against gains from securities licensed Russian non-state pension withheld amount. of the same class. Certain losses may be funds for the taxpayer and his or her A fine of 5% of the tax due per each full carried forward for up to 10 years from spouse, parents and children, and/ or partial month of delay is imposed for the tax period in which they arose. or additional insurance contributions the submission of a tax return after the Since the taxation of stock options paid by the taxpayer for the funded set deadline. The penalty is capped at and other equity-based compensation component of the state retirement 30% of the tax due and cannot be less is not directly addressed in the Tax pension than RUB 1,000 (approx. US$ 13.8). Code, general tax principles and OECD • The aggregate amount of the above Criminal sanctions may also be applied guidelines are normally applied in such so-called social tax deductions in rare cases. The late payment of tax cases (although Russia is not a member (medical, educational and pension is subject to interest penalties at a rate of the OECD). This makes it essential insurance) may not exceed RUB of 1/300 of the annual refinancing to carry out a careful analysis of the 120,000 (approx. US$ 1,659) per rate of the Central Bank of the Russian Russian tax implications for this type of annum (except for expenses for Federation for each day of late payment. income in each individual case. children’s education and high-cost Non-payment or underpayment of tax medical treatment) attracts a fine of 20% (40% in the case of a Tax deductions • Property purchase expenses relating wilful violation) of the underpaid amount. Tax-resident taxpayers are entitled to to the construction or purchase of A foreign citizen may not be allowed the following tax deductions: living premises in Russia (up to RUB to enter the territory of the Russian 2 million (approx. US$ 27,655)), • Educational fees for the taxpayer and plus mortgage interest or other Federation if he or she has an his or her dependent children (under outstanding Russian tax liability. The bank interest paid on a loan to fund the age of 24) up to a maximum such acquisition or purchase, are entry ban lasts until the foreign citizen of RUB 50,000 (approx. US$ 691) has fully paid the outstanding tax liability. deductible. The property deduction per annum per child in total for may be applied to several properties EY has extensive experience in personal both parents; this deduction is only until the entire amount of the RUB income tax compliance and consulting available if the expenses are paid to 2 million (approx. US$ 27,655) services, helping Russian and foreign a licensed educational establishment deduction has been used. The amount individuals with personal income tax (typically only Russian institutions will of deductible mortgage interest is matters at every stage of the tax process. have such a licence) limited to RUB 3 million (approx. US$ • Expenses for medical services, 41,482). If a residential property is Capital gains and losses medication and medical insurance owned by several individuals (so-called A capital gain on securities transactions contributions for the taxpayer and his shared ownership), each individual can is generally calculated as the difference or her spouse, parents and children, claim a property tax deduction of RUB between proceeds from the sale of provided that the services are 2 million (approx. US$ 27,655) securities and documented purchase provided by a Russian licensed medical • The first RUB 1 million (approx.

146 Doing business in Russia US$ 13,827) of income from the Taxpayers who cannot document leave allowance), except for sickness disposal of residential immovable expenses incurred in connection with allowances property that has been owned by their entrepreneurial activities are • Severance payments up to 3 months’ the taxpayer for less than five years allowed a standard professional tax average earnings is fully deductible against the sale deduction equal to 20% of total income • State pensions proceeds (alternatively, the taxpayer received from entrepreneurial activities. may pay tax on the actual taxable The deduction may be obtained through • Payouts from certain insurance gain, if any, equal to gross proceeds a tax agent or upon filing a tax return (in policies, including, in particular, less documented expenses) the absence of a tax agent). obligatory insurance, life insurance • The first RUB 250,000 (approx. US$ policies, insurance covering damage 3,457) of income from the disposal of Taxpayers are also entitled to a variety to life or health and voluntary pension movable property (except securities) of standard deductions (child deduction insurance and of non-residential immovable and deductions for certain disabled • Contributions to most medical property that has been owned by the individuals, veterans and victims of insurance policies made by companies taxpayer for less than three years natural disasters). However, the amount for the benefit of individuals of such deductions is not material. is fully deductible against the sale • Certain gifts received from individuals proceeds (alternatively, the taxpayer and legal entities (depending on may pay tax on the actual taxable Exemptions specific circumstances such as the gain, if any, equal to gross proceeds Taxpayers are entitled to the following nature of a gift and its value) less documented expenses) exemptions: • Income and items received by way of • Charitable contributions to scientific, • On the sale of property: inheritance in most situations cultural, educational, healthcare, religious and social security organi- If the immovable property has been • Specific types of material assistance zations financed by the state, limited owned by the taxpayer for less than 5 to 25% of the taxpayer’s annual income years, income from sale of the property is taxed at 13% (for tax residents) Deductions for property purchase or 30% (for tax non-residents). If the See Appendix 6. expenses, expenses related to pension property was inherited, privatized or Compliance calendar insurance contributions to Russian non- acquired under a life care contract or • Standard tax return filing deadline — state pension funds, medical expenses was considered the sole accommodation 30 April of the year following the and professional tax deductions may of its owner at the time of its sale, the reporting year be claimed through payroll. Other length of ownership of the property for • Departure tax return filing deadline deductions may be claimed by the subsequent tax-free sale is 3 years. taxpayer only through the submission of (expatriates only) — one month a tax return. For other property (e.g., cars), the length prior to departure from Russia of ownership for tax-free sale is 3 years. Individual entrepreneurs and other • Standard tax payment deadline – individuals performing work or rendering Starting from 2019, tax non-residents 15 July of the year following the services on a contractual basis may are also entitled to a tax exemption reporting year deduct related business expenses. for income from sale of movable and • Departure tax payment deadline Property tax paid by these taxpayers is immovable property if the above (expatriates only) – within 2 weeks deductible if the property is directly used requirements are met. upon submission of a tax return in carrying on entrepreneurial activities. • State allowances (e.g., maternity

Doing business in Russia 147 Immigration

In general, any foreign citizen who works in the Russian Federation must hold a work permit or licence, and any entity which employs or purchases work/services from a foreign citizen must hold a valid employer permit to engage such an individual (where applicable).

Highly Qualified Submission of forecasts Work permits Specialists (HQS) of foreign labour needs All expatriates working in Russia (except The term “Highly Qualified Specialist” (quota applications) for certain specific categories) must hold valid work permits. A company is defined in Russian immigration Under the current regulations, planning to engage expatriates to work legislation . An HQS is a foreign citizen companies must report annually (the in Russia must assume responsibility earning not less than RUB 167,000 deadline varies by region) the number for the work permit application process (approx. US$ 2,309) per month of foreign workers (including both and bear in mind that, with the possible for work performed in the Russian employees and civil contractors, but exception of HQSs, it will be a time- and Federation (with minor exceptions for excluding HQS, the citizens of the resource-consuming process, and not limited categories of employers). Eurasian Economic Union and CIS without risk. For most non-CIS citizens, A simplified quota-free one-step citizens) that they anticipate needing the application process (which can only application procedure for work permits to hire in the following calendar year, begin after the necessary quota has and visas is established for HQSs specifying the precise position and been obtained by the employer) consists intending to work in Russia for Russian citizenship of the anticipated foreign of three key steps. First, an employer legal entities or Russian branches and workers. This is effectively a quota submits to the Employment Centre the representative offices of foreign legal application. A quota must be obtained latest information on anticipated job entities. Such HQSs may apply for work before it is possible to submit a work vacancies for expatriate employees. permits and work visas valid for three permit application for any foreigner who Next, the employer applies to the years with the opportunity to extend is not an HQS and whose expected role Migration Service for a permit to engage their validity for subsequent three-year does not fall within the limited range of foreign labour (a corporate permit). periods. By contrast, work permits and specific quota-free job positions. Finally, once a corporate permit has visas of other types available to other been issued, an individual work permit is foreigners have a maximum one-year applied for. term24.

24 HQSs and their accompanying family members (if any) must have voluntary medical insurance during their stay in Russia. Immigration legislation also establishes a requirement for employers engaging HQSs to submit quarterly reports to the immigration authorities on salaries/remuneration paid to HQSs. The notification must be sent no later than the last working day of the month following the reporting quarter.

148 Doing business in Russia Most CIS citizens apply for work permits Registration and citizen is staying, or the employer/ (licences) themselves under a simplified inviting company if the accommodation procedure. deregistration provided to a foreign citizen for The registration procedure involves residence in Russia is owned or rented Russia is also a party to treaties the responsible hosting party notifying by the company. with France and Korea simplifying the appropriate territorial office of the Highly Qualified Specialists who own the Russian work permit application Ministry of Internal Affairs within seven accommodation in Russia have the process. business days of a foreign citizen’s right to act as a hosting party for their arrival at the place of his/her stay in From 1 January 2015, foreign citizens accompanying family members. who apply for a work permit, licence, Russia, or arrival at a new location in temporary residence permit or Russia where the individual will stay for De-registration takes place automatically permanent residence permit are obliged seven days or more. at the time of departure from Russia or at the time of registration at a new place to submit a certificate confirming The registration procedure for foreign of stay by a new hosting party (in the knowledge of Russian language and individuals who obtained their work case of a domestic trip). history and the fundamental principles permits under the Russia-France of Russian law. This requirement does agreement must take place within ten not apply when obtaining work permits business days of the individual’s arrival Sanctions for non- and permanent residence permits for at the place of stay in Russia. compliance with highly qualified specialists. The registration procedure for citizens immigration legislation of Armenia, Kazakhstan and Kyrgyzstan Russian legislation imposes severe Work visas must take place within 30 days after sanctions on companies, their executives Once an individual’s work permit has been they enter Russia. The registration and foreign citizens for non-compliance issued, the employer must arrange a work procedure for citizens of Ukraine, with immigration legislation. The upper visa invitation. A single-entry work visa is except for those who work in Russia, end of financial sanctions applicable to initially issued by the Russian Consulate and citizens of Belarus must take place a company can reach RUB 1,000,000 abroad and is valid for up to three months. within 90 days after they enter Russia. (approx. US $13,827) (per foreign individual per violation). The worst- Once the foreign individual arrives in HQSs and accompanying family case scenario may include deportation Russia under the single-entry work visa, members are allowed to enter and of the individual from the country and it should be replaced by a multiple-entry stay in Russia without an obligation suspension of the employer’s business visa valid for the term of the individual’s to register for 90 calendar days after activities for up to 90 days and/or a ban work permit, but not more than one year entering Russia. Furthermore, they have on the company engaging any foreigners (unless he or she is an HQS). no obligation to register if travelling to under the simplified HQS regime for up other regions of Russia from the one to two years. Financial sanctions, and in which they are registered under the Notifications even deportations, are increasingly current regulations, provided that the Companies are required to notify the being applied. In addition, a foreign period of stay in that other region does immigration authorities of the conclusion citizen may not be allowed to enter the not exceed 30 calendar days. or termination of an employment Russian Federation if he/she has been agreement or civil contract with any The responsible hosting party will held liable for an administrative offence category of foreign citizen within three generally be the hotel, if the foreign in Russia two or more times within three business days after the date of the citizen is staying at a hotel, the landlord years. The entry ban lasts for three years event. of an apartment at which a foreign from the date when the last decision

Doing business in Russia 149 on the imposition of administrative are obliged to notify the Ministry of Administrative liability in the form sanctions came into force. Internal Affairs if they have: of a fine amounting to RUB 1,000 (approx. US$ 13,8) is imposed for Punitive measures for violations incurred • citizenship of another state in the cities of federal significance violating the notification procedure (Moscow, St Petersburg, the Moscow • a residence permit or permanent (failing to meet the 60-day deadline Region and the Leningrad Region) are leave to remain in a foreign state or providing incomplete or inaccurate information), while criminal liability is even tougher. The time limit for submitting the imposed for failing to give notification. EY offers a full package of immigration notification is 60 days from the day The difference between failure to meet services to support companies in all on which a Russian citizen received a the 60-day deadline and failure to give aspects of the employment of foreign second citizenship or permanent leave notification requires clarification. personnel in various regions of Russia to remain in a foreign state. and throughout the CIS. Criminal liability for failing to give Liability notification is quite severe: the offender Mandatory Notification may incur a fine equal to his income Administrative and criminal charges for up to one year or punishment in the of Second Citizenship will be brought against an individual form of up to 400 hours’ compulsory Under the federal law on citizenship of who fails to comply with the notification labour. the Russian Federation, Russian citizens requirements.

