04.11.2016 — Tax Optimization of Dividend, Interest and Other Payouts Using Double Taxation Treaties Has Been Made Difficult

The Commercial Court of Moscow has considered a contentious case of PAO “Severstal” (No. А40-113217/2016), in which the company paid dividends to four Cyprus-based parent companies using a decreased 5% tax rate based on the Double Taxation Treaty between Russia and Cyprus instead of the default 15% tax rate. The Federal Tax Service and the Court established that the Cyprus companies were fictitious, being created only to transit money flow to actual beneficiaries. Furthermore, the Court refused to believe the letter from Cyprus authorities stating the contrary. As a result, the Court ruled that the DDT with Cyprus was inapplicable, and additional taxes were accrued in respect of PAO “Severstal”.

The Russian Federation has concluded Double Taxation Treaties (DDT) with many countries, foreseeing reduced tax rates for dividend pay-outs to foreign companies. As a result, many Russian companies started to route their dividends through companies fictitiously created in such countries in order to apply the DDT taxation regime. After receiving dividends from Russian companies, the fictitious companies would immediately transfer the money to the ultimate beneficiaries in Russia or other countries with no reduced taxation regime under DDT.

In order to battle this approach, amendments to the Russian Tax Code were introduced, under which only transactions to persons having actual legal rights to the income received from Russia (ultimate beneficiaries) could qualify for tax reductions. Furthermore, the court practice (particularly in the Severstal case) established a test, under which dividend pay-out to companies that carried out no other commercial activity and bore no entrepreneurial risks, merely re-directing the money flow to actual beneficiaries, could not qualify for DDT reductions. The fictitiousness of such companies in practice is established, for instance, by looking at the company’s constitutive documents, the nature of its financial operations and the accounting records. 

03.11.2016 — FAS to Abolish Antitrust Safe Harbor for Exercising IP Rights

The Russian antitrust authority has developed amendments to the Competition Law, under which antimonopoly control measures will be partially extended to intellectual property sphere, which is traditionally unaffected by antimonopoly prohibitions to enter into anti-competitive agreements. This immunity is proposed to be restricted to enable the antitrust authorities to oversee circulation of goods created using intellectual property.

The Federal Antimonopoly Service planned to implement these novelties back when the so-called “fourth antimonopoly package” was passed by the legislature. However, the intellectual property immunities were upheld, and the passed bill specifically noted that holders of intellectual property rights could not be accused of abusing their monopolistic position or creating a cartel.

Nonetheless, the Federal Antimonopoly Service has been trying to implement certain antitrust control over the intellectual property sphere through court practice. Thus, the courts have famously upheld the antitrust orders to enable non-discriminatory access to the products of Google and Teva, despite the companies’ exclusive intellectual property rights over the mobile applications and pharmaceutical goods, respectively. In those cases the Federal Antimonopoly Service, and ultimately the Russian courts, considered that companies may not abuse their monopolistic positions on the market regardless of exclusive intellectual property rights over their products.

The antitrust authorities propose to implement this idea in the legislation. However, realization of antitrust prohibitions in the intellectual property sphere may de-incentivize investment into high-tech industries. Creation of innovative goods requires substantial financial input at the stage of development, which is only plausible if the developer is sure that access to the innovative product will be provided on an exclusive basis, rather than non-discriminatorily to anyone. 

02.11.2016 — Unlawful Criminal Investigations against Businessmen Will Be Punishable by up to 10 Years in Prison

President Putin has introduced a bill to the State Duma, proposing to criminalize unlawful initiation of criminal proceedings. Under the bill, businessmen will be considered a specially protected category. As a result, law enforcement officers will serve up to 10 years in prison for initiating criminal cases to hinder their entrepreneurial activity.

This legislative initiative is supposed to strengthen the responsibility of law enforcement agencies for unsubstantiated criminal prosecution of entrepreneurs. Currently, abuse of Russian law enforcement officers is quite widespread. For instance, criminal cases are at times opened in the absence of the necessary elements of crime.

The investigation carried out after the criminal case is opened often significantly harms businesses and their owners’ reputation. Unfair entrepreneurs often use such criminal cases as an oppression method to eliminate competitors from the market. Experts agree that if the bill is passed and implemented in practice, the business climate in Russia will improve, while the existing abusive practices will be minimized. 

01.11.2016 — Hard Times for Business Centers in Moscow Downtown

The Government of Moscow has developed a new general layout of the city development, under which the business areas are to be moved out of the downtown into the intersections of transportation hubs. In order to incentivize businesses to move out of the downtown, land and real estate taxes will be raised significantly in the downtown territories. At the same time, the newly created business areas outside downtown Moscow will receive tax privileges.

This decision will allow Moscow to reduce the traffic load and decrease the burden on the downtown areas. Currently, more than 40% of the city’s workplaces are concentrated in the city center, while only 8-9% of the total population resides in the downtown. As a result, serious transportation problems are faced by the city every day. Earlier, the transportation problems were planned to be solved by relocating state authorities outside of downtown. However, this idea was never implemented in practice.

As a result, the authorities plan to motivate business to move out of the city center by increasing the tax burden per workplace, including through the increase of land taxes and real estate taxes.

Furthermore, approximately nine business areas are planned to be created around major transportation hubs, particularly near the stations of the newly-opened Moscow Central Circle as well as prospective subway stations. The new business areas will be granted the priority development status, which supply their residents with favorable commercial conditions, tax privileges and enable them to obtain land plots and real estate on a simplified basis.

31.10.2016 — Russia Sees Slowdown in Industrial Sector

The Ministry of Economic Development has recorded further decline of the industrial production index. Analysis of information dated September, 2016 shows that the decline rate of industrial production in Russia has reached its maximum since January, 2016.

In September, the industrial production index decreased to -0.2%. The Ministry of Economic Development considers performance fall in the processing industries to be the primary cause of decline. Processing industries used to be on the rise back in August with the growth rates reaching 0.5%, but now the decline amounted to 0.4%.

In certain other industries the decline turned out to be even heavier. Particularly, on an annualized basis production of light motor vehicles fell by 3.6%, footwear production decreased by 9.7%, cast iron production dropped by 9.9%, while the steel pipe industry slumped by 12.8%. According to the Ministry of Economic Development, the Russian GDP has also fell in the annual quantities by 0.7% total.