doing business in russia: efficient strategies for medium size business

8/13/2019 Doing Business in Russia: efficient strategies for medium size business

1/19

Efficient strategies for medium businesses in Russia

28 November 2013

Moscow


2/19

BASIC STRATEGIES

How it works in Russia

Decision to enterthe Russian

market

Organic growth

RO/Branch inRussia

Russian LegalEntity

Acquisitions

Acquisition ofRussian Distributor

Acquisition ofRussian Producer

Joint Activities

Joint Venture

Franchising


3/19

Form ofpresence

Compliance

Choice of

businesspartners

ORGANIC GROWTH

Russian regulatory environment differs from those in

Europe


4/19

ORGANIC GROWTH

Choice of key business partners

Forensic Check !

(shareholders have no criminal track record)

Known in the market?

(web site, office, available references)

Bona fide taxpayer?

(regular tax filings, not an SPV)

Solid financial position?

(realistic figures in statutory reports, audit opinion)


5/19

ORGANIC GROWTH

Forms of business presence

Marketing,advertising andother supportactivities

Subject toaccreditationand registrationwith the taxauthorities

No auditrequirements

Rep OfficeIncomegeneratingactivities

Subject toaccreditationand registrationwith the taxauthorities

No auditrequirements

BranchMaterial incomegeneratingactivities,localization

Should beincorporatedand registeredwith the taxauthorities

Statutory audit(under certainconditions)

Russian Legal

Entity


6/19

Form of

presence

ADVANTAGES DISADVANTAGES

Rep Office No currency control Limited number of

activities

PE risks Unclear profit allocation

rules

Simplified tax regime notavailable

Branch No currency control Difficulties with permits/

licenses

PE status Unclear profit allocation

rules

Simplified tax regime notavailable

RussianLegal

Entity

Simplified tax regimeavailable (under certain

conditions)

No or little difficultieswith permits/licenses

Subject to currencycontrol

Transfer pricing issues reHQ payments

ORGANIC GROWTH

Whether incorporation could give an advantage


7/19

Work permits and visas

Customs requirements

Labour law compliance

Tax and financial reporting

compliance

Certification andregistration

Key issuesto consider

ORGANIC GROWTH

Compliance with local legislation


8/19

ORGANIC GROWTH

Recommendations

1) Perform forensic check of key business partners (includingsuppliers, customers and lessors)2) Match the form of presence in Russia with your strategy3) Outsource regulatory compliance to reliable local providers4) Pay specific attention to compliance with customs regulations5) Consider requirements to keep detailed primary documentation

for tax and statutory accounting purposes


9/19

Holdingstructure

Completion

Due diligence

ACQUISITIONS

M&A process in Russia differs from those in Europe


10/19

ACQUISITIONS

Typical risks of a Russian distributor

FinancialRisks

Distortion of keyindicators(EBITDA,

working capital,net debt)

Slow movinginventories

Hidden liabilities

LegalRisks

Defects of rightsfor shares

IP not registered

Regulatorycompliance

issues

TaxRisks

Underpayment ofsalary taxes

Understatementof customspayments

Unjustifiedapplication ofsimplified tax

regime


11/19

ACQUISITIONS

Choice of the acquisition vehicle EU holding

Italian Parent

Holding Company

(EU)

Russian operationalcompany

How it works:

1) Italian Parent established a EU holding company2) The EU holding company purchases shares in a

Russian operational company

Advantages:

Safeguard the rights for shares

Reduced withholding tax rates on dividend Reduced taxation of capital gains on exitDisadvantages:

No right to apply for a simplified tax regime for theRussian operational company

Alternatives: Russian holding company Direct acquisition of shares in the Russian operational

company by Italian individuals

1

2


12/19

ACQUISITIONS

Key issues to address on completion

Issues

Non-competing

(retention of key personnel; renewal of key contracts)

SPA protection

(deferred payment;warranties & indemnities)

Post-completion performance

(share options, acquisition in stages, completionaccounts )


13/19

ACQUISITIONS

Recommendations

1) Perform operational, financial, tax and legal due diligence of theRussian target2) Consider tax implications of the transaction structuring options

(effective tax rates, capital gain taxation, etc.)

3) Agree on non-competing with the sellers4) Properly address risks revealed in the course of due diligence in

the SPA

5) Consider post-completion performance as a price adjustingevent


14/19

Legalframework

Profitssharing &

control

Choice of

businesspartners

JOINT ACTIVITIES

Partnerships in Russia differ from those in Europe


15/19

JOINT ACTIVITIES

Choice of business partners

Critical factors Good reputation and acceptable quality Attractive market share and product lines Stable financial KPIs Sufficient regulatory compliance

Comparable business culture

Management is open & willing to change Pre-deal steps

Market searches &forensic checks Operational due diligence Financial due diligence Legal due diligence Interviews with top management

Best fitRussianpartner


16/19


17/19

JOINT ACTIVITIES

Profits sharing & control

Valuation of the

partners shares &contributions

(SPA)

Establishing

profits distributionrules

(SHA)

Monitoringcurrant

performance andfinancial KPIs

(SHA)


18/19

JOINT ACTIVITIES

Recommendations

1) Perform operational financial, tax and legal due diligence of theRussian JV partner2) Consider cultural differences when deciding on joint activities3) Consider tax implications of profits repatriation when

structuring the JV

4) Properly address profits sharing and control issues in the SHA5) Perform regular health checks of the joint activities


19/19

Thank you for attention

Maria Semenova!"#. +7 916 332 5114

[email protected]

www.lawexpert.spb.ru

doing business in russia: efficient strategies for medium size business

Documents