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

2. Financing and repatriation tools: hot issues 2 © 2006 Deloitte & Touche Regional Consulting Services Limited Funding and repatriating –Debt financing: interest payments and thin capitalization rules –Equity financing: contribution of assets into charter capital –Liquidation proceeds paid to foreign shareholders Agenda

3. Financing and repatriation tools: hot issues 3 © 2006 Deloitte & Touche Regional Consulting Services Limited Debt financing: interest Interest is deductible subject to the following limitations: –Deductibility caps: –Interest rate should not differ by more than 20% from the average interest rate on similar debt obligations, Alternatively, –15% for loans granted in foreign currency –1.1*Russian Central Bank refinancing rate (making 12.65 % at present) for loans granted in RUB –Thin capitalization rules

4. Financing and repatriation tools: hot issues 4 © 2006 Deloitte & Touche Regional Consulting Services Limited Thin capitalization: new scope The scope of thin capitalization rules was significantly expanded starting from 1 January 2006 and in addition to –Debt obligations to a foreign company, which directly or indirectly owns more than 20% in the Russian company’s charter capital; the rules now also cover: –Debt obligations to a Russian company, which is considered to be affiliated with such a foreign company; and –Debt obligations guaranteed/secured in any way by the foreign company and/or its Russian affiliate

5. Financing and repatriation tools: hot issues 5 © 2006 Deloitte & Touche Regional Consulting Services Limited 50% New thin capitalization rules: example (1) Foreign Country Russia FLE RLE (debtor) 100% Direct or indirect ownership of more than 20% in the charter capital Debt

6. Financing and repatriation tools: hot issues 6 © 2006 Deloitte & Touche Regional Consulting Services Limited New thin capitalization rules: example (2) Foreign Country Russia Affiliated parties Debt Direct or indirect ownership of more than 20% in the charter capital FLE RLE (debtor) RLE

7. Financing and repatriation tools: hot issues 7 © 2006 Deloitte & Touche Regional Consulting Services Limited New thin capitalization rules: example (3) Foreign Country Russia Affiliated parties Debt Direct or indirect ownership in the charter capital Surety/guarantor FLE RLE (debtor) RLE Third party

8. Financing and repatriation tools: hot issues 8 © 2006 Deloitte & Touche Regional Consulting Services Limited When thin capitalization rules should not apply (1) Foreign Country Russia There is no guarantor affiliated with the foreign owner under the transaction FLE RLE (debtor) Independent lender Direct or indirect ownership of more than 20% in the charter capital Debt

9. Financing and repatriation tools: hot issues 9 © 2006 Deloitte & Touche Regional Consulting Services Limited When thin capitalization rules should not apply (2) Debt Direct or indirect ownership of more than 20% in the charter capital FLE RLE (debtor) FLE Foreign Country Russia FLE

10. Financing and repatriation tools: hot issues 10 © 2006 Deloitte & Touche Regional Consulting Services Limited Thin capitalization: issues for consideration –‘Affiliated’ companies –Scope of “debt obligations” – inclusion of outstanding liabilities under sales contracts with deferred payments –Negative net assets: when a company has negative capital the whole amount of interest may be considered non-deductible by virtue of the formula –The moment to withhold tax: accrual basis? –Double Tax Treaty relief/reduced withholding income tax rate applicable to excessive interest?

11. Financing and repatriation tools: hot issues 11 © 2006 Deloitte & Touche Regional Consulting Services Limited Charter capital contributions Contribution of assets into charter capital –Value of the contributed fixed assets –Valuation by an independent valuator

12. Financing and repatriation tools: hot issues 12 © 2006 Deloitte & Touche Regional Consulting Services Limited Liquidation Liquidation proceeds paid to foreign shareholders –Excess of liquidation proceeds over initial contribution may be treated as dividends and be subject to WHT –Withholding income tax: dividends (15%) vs. other income (20%) –Double Tax Treaty relief available?

13. Financing and repatriation tools: hot issues 13 © 2006 Deloitte & Touche Regional Consulting Services Limited Contact details Dmitry Kulakov Senior Manager Tax and Legal Services Tel: +7 (495) 787-0600 e-mail: dkulakov@deloitte.ru

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