How can EY help?

EY takes an effective and innovative approach to customer service and observes the highest standards of quality control and information security in providing services to individuals and employers. We would be happy to assist you with:

• Analysis of personal tax filing • Individual tax planning • Advisory related to labour law, HR obligations in Russia, preparation of • Communication with the tax administration and employment Russian tax returns and calculation authorities regarding the application taxes of Russian tax liability of international tax legislation and • Work permit applications • Assistance with in-person tax return double tax treaties • Applications for various types of submission • Assistance with tax audits and visas (work visa, business visa, • Assistance with the tax payment/tax querying of late payment interest technical services visa) refund process: preparation of tax and fines • Submission of various payment instructions and tax refund • Applying for tax compliance and tax notifications required under applications, support in verifying the residency certificates immigration law correct allocation of tax payments • Payroll and HR compliance services • Immigration health-checks • Assistance in opening and managing an online taxpayer account • Payroll and HR health-checks

150 Doing business in Russia Social security

Social contributions in Russia are the Exemptions • or construction of a dwelling (subject sole responsibility of the employer. to certain conditions) The following payments and benefits There are no “matching” employee are not subject to social contributions: • Expenses incurred by an individual for contributions. Employer contributions work performed or services rendered cover obligatory pension, medical and • State allowances, including sick leave under civil contracts social insurance. On a voluntary basis, allowance • Contributions paid under voluntary additional pension contributions may be • Severance payments (up to statutory medical insurance agreements paid by individuals or by their employers limits and subject to certain rules), concluded in respect of employees (e.g., as a part of a social package) to except for compensation for unused for at least one year either with an non-state funds or insurance companies. vacation insurance company or directly with The tax authorities are responsible for • Fees for additional professional licensed medical institutions administering social contributions. education, training and retraining • Contributions paid under voluntary Social contributions must be accrued of employees (subject to certain insurance agreements (on specific on payments made to individuals in conditions) types of insurance) concluded in the context of employment relations • Reimbursement of business trip- respect of employees and civil contracts for the performance related expenses • Pension insurance contributions paid of work or the rendering of services • Reimbursement of employees’ interest in respect of employees under the non- (except for individual entrepreneurs), expenses on loans for the acquisition state pension security agreements and copyright agreements. Generally, the tax base includes remuneration and • Specific types of material aid. most benefits provided to employees. The legislation also sets out a closed list of payroll items which are exempt from Social contribution rates social contributions. This list includes In 2021 the following rates of social contributions have been set for all categories the majority of social allowances, certain of payers (except for those entitled to preferential social security treatment): types of payments to employees of a Individual cumulative year-to-date Pension Social Medical Total compensatory nature (e.g., per diems income subject to social contributions Fund Insurance Fund Insurance Fund within established limits, hotel costs, Up to RUB 966,000 22.0 % 2.9 % 5.1 % 30.0 % travel expenses), severance payments, (approx. US$ 13,357) voluntary medical insurance if an From RUB 966,000 (approx. insurance agreement is concluded for US$ 13,357) up to RUB 1,465,000 22.0% 0% 5.1% 27.1% a period over one year, certain types of (approx. US$ 20,257) material aid given to employees, etc. Over RUB 1,465,000 (approx. 10% 0% 5.1% 15.1% US$ 20,257)

Doing business in Russia 151 The law lays down special rules pension contributions at rates ranging submitted to the authorities electronically governing the charging of social from 2% to 8%. if the number of persons in respect of contributions on payments made to whom social contributions were paid The legislation also specifies certain expatriate employees temporarily (i.e., insured persons) exceeds 25. categories of organizations that are staying in Russia: entitled to apply lower rates of social Starting from 2021 social allowances • Payments to expatriate employees contributions. These are organizations are paid by the Social fund directly to holding standard work permits are engaged in particular types of economic employees. not subject to contributions to the activity, including, but not limited to, the Medical Insurance Fund, and subject following: Workplace accident to a lower rate of contributions to • Certain types of IT companies the Social Insurance Fund. Pension insurance • Certain types of mass media Fund contributions are charged in the In addition to the aforementioned social companies normal manner. contributions, all employers are required • Payments to expatriate employees • Participants in the Skolkovo project to pay insurance contributions against whose immigration status is Highly workplace accidents and occupational • Companies rendering engineering illness. Qualified Specialist are not subject services to social contributions (except for The rate of these contributions depends workplace accident insurance) as • Some others. on a company’s economic activity and these categories of individuals are not Information on assessed and paid may vary from 0.2% to 8.5%. The rate is covered by the Russian social security contributions to the pension, social generally 0.2% for most employers that system. insurance and medical insurance funds predominantly or only employ office The Russian social security system must be submitted to the tax authorities. workers. The applicable rate is levied on requires additional pension contributions However, individual reports on period the contributions base without any cap. to be paid by organizations that have of employment and periods of absence, Contributions are assessed on all employees eligible for early retirement information on insured employees payments to individuals under (i.e., employees working in unsafe and (SZV-M and SZV-STAZH forms) and the employment agreements. Notably, hazardous conditions). Based on the SZV-TD “electronic work record” (a form employment income payable to foreign results of a special workplace assessment capturing major HR events concerning nationals is not exempt from these procedure, certain job positions may be employees, such as recruitment, contributions. Otherwise, items exempt classified as work performed in unsafe termination and change of job position) from these contributions are very similar and/or hazardous conditions. In this must be submitted to the Pension Fund. to those envisaged for obligatory social case, the employer must pay additional Reports must be submitted quarterly contributions. pension contributions on employment (the reporting periods are the first Information on workplace accident income of those special categories of quarter, six months and nine months and occupational illness contributions employees. Depending on the class of and the full calendar year) and monthly assessed and paid must be submitted to professional risk assigned to employees, (in the case of individual reports to the Social Insurance Fund on a quarterly employers are obliged to pay additional the Pension Fund). Reports must be basis.

152 Doing business in Russia Russian labour law

The Russian Labour Code forms the basis of labour relations in Russia, establishing procedures for hiring and dismissing employees as well as regulations concerning working time, vacations, business trips, salary payment and so on.

The Labour Code continues to be Standard daily working hours are established by a regional agreement at very protective of employees. If a determined by the employer. The the level of a constituent entity of Russia conflict arises, an employee will be generally accepted standard is a five- or, in the absence of such an agreement, able to demand the application of day week with an eight-hour working by federal legislation. any relevant protective provisions of day. Thus, the standard week is 40 As of 1 January 2021, the minimum the Labour Code, which will prevail working hours. A shortened work week monthly wage established by federal over any conflicting provision of the is envisaged for particular categories of legislation amounted to RUB 12,792 individual’s employment agreement. employees, for example women working (approx. US$ 176). The minimum Moreover, the Labour Code establishes in the Far North. Overtime work must monthly wage in Moscow as of 1 certain guarantees for some categories not exceed 4 hours over 2 consecutive January 2021 was set at RUB 20,589 of employees that must be fulfilled days and 120 hours over a year. Under (approx. US$ 284). These amounts by employers even if they are not Russian labour law, overtime work may are periodically adjusted by the specifically set out in employment only be required in exceptional cases Government. The minimum wage is far agreements. with the written agreement of the below salaries offered in the market. employee. Certain employees may also Labour law applies to all employees In practice, the minimum wage serves work irregular working hours, in which working in Russia regardless of more as a basis for the calculation of case they must be compensated for their nationality or the country of state social compensation payments this by at least three calendar days of incorporation of their employer. In than as a real minimum subsistence additional paid vacation per year. other words, Russian labour law covers level. not only Russian citizens, but also Employees must be granted at least In accordance with the requirements of expatriates working in Russia, regardless 28 calendar (as opposed to working) Russian labour legislation, salary must of where employment agreements were days of paid vacation a year. Additional be paid no less frequently than twice a concluded. It is worth mentioning that vacations are envisaged for certain month and paid in Russian roubles. Russian immigration rules and their categories of employees, i.e., those practical administration, which have working irregular working hours, in In addition to the conclusion of a become increasingly complex, oblige harmful and hazardous conditions, or written employment agreement with employers to conclude local employment in the Far North or equated localities. an employee (which must be in Russian agreements with expatriates in order to According to Russian labour law, the or bilingual), recruitment must be obtain work permits. monthly salary paid to an individual may documented internally by the employer not be less than the minimum salary through the issuance of a formal hiring

Doing business in Russia 153 order stating the name, position and date of hiring of the new employee in addition to other HR documents. The statutory guarantees and rights of employees may not be contractually limited, even at an employee’s initiative. Under labour law, an employment agreement must generally be concluded for an indefinite term, and fixed-term employment agreements may be used only in limited cases. An employer hiring an employee may wish to establish a probation period, which may have a maximum duration of three months for all employees except for a general director and chief accountant, for whom the probation period may be up to six months. To comply with Russian labour law, every employer is obliged to maintain a large number of HR documents aimed at documenting various HR events (hiring, vacation, business trips, termination, etc.). These documents are subject to audit by the authorities. Russian labour legislation also prescribes the maintenance of a number of obligatory internal HR policies. The Russian Labour Code envisages various grounds for termination. The following grounds are the most frequently used: • At the employee’s initiative • By mutual consent of the employer and the employee • At the initiative of the employer

