Sergey Artemiev

On October 26, our firm held a webinar dedicated to the current legal trends and regulatory changes in the pharmaceutical and healthcare industry, which companies may face in Russia. During the webinar ALRUD experts have covered topics such as: Expansion of mandatory labeling requirements Harmonization of Russian and EAEU legislation Acceleration of registration of new medicines Extension of counter-sanctions measures Latest trends of regulatory clearance of transactions Focus on the pre-audit analysis of business as the main direction of the new tax policy Current findings and trends in enforcement practice in patent disputes and registration of generics Settlements under foreign trade contracts: requirements and restrictions of currency legislation The speakers of the webinar were: Maria Ostashenko, Partner, Dina Kravchenko, Senior Associate, Ksenia Erokhina, Senior Associate, Ilya Khodakov, Senior Associate, Sergey Artemiev, Senior Associate and Alexander Artemenko, Associate. More information on the services and expertise of ALRUD's Healthcare and Pharmaceutical Industry team can be found here.

VEON is a major telecommunications operator in the CIS and several Asian countries that provides communications to more than 150 million users every day. VimpelCom (Beeline brand) was previously part of VEON Group. The ALRUD team advised VEON on comprehensive legal support throughout all the stages of the transaction: on the initial stages of the transaction, the ALRUD team advised VEON on general issues related to the structuring of the transaction and advised on the auction sale process with several potential buyers; ALRUD lawyers subsequently supported VEON with negotiating transaction documents with the Russian top management of VimpelCom led by Alexander Torbakhov. This included complex issues associated with structuring the redemption of VEON Eurobonds taking into account Russian and international regulatory restrictions and a disruption in communication between the National Settlement Depository and Euroclear/Clearstream; on the final stages of the transaction, ALRUD represented VEON in negotiating commercial terms of the brand’s division and the operating activities of VEON Group and VimpelCom, as well as in complex issues involving the finalization of the transaction (including interaction with the registrar and broker). Supporting such a major and multi-faceted transaction would not have been possible without the full-service concept of ALRUD law firm. We not only provide comprehensive, high-quality legal assistance, but also integrate our services into our clients’ strategic goals. The ALRUD team that worked on the project under the guidance of Corporate and M&A Practice Partner Sergey Khanaev and Head of the Corporate and M&A Practice Alexander Zharskiy included a cross-functional team from the Corporate, Competition/Antitrust, Commercial/IP and Tax practices: Partner German Zakharov, Senior Associate Anna Grosheva, Senior Associate Ksenia Erokhina, Senior Associate Daniil Lozovsky, Senior Associate Sergey Artemiev, Senior Associate Kristina Akalovich, Associate Eva-Maria Shakhmaeva, Associate Yulia Malchenkova and Associate Olga Yuz.

