funding of and repatriating profits for russian companies: recent developments. kulakov dmitry...
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Funding of and Repatriating Profits for Russian Companies: recent developments.Kulakov Dmitry
September 22, 2006
Financing and repatriation tools: hot issues2 © 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
Financing and repatriation tools: hot issues3 © 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
Financing and repatriation tools: hot issues4 © 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
Financing and repatriation tools: hot issues5 © 2006 Deloitte & Touche Regional Consulting Services Limited
50%50%
New thin capitalization rules: example (1)
Foreign Country
Russia
FLE FLE FLE
RLE (debtor)
100%
Direct or indirect ownership of more than 20% in the charter capital
Debt
Financing and repatriation tools: hot issues6 © 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
Financing and repatriation tools: hot issues7 © 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
Financing and repatriation tools: hot issues8 © 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
Financing and repatriation tools: hot issues9 © 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
Financing and repatriation tools: hot issues10 © 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?
Financing and repatriation tools: hot issues11 © 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
Financing and repatriation tools: hot issues12 © 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?
Financing and repatriation tools: hot issues13 © 2006 Deloitte & Touche Regional Consulting Services Limited
Contact details
Dmitry Kulakov
Senior ManagerTax and Legal Services
Tel: +7 (495) 787-0600
e-mail: [email protected]
© 2006 Deloitte & Touche Regional Consulting Services Limited. All rights reserved.Member ofDeloitte Touche Tohmatsu