154 Doing business in Russia Mutual consent is the most commonly Various post-employment restrictive from RUB 1,000 to 5,000 (approx. used ground for termination as it covenants (confidentiality, non- US$ 13.8 to 69). For legal entities, enables termination of the agreement competition, non-dealing with fines range from RUB 30,000 at any agreed date and on conditions customers or suppliers, non-solicitation to 50,000 (approx. US$ 415 to 691). agreed by both parties. This type of of remaining employees, etc.) are hard For repeat violations the law establishes termination is also considered the most or impossible to enforce. increased fines: RUB 10,000 – 20,000 favourable option by employers, as it (approx. US$ 138 to 276.5) on With effect from 1 January 2021, the helps to mitigate the risks of subsequent responsible executive and RUB 50,000 — Russian Labour Code has undergone disputes with a former employee. 70,000 (approx. US$ 691 to 968) significant amendment in the area for legal entities. If a violation leads to An employee may terminate the of remote working arrangements. In underpayment of salary, the employer is employment relationship on their own general terms, the remote working rules likely to be obliged to repay the underpaid initiative at any time with two weeks allow employers to hire individuals to amount potentially together with interest prior written notice to the employer. perform employment duties away from for each day of the delay. Interest is the location of the employer (i.e., at a Termination by the employer is calculated as 1/150 of the Central Bank’s location where the employer does not restricted to an exhaustive list of refinancing rate for each day of delay. have a registered presence). The new reasons. Termination without a specific, regulations distinguish between different An alternative sanction may be applied expressly stated and valid reason is null types of remote working arrangements in the form of the suspension of an and void. A termination may also be (permanent, temporary, hybrid) and organization’s activity for up to 90 days considered invalid because the employer establish obligations of employers (in practice this happens extremely has not complied with the termination in relation to remote employees, rarely). Violation of labour laws and procedure laid down in labour law. particularly with regard to compensation labour protection laws by a person who A court may reinstate an illegally for certain expenses. There are also has been subjected to administrative dismissed employee in their former provisions allowing HR documents to be penalties for a similar administrative position with payment of salary with exchanged with remote employees in offence in the past may result in interest for the period of exclusion from electronic format, including cases where disqualification for a period from one to the workplace, and may also impose documents may be exchanged without a three years. Suspension of a company’s additional liability for moral injury. digital signature. activity and disqualification of company In certain limited circumstances an executives may be enforced only employer is allowed to dismiss an Sanctions for through a court decision. employee without a notice period or non-compliance Labour law in Russia is complicated and any severance pay. In all other cases, an Currently, fines for non-compliance contains numerous rules and conditions employee is entitled to a notice period with labour legislation are prescribed by that are obligatory for all employers and severance pay, the duration and the Administrative Offences Code and and companies operating in Russia. EY amount respectively depending on the are imposed on responsible executives provides a full range of consulting services circumstances of the employment and (i.e., the general director, the chief to assist with the proper management of the termination. accountant, the HR director) in amounts labour relations in Russia.

Doing business in Russia 155 18Appendices

156 Doing business in Russia Appendix 1: Useful addresses and telephone numbers

When calling from an international location, the caller must use the international telephone country code for Russia, 7, as a prefix.

Major business and commercial organizations

American Chamber of Commerce Association of European Businesses Chambre de Commerce et D’Industrie Ul. Lesnaya, 7, Butyrsky Val, 68/70, bld. 1. Française en Russie Moscow, 125196 Moscow, 127055 Milyutinskiy Pereulok, 10, bld. 1 Russia Russia Moscow, 101000 Tel: + 7 495 961 2141 Tel: + 7 495 234 2764 Russia Fax: + 7 495 961 2142 Fax: + 7 495 234 2807 Tel: + 7 495 721 3828 Email: [email protected] Email: [email protected] Email: [email protected] Website: www.amcham.ru Website: www.aebrus.ru Website: www.ccifr.ru

The U.S.-Russia Business Council Deutsch-Russische Japan Association for Trade (USRBC) Auslandshandelskammer (Russo- with Russia & NIS (ROTOBO) Ul. Myasnitskaya, 24, bld. 1., Moscow, German Chamber of Commerce) Ul. Pyatnitskaya, 18, bld. 3. 101000 Beregovoy Proezd, 5A/1. Moscow, 115035 Russia Moscow, 121087 Russia Tel: +7 985 155 9655 Russia Tel: +7 495 098 0018 Email: [email protected] Tel: + 7 495 234 4950 Email: [email protected] Website: www.usrbc.org Fax: + 7 495 234 4951 Website: www.rotobo.or.jp Email: [email protected] The Canada Eurasia Russia Business Website: www.russland.ahk.de Russian-Japanese Business Council Association (CERBA) Ul. Delegatskaya, 7, bld. 1. 1-y Kazachiy Pereulok, 7. Russo-British Chamber of Commerce Moscow, 127473 Moscow, 119017 Ul. Tverskaya, 16/1. Russia Russia Moscow, 125009 Tel: +7 495 139 9112 Tel: +7 495 134 0268 Russia Email: [email protected] Email: [email protected] Tel: + 7 495 961 2160 Website: www.russia-japan.info Website: www.cerbanet.org Email: [email protected] Website: www.rbcc.com

Doing business in Russia 157 The Foreign Investment Advisory Association of Russian Banks The International Business Leaders Council (FIAC) Skatertny Pereulok, 20, bld. 1. Forum Russia Sadovnicheskaya Nab., 77, bld.1. Moscow, 121069 1st Tverskaya-Yamskaya Ul., 23, bld.1. Moscow, 115035 Russia Moscow, 125047 Russia Tel: +7 495 691 8788 Russia Tel: +7 495 755 9700 +7 495 691 6630 Tel: +7 495 960 4021 Fax: +7 495 755 9701 +7 495 691 8098 Email: [email protected] Email: [email protected] Email: [email protected] Website: www.iblfrussia.org Website: fiac.ru Website: www.arb.ru Self-Regulated Organization of Russian Chamber of Commerce Self-regulated organization of Auditors “Audit Chamber of Russia” and Industry auditors “Russian Union of auditors” (Association) Ul. Ilyinka, 6/1, bld. 1. (Association) 3rd Syromyatnichesky Pereulok, 3/9. Moscow, 109012 Ul. Seleznevskaya, 32, Moscow, 105120 Russia Moscow, 127473 Russia Tel: + 7 495 620 0009 Russia Tel: +7 495 781 2479 Fax: + 7 495 620 0360 Tel: +7 495 150 3347 Email: [email protected] Email: [email protected] Website: www.org-rsa.ru Website: www.sroapr.ru Website: www.tpprf.ru Moscow International Business “Institute of Internal Auditors” Russian Union of Industrialists Association Association and Entrepreneurs (RSPP) Ul. Ilyinka, 5/2. Naryshkinskaya Alleya, 5, bld.1. Kotelnicheskaya Naberezhnaya, 17. Moscow, 109012 Moscow, 125167 Moscow, 109240 Russia Russia Russia Tel: +7 495 620 0130 Tel: +7 985 393 1240 Tel: + 7 495 663 0404 Email: [email protected] Email: [email protected] Email: [email protected] Website: www.mibas.ru Website: www.iia-ru.ru Website: en.rspp.ru Russian Managers Association National Alternative Investment Management Association All Russia Public Organization Butyrsky Val, 68/70, bld. 5. “Business Russia” Moscow, 127055 Presnenskaya Naberezhnaya, 10C. Ul. Delegatskaya, 7, bld. 1. Russia Moscow, 123317 Moscow, 127473 Tel: +7 495 902 5232 Russia Russia Email: [email protected] Email: [email protected] Tel: +7 495 649 1826 Website: www.amr.ru Website: www.naima-russia.org Fax: +7 495 649 1819 Email: [email protected] Website: www.deloros.ru

158 Doing business in Russia Russian ministries, agencies and services

Government of the Russian Federation Ministry of Economic Development Ministry of Health Care Krasnopresnenskaya Nab., 2 Moscow, 125039 Rakhmanovsky Pereulok, 3/25. Moscow, 103274 Russia Moscow, 127994 Russia Tel: + 7 495 870 2921 Russia Tel: + 7 495 985 4444 Fax: + 7 499 870 7006 Tel: + 7 495 628 4453 + 7 800 200 8442 Email: [email protected] + 7 495 627 2944 Website: www.government.ru Website: www.economy.gov.ru Email: [email protected] Website: Ministry of Agriculture Ministry of Energy www.minzdrav.gov.ru Orlikov pereulok, 1/11 Ul. Schepkina, 42 Moscow, 107139 Moscow, 107996 Ministry of Industry and Trade Russia Russia Presnenskaya Nab., 10/2 Tel: + 7 495 607 8000 Tel: + 7 495 631 9858 Moscow, 125039 Fax: + 7 495 607 8362 Fax: + 7 495 631 8364 Russia Email: [email protected] Email: [email protected] Tel: + 7 495 539 2166 Website: Website: www.minenergo.gov.ru Fax: + 7 495 539 2172 www.mcx.gov.ru Email: [email protected] Ministry of Finance Website: www.minpromtorg.gov.ru Ministry of Construction and Communal Ul. Ilyinka, 9 Development Moscow, 109097 Ministry of Internal Affairs Ul. Sadovaya-Samotechnaya, 10, bld. 1. Russia Zhitnaya Ul., 16 Moscow, 127994 Tel: + 7 495 987 9101 Moscow, 119049 Russia Fax: + 7 495 987 9381 Russia Tel: + 7 495 647 1580 Email: [email protected] Tel: + 7 495 667 7447 Fax: +7 495 645 7340 Website: www.minfin.ru + 7 800 222 7447 Website: www.minstroyrf.gov.ru Website: www.en.mvd.ru Ministry of Foreign Affairs Ministry of Digital Development, Smolenskaya-Sennaya Pl., 32/34 Ministry of Justice Communications and Mass Media Moscow, 119200 Zhitnaya Ul., 14 Presnenskaya Nab., 10/2. Russia Moscow, 119991 Moscow, 123112 Tel: + 7 499 244 2469 Russia Russia Email: [email protected] Tel: + 7 495 994 9355 Tel: + 7 495 771 8000 Website: www.mid.ru Website: www.minjust.ru + 7 800 222 1501 Email: [email protected] Website: www.digital.gov.ru

Doing business in Russia 159 Ministry of Labour and Social Ministry for the Development of the Federal Service for Ecological, Protection Russian Far East Technological and Nuclear Supervision Ul. Ilyinka, 21 Ul. Burdenko, 14 Ul. A. Lukyanova, 4, bld. 1 Moscow, 127994 Moscow, 119121 Moscow, 105066 Russia Russia Russia Tel: + 7 495 870 6700 Tel: + 7 495 531 0644 Tel: + 7 495 647 6081 Fax: + 7 495 870 6871 Email: [email protected] Fax: + 7 495 645 8986 Email: [email protected] Website: www.eng.minvr.ru Email: rostekhnadzor@gosnadzor.ru Website: www.mintrud.gov.ru Website: www.gosnadzor.ru Agency for Strategic Initiatives Ministry of Natural Resources and Novy Arbat, 36. Federal Financial Monitoring Service Ecology Moscow, 121099 Ul. Myasnitskaya,39, bld. 1 Ul. Bolshaya Gruzinskaya, 4/6 Russia Moscow, 107450 Moscow, 125993 Tel: +7 495 690 9129 Russia Russia Fax: +7 495 690 9139 Tel: + 7 495 627 3397 Tel: + 7 499 254 4800 Email: [email protected] Fax: +7 495 627 3333 + 7 800 222 4801 Website: www.asi.ru Email: [email protected] Fax: + 7 499 254 4310/6610 Website: www.fedfsfm.ru Website: www.mnr.gov.ru Federal Antimonopoly Service Ul. Sadovaya-Kudrinskaya, 11 Federal Service for State Registration, Ministry of Science and Higher Cadaster and Cartography Moscow, 125993 Education Russia Chistoprudny Bulvar, 6/19 Ul. Tverskaya, 11 Tel: + 7 499 755 2323 Moscow, 101000 Moscow, 125993 Fax: + 7 499 755 2323 Russia Russia Email: [email protected] Tel: + 7 495 917 5798 Tel: + 7 495 547 1316 [email protected] Fax: + 7 495 917 1524 Email: [email protected] Website: www.fas.gov.ru Email: [email protected] Website: www.minobrnauki.gov.ru Website: rosreestr.gov.ru Federal Customs Service Ministry of Transport Federal State Statistics Service Ul. Novozavodskaya, 11/5 Ul. Rozhdestvenka, 1, bld. 1 Moscow, 121087 Ul. Myasnitskaya, 39, bld. 1 Moscow, 109992 Russia Moscow, 107450 Russia Tel: + 7 499 449 7235 Russia Tel: + 7 499 495 0000 Fax: + 7 495 913 9390 Tel: + 7 495 607 4677 Fax: + 7 499 495 0010 Email: [email protected] Email: [email protected] Email: [email protected] Website: customs.gov.ru Website: rosstat.gov.ru Website: www.mintrans.ru

160 Doing business in Russia Federal Tax Service Ul. Neglinnaya, 23 Moscow, 127381 Russia Tel: +7 800 222 2222 Fax: +7 495 913 0006 Website: www.nalog.ru

Federal Agency for Management of Federal Property Nikolsky Pereulok, 9 Moscow, 109012 Russia Tel: + 7 495 539 5862 Fax: + 7 495 606 1119 Email: [email protected] Website: www.rosim.ru

The Central Bank of the Russian Federation Ul. Neglinnaya, 12 Moscow, 107016 Russia Tel: + 7 800 300 3000 + 7 499 300 3000 Fax: + 7 495 621 6465 Website: www.cbr.ru

Doing business in Russia 161 Appendix 2: Exchange rates (as of year’s end)

2013 2014 2015 2016 2017 2018 2019 2020 RUB/US$, eop (end of period) 32.73 56.26 72.88 60.66 57.60 69.47 61.91 72.32 RUB/EUR 44.97 68.34 79.70 63.81 68.87 79.46 69.34 90.68

Source: Central Bank of the Russian Federation

162 Doing business in Russia Appendix 3: Treaty withholding tax rates Russian legislation currently states that double tax treaties signed by the former USSR are still valid. Withholding tax rates under treaties of the USSR and the Russian Federation are listed in the following table. Like most double tax treaties, treaty rates do not apply if domestic withholding tax rates (see Section A) are lower. On 25 March 2020 President Putin announced that the conditions of double tax treaties concluded by Russia with certain foreign states (mostly traditional “transit” jurisdictions) would be toughened insofar as dividend and interest income is concerned. He said that the tax treaties must be amended to impose a 15% withholding tax rate on dividends and interest paid to recipients that are not Russian tax residents, and that Russia will unilaterally withdraw from treaties if agreement is not reached (i.e., if the treaty country rejects the proposed amendments). Russia has already sent official letters to Cyprus, Malta, the Netherlands and Luxembourg proposing the above-mentioned tax treaty amendments. A Protocol amending the DTT between Russia and Cyprus was signed on 8 September 2020, followed by Protocols with Malta on 1 October 2020 and with Luxembourg on 6 November 2020. The amendments to the DTTs with Cyprus and Malta provisionally apply from 1 January 2021, while the changes made by the Protocol with Luxembourg will enter into force on the date of the later of notifications provided through diplomatic channels by the contracting states upon completion of the necessary legal procedures and will take effect in the calendar year following the year of the entry into force of the Protocol (in any case, not earlier than 2022). All three Protocols provide for the standard withholding tax rates for dividends and interest to be raised to 15% (compared with 0%/5%/10%/15% for dividends and 0%/5% for interest before the amendments) with a few exceptions for certain categories of taxpayers and certain types of income. At the same time, the requirement for foreign recipients of dividend and interest income to prove their beneficial ownership status in order to take advantage of reduced tax rates under the DTTs remains unchanged. As for the DTT with the Netherlands, in December 2020 the Russian Ministry of Finance initiated procedures for the denunciation of that DTT since the parties have not yet reached agreement on the proposed amendments.

Country Dividends, % Interest, % Royalties, % Country Dividends, % Interest, % Royalties, % Albania 10 10 10 Chile 5/10 (ddd) 15 5/10 (eee) Algeria 5/15 (tt) 0/15 (k) 15 China (mainland) 5/10 (sss) 0 6 Argentina 10/15 (bbb) 0/15 (ccc) 15 Croatia 5/10 (e) 10 10 Armenia 5/10 (a) 0/10 (xxx) 0 Cuba 5/15 (aaa) 0/10 (cccc) 5 Australia 5/15 (nn) 10 10 Cyprus 5/15 (f) 0/5/15 (f) 0 Austria 5/15 (ssss) 0 0 Czech Republic 10 0 10 Azerbaijan 10 0/10 (yyy) 10 Denmark 10 0 0 Belarus 15 0/10 (xxx) 10 Ecuador 5/10 (www) 0 10/15 (www) Belgium 10 0/10 (ggg) 0 Egypt 10 0/15 (g) 15 Botswana 5/10 (ll) 0/10 (zzz) 10 Finland 5/12 (h) 0 0 Brazil 10/15 (uuu) 0/15 (aaaa) 15 France 5/10/15 (i) 0 0 Bulgaria 15 0/15 (xxx) 15 Germany 5/15 (j) 0 0 Canada 10/15 (c) 0/10 (bbbb) 0/10 (d) Greece 5/10 (rr) 7 7

Doing business in Russia 163 Country Dividends, % Interest, % Royalties, % Country Dividends, % Interest, % Royalties, % Hong Kong SAR 0/5/10 (ttt) 0 3 Norway 10 0/10 (t) 0 Hungary 10 0 0 Philippines 15 0/15 (kkk) 15 Iceland 5/15 (jj) 0 0 Poland 10 0/10 (mmmm) 10 India 10 0/10 (dddd) 10 Portugal 10/15 (u) 0/10 (v) 10 Indonesia 15 0/15 (k) 15 Qatar 5 0/5 (mm) 0 Iran 5/10 (ll) 0/7.5 (ffff) 5 Romania 15 0/15 (nnnn) 10 Ireland 10 0 0 Saudi Arabia 0/5 (lll) 0/5 (oooo) 10 Israel 10 0/10 (gggg) 10 Serbia 5/15 (hh) 10 10 Italy 5/10 (ss) 10 0 Singapore 0/5/10 (vv) 0 5 Japan 5/10 (m) 0 0 Slovak Republic 10 0 10 Kazakhstan 10 0/10 (hhhh) 10 Slovenia 10 10 10 Korea (North) 10 0 0 South Africa 10/15 (w) 0/10 (pppp) 0 Korea (South) 5/10 (x) 0 5 Spain 5/10/15 (y)(z) 0/5 (z)(qq) 5 (z) Kuwait 0/5 (hhh) 0 10 Sri Lanka 10/15 (aa) 0/10 (dddd) 10 Kyrgyzstan 10 0/10 (iiii) 10 Sweden 5/15 (bb) 0 0 Latvia 5/10 (fff) 0/5/10 (dd) 5 Switzerland 0/5/15 (cc) 0 0 Lebanon 10 0/5 (kkk) 5 Syria 15 0/10 (kkk) 4.5/13.5/18 Lithuania 5/10 (l) 0/10 (jjjj) 5/10 (pp) (kk) Tajikistan 5/10 (ll) 0/10 (oo) 0 Luxembourg 5/15 (n) 0 (n) 0 Thailand 15 0/10 (ww) 15 Macedonia 10 10 10 Turkey 10 0/10 (qqqq) 10 Malaysia 0/15 (jjj) 0/15 (kkkk) 10/15 (o) Turkmenistan 10 5 5 Mali 10/15 (p) 0/15 (iii) 0 Ukraine 5/15 (ee) 0/10 (rrrr) 10 Malta 5/15 (mmm) 5/15 (mmm) 5 United Arab 0 (ppp) 0 (qqq) 20 (rrr) Mexico 10 0/10 (uu) 10 Emirates Moldova 10 0 10 United Kingdom 10/15 (eeee) 0 0 Mongolia 10 0/10 (nnn) 20 (q) United States 5/10 (ff) 0 0 Montenegro 5/15 (hh) 10 10 Uzbekistan 10 0/10 (vvv) 0 Morocco 5/10 (r) 0/10 (ooo) 10 Venezuela 10/15 (xx) 0/5/10 (yy) 10/15 (zz) Namibia 5/10 (e) 0/10 (llll) 5 Vietnam 10/15 (gg) 10 15 Netherlands 5/15 (s) 0 0 Non-treaty 15 15/20 (ii) 20 New Zealand 15 10 10 jurisdictions

164 Doing business in Russia (a) The 5% rate applies if the recipient of the dividends has invested at least (i) The 5% rate applies if the recipient of the dividends has invested in the US$40,000 or the equivalent in local currency in the payer’s charter capital. payer at least FF500,000 (EUR76,225) or the equivalent amount in other The 10% rate applies to other dividends. currency and if the beneficiary of the dividends is a company that is exempt (b) The 5% rate applies if the beneficial owner of the dividends (except for a from tax on dividends in its state of residence. The 10% rate applies if only partnership) holds directly at least 10% of the capital of the payer of the one of these conditions is met. The 15% rate applies to other dividends. dividends and if the participation exceeds US$100,000. The 15% rate (j) The 5% rate applies to dividends paid to corporations that hold a 10% or applies to other dividends. greater interest in the capital of the payer and have invested in the payer at (c) The 10% rate applies if the beneficial owner of the dividends owns at least least EUR80,000 or the equivalent amount in roubles. The 15% rate applies 10% of the voting shares of the payer or, in the case of a Russian payer that to other dividends. has not issued voting shares, at least 10% of the statutory capital. The 15% (k) The 0% rate applies if the recipient of the interest is the government of rate applies to other dividends. the other contracting state, including local authorities thereof, a political (d) The 0% rate applies to royalties for the following: subdivision or the central bank. The 15% rate applies to other interest payments. • Copyrights of cultural works (excluding films and television rights) (l) The 5% rate applies to dividends paid to corporations that hold at least • The use of computer software 25% of the capital of the payer and have invested in the payer at least • The use of patents or information concerning industrial, commercial or US$100,000 or the equivalent amount in other currency. The 10% rate scientific experience, if the payer and the beneficiary are not related persons applies to other dividends. The 10% rate applies to other royalties. (m) The 5% rate applies if the beneficial owner of the dividends is a company that (e) The 5% rate applies to dividends paid to corporations that hold at least has held directly at least 15% of the voting power of the company paying 25% of the capital of the payer and have invested in the payer more than the dividends for 365 days ending on the date on which the entitlement to US$100,000 or the equivalent amount in local currency. The 10% rate dividends is determined. The 10% rate applies to all other dividends. applies to other ­dividends. (n) The 5% rate applies if the recipient of the dividends directly holds at least (f) The 5% rate applies to dividends if the beneficial owner of the dividends is a 10% of the capital of the payer and has invested in the payer more than resident of Cyprus and is (a) an insurance company or a pension fund, (b) a EUR80,000 or the equivalent amount in local currency. The 15% rate applies company whose shares are listed on a registered stock exchange, provided to other dividends. The Russian Finance Ministry has sent an official letter that no less than 15% of the voting shares of that company are in free to Luxembourg proposing amendments to the treaty to introduce a 15% float, and which holds directly at least 15% of the capital of the company withholding tax rate for dividend and interest income. The amendments to paying the dividends throughout a 365 day period that includes the day of Russia-Luxembourg DTT (not yet in force) will increase withholding tax rates payment of the dividends, (c) the Government, a political subdivision or a to 15% (5% in certain cases) for dividends and 15% (0%/5% in certain cases) local authority, (d) the Central Bank. The 15% rate applies to dividends if the for interest. beneficial owner of the dividends is a tax resident of Cyprus The 15% rate (o) The 15% rate applies to royalties for copyrights, including film and radio applies to interest if the recipient of the interest is a tax resident of Cyprus broadcasts. The 10% rate applies to other royalties. and is the beneficial owner of the income. The 5% rate applies to interest (p) The 10% rate applies if the recipient of the dividends has invested more if the recipient of the interest, being the beneficial owner of such income, than FF1 million (EUR152,449) in the payer. The 15% rate applies to other is a tax resident of Cyprus and is a company whose shares are listed on a dividends. registered stock exchange, provided that no less than 15% of the voting shares of that company are in free float, and which holds directly at least (q) Royalties are subject to tax in the country of the payer in accordance with 15% of the capital of the company paying the interest throughout a 365 day that country’s law. period that includes the day of payment of the interest. The 0% rate applies (r) The 5% rate applies if the beneficial owner of the dividends owns at least to interest if the recipient of the interest, being the beneficial owner of the US$500,000 of the shares of the payer. The 10% rate applies to other income, is a tax resident of Cyprus and is (a) an insurance company or a dividends. pension fund, (b) the Government, a political subdivision or a local authority, (s) The 5% rate applies to dividends paid to corporations that hold at least 25% (c) the Central Bank, (d) a bank. The 0% rate also applies to interest if the of the capital of the payer and have invested at least ECU75,000 or an interest is paid in respect of the following securities listed on a registered equivalent amount in local currency. The 15% rate applies to other dividends. stock exchange: government bonds, corporate bonds, Eurobonds In December 2020, the Russian Ministry of Finance initiated procedures for (g) The 0% rate applies if the recipient of the interest is the other contracting the denunciation of the DTT. state or a bank that is more than 51%-owned by the other contracting state. (t) The 0% rate applies if the recipient of the interest is the government of the The 15% rate applies to other interest payments. other contracting state including local authorities thereof, an instrumentality (h) The 5% rate applies if the beneficial owner of the dividends is a company of that state that is not subject to tax in that state or the central bank. The (other than a partnership) that holds directly at least 30% of the capital 10% rate applies to other interest payments. of the payer of the dividends and if the foreign capital invested exceeds (u) The 10% rate applies if the beneficial owner is a company that, for an US$100,000 or its equivalent in the national currencies of the contracting uninterrupted period of two years before the payment of the dividends, states when the dividends become due and payable. The 12% rate applies to owned directly at least 25% of the capital of the payer of the dividends. The other dividends. 15% rate applies to other dividends.

Doing business in Russia 165 (v) The 0% rate applies if the interest is derived and beneficially owned by the (gg) The 10% rate applies to dividends paid to shareholders that have invested at other contracting state, a political or administrative subdivision or a local least the equivalent of US$10 million in the payer. The 15% rate applies to authority thereof or any institution specified and agreed to in an exchange other dividends. of notes between the competent authorities of the contracting states (hh) The 5% rate applies to dividends paid to corporations that hold at least in connection with any credit granted or guaranteed by them under an 25% of the capital of the payer and have invested in the payer at least agreement between the governments of the contracting states. The 10% US$100,000 or the equivalent amount in local currency. The 15% rate rate applies to other interest payments. applies to other dividends. (w) The 10% rate applies if the beneficial owner of the dividends owns at least (ii) The 15% rate applies to interest on certain types of state and municipal 30% of the charter capital of the payer and has directly invested at least securities; the 20% rate applies to other interest. US$100,000 in the charter capital of the payer. The 15% rate applies to (jj) The 5% rate applies to dividends paid to corporations that hold at least other dividends. 25% of the capital of the payer and have invested in the payer at least (x) The 5% rate applies to dividends paid to corporations that hold at least US$100,000 or an equivalent amount in local currency. The 15% rate 30% of the capital of the payer and have invested in the payer at least applies to other dividends. US$100,000 or the equivalent amount in local currency. The 10% rate (kk) The 4.5% rate applies to royalties paid to entities for copyrights of applies to other ­dividends. cinematographic films, programs and recordings for radio and television (y) The 5% rate applies if the beneficial owner of the dividends (except for a broadcasting. The 13.5% rate applies to royalties paid to entities for partnership) has invested at least ECU100,000 in the charter capital of the copyrights of works of literature, art or science. The 18% rate applies payer and if the country of residence of the beneficial owner of the dividends to royalties paid to entities for patents, trademarks, designs or models, does not impose taxes on the dividends. The 10% rate applies if one of these plans, secret formulas or processes and computer software, as well as for conditions is met. The 15% rate applies to other dividends. information relating to industrial, commercial or scientific experience. (z) The treaty does not provide relief for Spanish companies receiving (ll) The 5% rate applies to dividends paid to corporations that hold at least 25% dividends, interest or royalties from Russian sources if more than 50% of the of the capital of the payer. The 10% rate applies to other dividends. Spanish company is owned (directly or indirectly) by non-Spanish residents. (mm) The 0% rate applies if the recipient of the interest is the other contracting (aa) The 10% rate applies if the beneficial owner of the dividends owns at least state or local authorities and governmental agencies of that state. The 5% 25% of the charter capital of the payer. The 15% rate applies to other rate applies to other interest payments. dividends. (nn) The 5% rate applies to dividends paid to corporations that hold at least (bb) The 5% rate applies if the recipient is a company (other than an investment 10% of the capital of the payer and have invested in the payer at least fund) that holds at least 10% of the capital of the payer, and this holding AUD700,000 or an equivalent amount in local currency and if dividends amounts to at least EUR80,000 or its equivalent in any other currency. The paid by a Russian company are exempt from tax in Australia. The 15% rate 15% rate applies to other dividends. applies to other dividends. (cc) If the competent authorities agree, the 0% rate applies to dividends paid to (oo) The 0% rate applies if the following circumstances exist: the following: • he interest is derived and beneficially owned by the other contracting state, • A pension fund a political or administrative subdivision or a local authority thereof. • The government of a contracting state, political subdivision or local authority • The interest is derived and beneficially owned by the central bank or a similar institution specified and agreed to in an exchange of notes between • The central (national) bank the competent authorities of the contracting states. The 5% rate applies if the recipient of the dividends is a corporation that • The interest is derived with respect to the deferral of payment under holds at least 20% of the capital of the payer and if, at the time the dividends commercial credits. become due, the amount of the recipient’s investment exceeds CHF200,000. The 15% rate applies to other dividends. The 10% rate applies to other interest payments. (dd) The 0% rate applies to interest paid to the government of a contracting state, (pp) The 5% rate applies to royalties paid for the right to use industrial, including its political subdivisions and local authorities, the central bank or commercial or scientific equipment. The 10% rate applies to other royalties. any financial institution wholly owned by that government and to interest (qq) The 0% rate applies if the interest is paid on a long-term loan (seven or derived from loans guaranteed by that government. The 5% rate applies more years) issued by a bank or other credit institution or if the recipient to loan interest paid by one bank to another bank. The 10% rate applies to of the interest is the government of the other contracting state, a political other interest. subdivision or a local authority. (ee) The 5% rate applies to dividends paid to corporations that have invested in (rr) The 5% rate applies if the beneficial owner is a company (other than a the payer at least US$50,000 or the equivalent amount in local currency. partnership) that holds directly at least 25% of the capital of the company The 15% rate applies to other dividends. paying the dividends. The 10% rate applies in all other cases. (ff) The 5% rate applies to dividends paid to corporations holding at least 10% (ss) The 5% rate applies to dividends paid to corporations that hold at least of the voting shares of the payer or, in the case of a Russian payer that has 10% of the capital of the payer and that have invested in the payer at least not issued voting shares, at least 10% of the statutory capital. The 10% rate US$100,000 or the equivalent amount in other currency. The 10% rate applies to other dividends. applies to other dividends.

166 Doing business in Russia (tt) The 5% rate applies to dividends paid to corporations that hold at least 25% (zz) The 10% rate applies to fees for technical assistance. The 15% rate applies to of the capital of the payer. royalties. (uu) The 0% rate applies if any of the following circumstances exist: (aaa) The 5% rate applies if the beneficial owner of the dividends (except for a • he beneficial owner is a contracting state, a political subdivision or the partnership) holds directly at least 25% of the capital of the payer of the dividends. The 15% rate applies to other dividends. central bank of a contracting state. (bbb) The 10% rate applies if the beneficial owner of the dividends holds directly • The interest is paid by any of the entities mentioned in the preceding bullet.­ at least 25% of the capital of the payer of the dividends. The 15% rate • The interest arises in the Russian Federation and is paid with respect to a applies to other dividends. loan for a period of not less than three years that is granted, guaranteed (ccc) The 0% rate applies if the recipient of the interest is the government of or insured, or a credit for such period that is granted, guaranteed or the other contracting state or the central bank. The 15% rate applies to insured, by Banco de México, S.N.C., Banco Nacional de Comercio Exterior, other interest. S.N.C., Nacional Financiera, S.N.C. or Banco Nacional de Obras y Servicios­ Públicos, S.N.C., or interest is derived by any other institution, as may (ddd) The 5% rate applies if the beneficial owner of the dividends holds directly be agreed from time to time between the competent authorities of the at least 25% of the capital of the payer of the dividends. The 10% rate contracting states. applies to other dividends. • The interest arises in Mexico and is paid with respect to a loan for a period (eee) The 5% rate applies to royalties paid for the right to use industrial, of not less than three years that is granted, guaranteed or insured, or a commercial or scientific equipment. The 10% rate applies to other credit for such period that is granted, guaranteed or insured, by The Bank royalties. for Foreign Trade (Vneshtorgbank) or The Bank for Foreign Economic (fff) The 5% rate applies if the beneficial owner of the dividends (except for a Relations of the USSR (Vnesheconombank), or the interest is derived by partnership) directly owns at least 25% of the capital of the payer and has any other institution, as may be agreed from time to time between the invested more than US$75,000 in the capital of the payer. The 10% rate competent authorities of the contracting states. applies to other dividends. (vv) The 0% rate applies to dividends paid to the Monetary Authority of Singa­ (ggg) The 0% rate applies if any of the following conditions is met: pore, GIC Private Limited, the Central Bank of the Russian Federation and • The recipient of the interest is the government of a contracting state, or institutions wholly or mainly owned by the Central Bank of the Russian a political subdivision or local authority of a contracting state. Federation and any statutory bodies or institutions wholly or mainly owned • The relevant loan is secured by a contracting state, or a political by the governments of a contracting state as may be agreed from time to subdivision or local authority of a contracting state. time between the competent authorities of the contracting states. The 5% rate applies if the recipient of the dividends is a company that holds directly­ • The loan is issued by a bank or other credit institution of a contracting at least 15% of the capital of the company paying the dividends. The 10% state. rate applies to other dividends. (hhh) The 0% rate applies if the dividends are paid to the government of a (ww) The 0% rate applies if the beneficial owner of the interest is the government contracting state, a local authority or political subdivision of a contracting state, the central bank or other state institutions, as agreed by the of a contracting state, a government body of a contracting state, the central competent authorities. The 5% rate applies to other dividends. bank or the Export-Import bank of Thailand. The 10% rate applies if interest is received by an institution that has a licence to carry on banking operations (iii) The 0% rate applies if any of the following conditions is met: (Russian Federation) or a financial institution including an insurance • Interest is paid by the government or local authorities of a contracting company (Thailand). state. (xx) The 10% rate applies if the beneficial owner of the dividends (except for • Interest is paid to the government or local authorities of a contracting a partnership) holds directly at least 10% of the capital of the payer of state or to the central bank. the dividends and if the participation exceeds US$100,000. The 15% rate • Interest is paid on loans issued under agreements between the applies to other dividends. governments. (yy) The 0% rate applies if any of the following conditions is met: (jjj) The 0% rate applies to dividends paid to Russian tax residents. The 15% • The beneficial owner is a government of a contracting state, the central rate applies to dividends paid to Malaysian tax residents. bank of a contracting state, a political subdivision of a contracting state or (kkk) The 0% rate applies to interest paid to the government of a contracting a local authority. state, or a political subdivision or local authority of a contracting state. • The interest is paid by the government of a contracting state, the central (lll) The 0% rate applies to dividends paid to any of the following: bank of a contracting state, a political subdivision of a contracting state or • The government, a political subdivision or a local authority of a a local authority. contracting state • The interest is paid with respect to a loan granted or guaranteed by a • The central bank public financial institution with the objective to promote exports and development. • Other government agencies or financial institutions, as agreed by the competent authorities The 5% rate applies to interest on bank loans. The 10% rate applies to other interest. The 5% rate applies to other dividends.

Doing business in Russia 167 (mmm) The 5% rate applies to dividends if the beneficial owner of the dividends (vvv) The 0% rate applies if any of the following circumstances exist: is a resident of Malta and is (a) an insurance company or a pension fund, • The interest is paid to a contracting state, a political subdivision or a (b) a company whose shares are listed on a registered stock exchange, local authority thereof. provided that no less than 15% of the voting shares of that company are in free float, and which holds directly at least 15% of the capital of the • The interest is paid to the central bank of a contracting state, an export company paying the dividends throughout a 365 day period that includes credit guarantee agency or other similar institution that may from the day of payment of the dividends, (c) the Government, a political time to time be agreed upon between the competent authorities of the subdivision or a local authority, (d) the Central Bank. The 15% rate applies contracting states. to dividends if the beneficial owner of the dividends is a tax resident of • The interest is paid with respect to a commercial loan in the form of Malta. The 15% rate applies to interest if the recipient of interest is a tax deferred payment for goods, equipment and services. resident of Malta and is the beneficial owner of the income. The 5% rate (www) The 5% rate applies to dividends if the beneficial owner of the dividends applies to interest if the recipient of the interest, being the beneficial is a company that owns directly at least 25% of the voting stock of owner of the income, is a tax resident of Malta and is (a) an insurance the company paying the dividends. The 10% rate applies to all other company or a pension fund, (b) the Government, a political subdivision dividends. The 10% rate applies to royalties for the use of, or the right to or a local authority, (c) the Central Bank, (d) a bank, (e) a company use, industrial, commercial or scientific equipment. The 15% rate applies whose shares are listed on a registered stock exchange, provided that no to royalties in all other cases. less than 15% of the voting shares of that company are in free float, and (xxx) The 0% rate applies if the recipient of the interest is the government or which holds directly at least 15% of the capital of the company paying the the central bank of a contracting state. interest throughout a 365 day period that includes the day of payment of the interest. The 5% rate also applies to interest if the interest is paid in (yyy) The 0% rate applies if the recipient of the interest is the government of a respect of the following securities listed on a registered stock exchange: contracting state or an institution authorized by such a government. government bonds, corporate bonds, Eurobonds. (zzz) The 0% rate applies if the recipient of the interest is any of the following: (nnn) The 0% rate applies if the recipient of the interest is the government of • The government of a contracting state, a political subdivision or a local a contracting state, or the central or foreign trade bank. The 10% rate authority thereof applies to other interest payments. • The central bank of a contracting state (ooo) The 0% rate applies to interest on foreign-currency deposits and interest • Any government institution agreed upon in writing by the competent on loans granted to a contracting state or guaranteed by a contracting authorities of the contracting states state. The 10% rate applies to other interest payments. (aaaa) The 0% rate applies if either of following circumstances exist: (ppp) The 0% rate applies to dividends paid to a contracting state or its financial or investment institutions. • The recipient of the interest is the government of a contracting state, a political subdivision thereof or any agency (including a financial (qqq) The 0% rate applies to interest paid to a contracting state or its financial institution) wholly owned by that government or political subdivision. or investment institutions. • The interest is paid with respect to securities, bonds or debentures (rrr) The treaty does not cover royalties. issued by the government of a contracting state, a political subdivision (sss) The 5% rate applies if the recipient is a company (other than a thereof or any agency (including a financial institution) wholly owned by partnership) that holds at least 25% of the capital of the payer, and this that government or political subdivision. holding amounts to at least EUR80,000 or its equivalent in any other (bbbb) The 0% rate applies if any of the following circumstances exist: currency. The 10% rate applies to other dividends. • The recipient of the interest is the central bank of a contracting state. (ttt) The 0% rate applies to dividends paid to the following: • The interest is paid to a resident of a contracting state with respect to • The government of Russia, a political subdivision or local authority indebtedness of the other contracting state or of its state authorities, thereof, or the government of the Hong Kong Special Administrative including local authorities thereof. Region (SAR) • The interest is paid with respect to a loan made, guaranteed or insured, • The Central Bank of the Russian Federation or the Hong Kong Mone­tary or a credit extended, guaranteed or insured, by an organization created Authority and wholly owned by the government of a contracting state for the • Any entity that is wholly or mainly owned by the government of purpose of facilitating exports. Russia or by the government of the Hong Kong SAR and that is (cccc) The 0% rate applies if the recipient of the interest is either of the mutually agreed on by the competent authorities of the two contracting following: parties • The government of a contracting state, a political subdivision thereof or The 5% rate applies if the recipient of the dividends is a company (other a local authority, or a financial institution wholly owned or controlled by than a partnership) that holds directly at least 15% of the capital of the that government, political subdivision or local authority company paying the dividends. The 10% rate applies to other dividends. • Any organization (including a financial institution) that is financed (uuu) The 10% rate applies if the beneficial owner of the dividends holds directly in accordance with an agreement between the governments of the at least 20% of the capital of the payer of the dividends. contracting states

168 Doing business in Russia (dddd) The 0% rate applies if the recipient of the (jjjj) The 0% rate applies if either of the following • The interest is paid to the government of a interest is any of the following: circumstances exist: contracting state or a local authority thereof, • The government of a contracting state, • The recipient of the interest is the or any agency or instrumentality (including a political subdivision thereof or a local government of a contracting state, a financial institution) wholly owned by the authority including its political subdivisions and contracting state or local authority thereof. • The central bank of a contracting state local authorities, the central bank or any • The interest is paid to any other agency financial institution wholly owned by that or instrumentality (including a financial • Any government agency or a financial government. institution) with respect to loans made in institution agreed upon by an exchange of application of any agreement concluded • The interest is paid on loans guaranteed by notes by the competent authorities of the between the governments of the the government of a contracting state. contracting states contracting states. (kkkk) The 0% rate applies if any of the following (eeee) The 10% rate applies to dividends in the (pppp) The 0% rate applies to interest paid with circumstances exist: source state if the recipient is subject to respect to a loan made or guaranteed by the tax with respect to the dividends in the • The interest is paid to a resident of government of a contracting state, a local recipient’s resident state. the Russian Federation with respect authority thereof, the Bank of Russia or the (ffff) The 0% rate applies if the recipient of the to an approved loan as defined under South African Reserve Bank. Malaysian law. interest is any of the following: (qqqq) The 0% rate applies to the following interest: • The interest is paid to the government • The government of a contracting state, • Interest paid in the Russian Federation to or the central bank of a contracting a political subdivision thereof or a local the government of Turkey, its central bank state. authority or Eximbank • The interest is paid in a contracting state • The central bank of a contracting state, the • Interest paid in Turkey to the government with respect to a loan provided, guaranteed bank for external trade of a contracting of the Russian Federation, its central bank or insured by the government of the state, a state agency for insurance of or its bank for foreign trade export credits or a state-owned bank other state, which may be agreed upon (rrrr) The 0% rate applies to the following interest: • Any other state agency of a contracting state between the competent authorities of the contracting states. • Interest paid in the Russian Federation to (gggg) The 0% rate applies if the recipient of the the government of Ukraine, its national interest is either of the following: (llll) The 0% rate applies if the recipient of the interest is either of the following: bank, a local authority or any other • The government of a contracting state government body, or paid with respect to or a local authority thereof, the central • The government of a contracting state, loans guaranteed by them bank or any agency (including a financial a political subdivision thereof or a local authority • Interest paid in Ukraine to the government institution) wholly owned by that of the Russia Federation, its central bank or government or political subdivision • Any government institution agreed upon in any other government body, or paid with • Any resident of a contracting state, if the writing by the competent authorities of the respect to loans guaranteed by them contracting states interest is paid with respect to debt claims (ssss) The 5% rate applies if the beneficial owner guaranteed, insured or indirectly financed (mmmm) The 0% rate applies if the recipient of the of the dividends (except for a partnership) by the government of the other contracting interest is the government of a contracting holds directly at least 10% of the capital of state, a local authority thereof or the state, a political subdivision or a local the payer of the dividends. central bank authority thereof, or the central bank. (hhhh) The 0% rate applies if the recipient of the (nnnn) The 0% rate applies to the following interest is the government of a contracting interest: The Russian Federation has signed tax state, a political subdivision thereof or a • Interest paid in the Russian Federation to local authority, or any institution of that treaties with Estonia, Ethiopia, Georgia, the government of Romania, its national government, political subdivision or local bank, its bank for foreign trade or Laos, Mauritius and Oman, as well as authority. Eximbank a new treaty with Belgium, but these (iiii) The 0% rate applies if the recipient of the • Interest paid in Romania to the government treaties are not yet in force. interest is any of the following: of the Russian Federation, its central Bank • The government of a contracting state or its bank for foreign trade The Russian Federation is negotiating a • The central bank of a contracting state (oooo) The 0% applies if any of the following tax treaty with Bosnia and Herzegovina. • A government agency or an authorized circumstances exist: The Russian Federation is renegotiating financial institution agreed upon by the • The interest is paid by the government its tax treaties with Malaysia, the exchange of notes by the competent of a contracting state or a local authority authorities of the contracting states thereof. Netherlands and the United Kingdom.

Doing business in Russia 169 Appendix 4: Blacklist of jurisdictions approved by the Ministry of Finance

The list of states and territories that grant preferential tax treatment and do not require the disclosure and provision of information in relation to financial operations carried out (offshore zones) is as follows:

1. Anguilla 16. Union of the Comoros: 31. Turks and Caicos Islands 2. Kingdom of Andorra Anjouan Islands 32. Republic of Palau 3. Antigua and Barbuda 17. Republic of Liberia 33. Republic of Panama 4. Aruba 18. Principality of Liechtenstein 34. Republic of Samoa 5. Commonwealth of the Bahamas 19. Republic of Mauritius 35. Republic of San Marino 6. Kingdom of Bahrain 20. Malaysia: Labuan Island 36. Saint Vincent and the Grenadines 7. Belize 21. Republic of Maldives 37. Saint Kitts and Nevis 8. Bermuda 22. Republic of the Marshall Islands 38. Saint Lucia 9. Brunei-Darussalam 23. Principality of Monaco 39. Administrative units of the 10. Republic of Vanuatu 24. Montserrat United Kingdom of Great Britain and Northern Ireland: Isle of Man and 11. British Virgin Islands 25. Republic of Nauru Channel Islands (Islands 26. Сuraçao and Sint Maarten 12. Gibraltar of Guernsey, Jersey, Sark (the Dutch part) 13. Grenada and Alderney) 27. Republic of Niue 14. Commonwealth of Dominica 40. Republic of Seychelles 28. United Arab Emirates 15. People’s Republic of China: Macau (Aomen) Special 29. Cayman Islands Administration Region 30. Cook Islands

170 Doing business in Russia Appendix 5: Blacklist of jurisdictions approved by the Federal Tax Service

States Territories

1. Angola 26. Grenada 51. Maldives 74. Saint Lucia 1. Anguilla 2. Andorra 27. Democratic 52. Marshall Islands 75. Solomon Islands 2. Virgin Islands, USA Republic of the 3. Antigua and 53. Micronesia, 76. Somalia 3. Gibraltar Barbuda Congo Federated 77. Sudan 4. Greenland 4. Afghanistan 28. Djibouti States of 78. Surinam 5. Guam 5. Bahamas 29. Dominica 54. Mozambique 79. Sierra Leone 6. Comoros: Anjouan Island 6. Bangladesh 30. Dominican 55. Myanmar Republic 80. Tanzania, United 7. Curaçao 7. Barbados 56. Nauru Republic of 31. Zambia 8. Macau 8. Bahrain 57. Nepal 81. Timor-Leste 32. Zimbabwe 9. Malaysia: Labuan Island 9. Benin 58. Niger 82. Togo 33. Jordan 10. Montserrat 10. Bolivia, 59. Nigeria 83. Tonga 34. Iraq 11. Niue Plurinational 60. Nicaragua 84. Trinidad and State of 35. Yemen 61. Oman Tobago 12. Puerto Rico 11. Bosnia and 36. Cape Verde 62. Pakistan 85. Tuvalu 13. Cook Islands Herzegovina 37. Cambodia 63. Palau 86. Tunisia 14. Turks and Caicos Islands 12. Brunei- 38. Cameroon 15. Certain administrative units Darussalam 64. Palestine, 87. Uruguay 39. Kenya State of of the United Kingdom 13. Burkina Faso 88. Fiji of Great Britain and Northern 40. Kiribati 65. Papua New 14. Burundi 89. Central African Ireland: Channel Islands 41. Colombia Guinea Republic (Jersey, Sark, Alderney) 15. Bhutan 42. Comoros 66. Paraguay 90. Chad 16. Sint Maarten (Dutch part) 16. Vanuatu 43. Costa Rica 67. Peru 91. Ecuador 17. Taiwan (China) 17. Gabon 44. Ivory Coast 68. Republic 92. Equatorial Guinea 18. Faroe Islands 18. Haiti of the Congo 45. Laos People’s 93. El Salvador 19. Guyana 69. Rwanda Democratic 94. Eritrea 20. Gambia Republic 70. Samoa 95. Ethiopia 21. Ghana 46. Lesotho 71. São Tomé and 96. Eswatini 22. Guatemala 47. Liberia Príncipe 97. South Sudan 23. Guinea 48. Mauritania 72. Senegal 98. Jamaica 24. Guinea-Bissau 49. Madagascar 73. Saint Vincent and the Grenadines 25. Honduras 50. Malawi

Doing business in Russia 171 Appendix 6: Compliance calendar Schedule for submission of reports to tax and other authorities in 2021 for Representative Offices/ Branches of FLE in Russia

№ Name of report Frequency* January Ferbuary March April May 1 Corporate Income Tax Return 4Q 29 March 28 April 2 Statement of Activities of a Foreign Organization in the RF A 29 March Explanatory Note to the Statement of Activities 3 A 29 March (only for Moscow) 30 March Corporate property tax (only for immovable property 30 April 4 4Q (return plus (for payment since 1 January 2020)** payment) only) 25 January 5 VAT Return 4Q 26 April (for Q4 2020) 6 Withholding tax return 4Q 29 March 28 April 1 March (for 30 April Annual 2020; 7 Transport tax payment*** 4Q (for advance for payment payment only) only) 1 March (for 30 April Annual 2020; (for advance 8 Land Tax payment*** 4Q for payment payment only) only) 9 Form 5-Z**** 3Q 30 April 10 Form 8-VES A 27 January 11 Form 1-Enterprise A 1 April Pension report on insured individuals length of services 12 A 1 March (SZV-stazh) 13 Monthly Pension Fund Report (SZV-M) M 15 January 15 February 15 March 15 April 17 May 14 Monthly Pension Fund Report (SZV-TD) M 15 January 15 February 15 March 15 April 17 May M (if ≥15 15 15 January 15 February 15 March 15 April 17 May Report on Headcount, Salary and Employee Turnover employees) (Form P4) 4Q (if <15 16 15 January 15 April employees) 25 January 17 Social Insurance Fund (SIF) Report**** (4-FSS) 4Q 26 April for 2020 Personal Income Tax (PIT) Accrued and Withheld 1 March 18 4Q 30 April by the Tax Agent (Form 6-NDFL) for 2020 1 February 19 Report on Accrued Insurance Contributions 4Q 30 April for 2020 1 March 20 Personal Income Tax (PIT) Withheld by RO (Form 2-NDFL) A for 2020 Confirmation of the type of economic activity 15 April 21 A (to Social Insurance Fund) for 2020 22 Personal Income Tax (PIT) for Individuals* A 30 April 23 Payment of the PIT A 24 Salary Reports on Income of HQS 4Q 31January 30 April

172 Doing business in Russia Corporate tax related report June July August September October November December Payroll related report 28 July 28 October Income tax related report Immigration reports for HQS

* Frequency: A — annual; SA — semi-annual; 30 July 1 November 4Q — quarterly, 4 times a year; (for payment (for payment 3Q — quarterly, 3 times a year; M — monthly only) only) ** Starting in 2021, organizations will no longer 26 July 25 October have to file quarterly computations of advance corporate property tax payments. 28 July 28 October We stress that taxpayers will still be obliged to 1 November pay advance payments unless regional corporate 2 August (for advance property tax legislation establishes otherwise. (for advance payment payment only) *** Starting 2021 organizations will no longer have to only) file Transport Tax and Land Tax returns. Advance 1 November payments are established by regional authorities 2 August (for advance **** The list of required reports should be checked (for advance payment on a monthly basis at https://websbor.gks.ru/ payment only) only) online/#!/gs/statistic-codes

30 July 30 October ***** Starting from the 2020 tax period there will be no requirement to prepare and file a land tax return. Tax inspectorates will calculate tax based on information available to them and send appropriate notices to payers. The last return must be filed for 2019. Thereafter, companies will pay tax based on notices from the 15 June 15 July 16 August 15 September 15 October 15 November 15 December inspectorate in the same way as individuals. 15 June 15 July 16 August 15 September 15 October 15 November 15 December ****** Social Insurance Fund (SIF) report — No later than 15 June 15 July 16 August 15 September 15 October 15 November 15 December the 20th (in hard copy) and 25th (in electronic form) of the month following the reporting period

15 July 15 October

26 July 25 October

2 August 1 November

30 July 1 November

15 July 31 July 30 October

Doing business in Russia 173 Schedule for submission of reports to tax and other authorities in 2021 for LLCs in Russia

№ Name of report Frequency* January Ferbuary March April May 1 Corporate Income Tax Return 4Q 29 March 28 April 2 Statutory financial reporting A 31 March 30 March 30 April Corporate property tax (only for immovable property 3 4Q (return plus (for payment since 1 January 2020)** payment) only) 4 VAT Return 4Q 25 January 26 April 5 Withholding tax return 4Q 29 March 28 April 1 March 30 April (for Annual 6 Transport tax payment*** 4Q (for advance 2020; for payment only) payment only) 1 March 30 April (for Annual 7 Land Tax payment*** 4Q (for advance 2020; for payment only) payment only) 30 January 8 Form P-3**** 4Q 30 April (for Q4 2020) 9 Form 12-F A 1 April 10 Form 11 A 1 April 11 Form 1-Enterprise A 1 April Pension report on insured individuals length of services 5 March 12 A (SZV-stazh) for 2020 13 Monthly Pension Fund Report (SZV-M) M 15 January 15 February 15 March 15 April 17 May 14 Monthly Pension Fund Report (SZV-TD) M 15 January 15 February 15 March 15 April 17 May M (if ≥15 15 15 January 15 February 15 March 15 April 17 May Report on Headcount, Salary and Employee Turnover employees) (Form P4) 4Q (if <15 16 15 January 15 April employees) Social Insurance Fund (SIF) Report 25 January 17 4Q 26 April (4-FSS)******* for 2020 Personal Income Tax (PIT) Accrued and Withheld 1 March 18 4Q 30 April by the Tax Agent (Form 6-NDFL) for 2020 1 February 19 Report on Accrued Insurance Contributions 4Q 30 April for 2020 1 March 20 Personal Income Tax (PIT) Withheld by LLC (Form 2-NDFL) A for 2020 Confirmation of the type of economic activity 15 April 21 A (to Social Insurance Fund) for 2020 22 Personal Income Tax (PIT) for Individuals A 30 April 23 Payment of the PIT A 24 Salary Reports on Income of HQS 4Q 31 January 30 April Corporate tax related report June July August September October November December Payroll related report 28 July 28 October Income tax related report Immigration reports for HQS 1 November 30 July * Frequency: A — annual; SA — semi-annual; (for payment (for payment 4Q — quarterly, 4 times a year; 3Q — quarterly, only) only) 3 times a year; M — monthly

26 July 25 October ** Starting in 2021, organizations will no longer 28 July 28 October have to file quarterly computations of advance corporate property tax payments.

2 August 1 November We stress that taxpayers will still be obliged to (for advance (for advance pay advance payments unless regional corporate payment only) payment only) property tax legislation establishes otherwise.

*** Starting 2021 organizations will no longer have to 2 August 1 November file Transport Tax and Land Tax returns. Advance (for advance (for advance payments are established by regional authorities payment only) payment only) **** The list of required reports should be checked 30 July on a monthly basis at https://websbor.gks.ru/ 30 October online/#!/gs/statistic-codes

**** Social Insurance Fund (SIF) report - No later than the 20th (in hard copy) and 25th (in electronic form) of the month following the reporting period

15 June 15 July 16 August 15 September 15 October 15 November 15 December 15 June 15 July 16 August 15 September 15 October 15 November 15 December

15 June 15 July 16 August 15 September 15 October 15 November 15 December

15 July 15 October

26 July 25 October

2 August 1 November

30 July 1 November

15 July 31 July 30 October General compliance obligations of a branch/representative office of a foreign legal entity in Russia

Filing Filing Filing Additional comments Branch/ Tax Statutory filing due dates Payment due dates monthly quarterly** annually (assumptions) RO Tax returns (Federal taxes)

Newly established branches and ROs of foreign legal entities are obliged to connect to telecommunications channels within 10 days in order to ensure ✓ filing and communications with tax authorities via electronic channels

The Russian Tax Code provides that filing and formalized communications with tax authorities have to be organized via electronic channels. It is important to meet deadlines. For example, companies must confirm receipt of official messages within 6 days and must respond to those messages ✓ within the period specified by the Russian Tax Code.

Due date is the 28th Quarterly advance payments day of the month following by the 28th day of the Profit (Corporate ✓ ✓ the reporting quarter, month following the ✓ income) tax i.e. 28 April, 28 July, reporting quarter and annual 28 October, and 28 March payment is due by 28 March for annual tax return. following the tax period. Statement of Due date is the 28th March of Explanatory Note is Activity and ✓ ✓ the following reporting year applicable for Moscow only. Explanatory Note Due date is the 25th day The payment is due by of the month following the installments in equal parts by Value added tax ✓ tax reporting period (quarter) the 25 th day of each of the ✓ (VAT) i.e. 25 April, 25 July, 3 months following the tax 25 October, 25 January reporting period (quarter).

"Due date is the 28th day of the month following the The due date is the There are some Withholding tax reporting quarter, i.e. 28 April, ✓ next day following the day tax reliefs in double ✓ (WHT) 28 July, 28 October, and of income payment. tax treaties 28 March for annual tax report. Applicable only in cases State duties where the Company makes requests to state authorities Tax returns (Regional taxes) Applicable only if the Company owns real estate. Inseparable leasehold improvements may be considered as real estate for Due date is the 30th day the purposes of assets tax. of the month following Organizations no longer have Corporate the reporting period i.e. ✓ Due date is 30 March. to file quarterly computations ✓ property tax 30 April, 30 July, of advance corporate 30 October, and 30 March property tax payments. for annual payment. Taxpayers will still be obliged to pay advance payments unless regional corporate property tax legislation establishes otherwise. Filing Filing Filing Additional comments Branch/ Tax Statutory filing due dates Payment due dates monthly quarterly** annually (assumptions) RO Applicable only if the Due date is 1 March following Company owns transport the tax period; The advance vehicles. Taxpayers are From 2020 tax year no tax payment should be paid by the Transport tax obliged to pay advance ✓ return should be filed end of the month following the payments unless regional reporting quarter i.e. 30 April, transport tax legislation 31 July, 31 October establishes otherwise. Statistical reporting The list of required reports Statutory deadlines are should be checked Statistical ✓ ✓ ✓ different for the different on a monthly basis at ✓ reporting forms of filings https://websbor.gks.ru/ online/#!/gs/statistic-codes Transfer pricing reporting to the tax authorities TP documentation may be Notification requested by tax authorities, Due date is 20 May of the on controlled ✓ in this case taxpayers must ✓ following year transactions provide it within 30 days from the date it is requested Russian legislation requires taxpayers that are constituent entities of an Notification on MNE group to submit a CbCR participation in ✓ ✓ Notification annually, no MNE group later than eight month after the end of the MNE group's financial year Payroll-related reporting Due date is the 25th day Contributions of the month following the The contributions must be paid against workplace ✓ reporting quarter and not later than the 15th ✓ accidents 25 January for the annual of the following month report. Due date is the 30th day of the month following the Social contributions must Social ✓ reporting quarter and 1 be paid not later than the 15th ✓ contributions February for the annual of the following month report. Report on individuals Due date is the 15th day covered by ✓ of the month following the √ pension insurance reporting month (SZV-M) Report on Due date is 1 March of the individuals' ✓ year following the reporting ✓ length of service year (SZV-STAZH) Filing Filing Filing Additional comments Branch/ Tax Statutory filing due dates Payment due dates monthly quarterly** annually (assumptions) RO

Due date is the 15th day of the month following the reporting month, except "Electronic labor ✓ for hirings/terminations ✓ book" (SZV-TD) where the due date is the next day after HR event

Due date is the last day Consolidated of the month following Tax agents personal income ✓ the reporting quarter ✓ are required to remit tax form (6-NDFL) and 1 March for the withheld personal income annual report. tax not later than the day following the day Individual payment was made Due date is 1 March personal income ✓ to individuals ✓ of the following year tax form (2-NDFL)

Annual confirmation of ✓ Due date is 15 April ✓ the main type of economic activity

Notes: * The table below includes only general tax, social insurance and statistical reporting obligationsappliable to a Branch/Representative Office («RO») located in Moscow. The filing and payment deadlines presented below may be changed by the government based on current circumstances ** The payment deadline may be different from the filing deadline *** If the deadline falls on a day of rest or a non-working public holiday, the due date for tax payment is postponed to the next working day.

178 Doing business in Russia EY in the CIS

Russia Novosibirsk Azerbaijan Nur-Sultan Ul. Sovietskaya, 5, Block A, Talan Towers Offices Moscow Baku 10th floor Dostyk st., 16 Sadovnicheskaya Nab., 77, Novosibirsk, 630102 Port Baku Towers Business Nur-Sultan, Z05H9K3 bld. 1 Tel: + 7 383 211 9007 Centre Tel: +7 7172 58 0400 Moscow, 115035 Fax: + 7 383 211 9008 South Tower, 9th floor Fax: +7 7172 58 0410 Paveletskaya Pl. 2, bld. 2 Neftchilar ave., 153 115054, Moscow, Russia Baku, AZ1010 Tel: + 7 495 755 9700 Rostov-on-Don Tel: + 994 12 490 7020 Atyrau Fax: + 7 495 755 9701 League of Nations Business Fax: + 994 12 490 7017 Satpaev st., 17B Center Atyrau, 060000 Ul. Suvorova, 91 Tel: + 7 7122 55 2100 St . Petersburg Rostov-on-Don, 344022 Fax: + 7 7122 55 2101 White Nights House Business Tel: + 7 863 261 8400 Belarus Center Fax: + 7 863 261 8401 Ul. Malaya Morskaya, 23 Minsk St. Petersburg, 190000 Klary Tsetkin st., 51, 15th Kyrgyz Republic Togliatti Tel: + 7 812 703 7800 floor Bishkek Fax: + 7 812 703 7810 Ul. Frunze, 14B, office 413 Minsk, 220004 Togliatti, 445037 Tel: + 375 17 240 4242 Abdrakhmanov Str., 191 Bishkek, 720011 Ekaterinburg Tel: + 7 8482 99 9777 Fax: + 375 17 240 4241 Fax: + 7 8482 99 9700 Tel: +996 312 66 5997 Business Center Palladium Ul. Khokhryakova, 10 Ekaterinburg, 620014 Vladivostok Tel: + 7 343 378 4900 Okeanskiy Pr., 17 Georgia Ukraine Fax: + 7 343 378 4901 Fresh Plaza Tbilisi Kyiv Vladivostok, 690091 Kote Abkhazi st., 44 Khreshchatyk st., 19A Kazan Tel: + 7 423 265 8383 Tbilisi, 0105 Fax: + 7 423 265 8384 Kyiv, 01001 Ul. Spartakovskaya, 6, suite Tel: + 995 32 215 8811 Tel: + 380 44 490 3000 1015 Fax: + 995 32 215 8822 Fax: + 380 44 490 3030 Kazan, Republic of Tatarstan 420107 Tel: + 7 843 567 3333 Armenia Fax: + 7 843 567 3337 Yerevan Kazakhstan Uzbekistan 1 Northern ave., office 27 Almaty Tashkent Krasnodar Yerevan, 0001 Esentai Tower Tel: + 374 10 500790 Inconel Business Center, 3rd Ul. Sovietskaya, 30, office Al-Farabi ave., 77/7 floor Fax: + 374 10 500705 1106, 1108 Almaty, 050060 Mustaqillik st., 75 Krasnodar, 350063 Tel: + 7 727 258 5960 Tashkent, 100000 Tel: + 7 861 210 1212 Fax: + 7 727 258 5961 Tel: + 998 78 140 6482 Fax: + 7 861 210 1211 Fax: + 998 78 140 6483

Doing business in Russia 179 EY | Building a better working world

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