On August 8, 2023 the President of the Russian Federation signed and published new Decree 'On suspension by the Russian Federation of certain provisions of the Double Tax Treaties' No. 585 (the “Decree No. 585”). The list of partially suspended Double Tax Treaties (the “DTTs”) includes 38 “Unfriendly States”: Albania; Australia; Austria; Belgium; Bulgaria; the Czech Republic; Canada; Croatia; Cyprus; Denmark; Finland; France; Germany; Greece; Hungary; Iceland; Ireland; Italy; Japan; Lithuania; Luxembourg; Macedonia; Malta; Montenegro; New Zealand; Norway; Poland; Portugal; Romania; Singapore; Slovakia; Slovenia; South Korea; Spain; Sweden; Switzerland; the UK and Northern Ireland; and the US. Decree No. 585 comes into force immediately and suspends the key provisions of the DTTs regulating taxation of income, while certain provisions such as tax credits, exchange of tax information, etc. remain in force. Decree No. 585 does not have a retrospective effect, and the tax rates that have already been applied before August 8, 2023 would not be recalculated. At the same time, Decree No. 585 does not specify any date for restoring full effect of the DTTs. Partial suspension of the DTTs is a second Russian countermeasure against including Russia into the list of non-cooperative jurisdictions for the tax purposes (the so-called “EU blacklist”). Previously, the Ministry of Finance of the Russian Federation has included all “Unfriendly States” into the blacklist of “offshore jurisdictions” (the Order No. 86н dated June 15, 2023). As a result, starting from July 1, 2023 any transactions between a Russian company and a company from one of the “Unfriendly States” (irrespective whether it is a related or a third party) exceeding RUB 120 mln per year (approx. EUR 1,145 mln) are subject to the Russian transfer pricing rules and special disclosure in Russia. What is the tax effect of partial suspension? Decree No. 585 impacts potential and scheduled payments of dividends, interest, royalties, and other similar “passive” types of income from Russia under the DTTs with “Unfriendly States”, i.e. the beneficial tax rates provided by the DTTs are no longer available. The standard withholding tax (WHT) rates apply starting August 8, 2023: {{1)}} 15% WHT rate for dividends (instead of 5% or 10%); {{2)}} 20% WHT rate for interest payments (instead of a tax exemption or 10%); {{3)}} 20% WHT rate for royalties (instead of tax exemption or other lower WHT rates); and {{4)}} 20% WHT rate for distribution of profit (other than dividends) (instead of a tax exemption). The latter change may have a potentially substantial effect as the tax authorities obtain more opportunities and fiscal reasons to requalify any suspicious payments and/or payments with low economic justification (even “active” types of income such as payments for the intragroup services) to distribution of profit that is subject to 20% WHT rate at the source of income in Russia. These standard tax rates apply irrespective of the amounts of payments and existence / absence of the special approvals of the Governmental Commission (i.e., even payments below RUB 10 mln per month, which do not require the special approval, are subject to the WHT). The tax must be withheld by the Russian company acting as a tax agent, i.e. the amount of income will be decreased by the amount of tax if no “gross-up” provision applies in the agreements between the parties (this does not apply to dividends). The standard WHT rates apply at the time of payment, e.g., if the foreign shareholder has already issued the Resolution on distribution of dividends by its Russian subsidiary before August 8, 2023, but the actual payment is made after that date, the beneficial DTTs’ rates cannot be applied. This list of negative tax effects of the DTTs’ suspension is not exhaustive, as other mechanisms are also affected (e.g., international transportation services, and rules for permanent establishments). Our key recommendations Considering the abovementioned changes, it might be reasonable for an international group of companies with Russian subsidiaries to check: {{1)}} anticipated payments of dividends, interest, royalties, and other similar types of income and assess possible increase of tax burden; {{2)}} the contractual structures (in particular, loan agreements and license agreements), whether they provide for a “gross-up” provision (if applicable); {{3)}} possible risks of requalification of payments in cases with the intercompany agreements, disproportional distribution of dividends, etc. This analysis shall contribute to better understanding of the further tax position of Russian subsidiaries, new tax implications, and possible tax risks.

As a matter of important update that may impact potential and scheduled payments of dividends, interest, royalties and other similar “passive types” of income from Russia, please be informed that on 18th of May 2023 Russian Media has announced that Double Tax Treaties (the “DTTs”) with “Unfriendly States” will be temporarily suspended by the Presidential Decree in June 2023 . This initiative was prepared by the Ministry of Foreign Affairs of Russia and the Ministry of Finance of Russia in the middle of March 2023 as a countermeasure for including Russia into the list of non-cooperative jurisdictions for the tax purposes (the so-called “EU blacklist”). Since the joint initiative was prepared, no additional information on the form, terms and other details of suspension was announced. Now it seems that DTTs will be suspended based on the Presidential Decree that most likely will have an immediate effect, with no transition period and exact date of restoring effect of the DTTs. Although the DTTs do not provide for such mechanisms of suspension, the DTT with Latvia was already suspended by the Presidential Decree No. 668 dated 26 September 2022 with simple notification of the Latvian Government on suspension of the DTT until Latvia will exclude its violations under the DTT or until the DTT will be fully terminated (similar to the DTT with the Netherlands that was terminated in 2021). What is the tax effect? No beneficial tax rates provided by the DTTs will be available for payments of so-called “passive types” of income from Russia to the US, UK, Japan, Canada, EU and other “Unfriendly States” implemented sanctions against Russia. As a result, only standard tax rates will apply: {{1)}} 15% WHT rate for dividends (instead of 5% or 10%); and {{2)}} 20% WHT rate for interest payments (instead of tax exemption or 10%); and {{3)}} 20% WHT rate for royalties (instead of tax exemption or other lower WHT rates); and {{4)}} 20% WHT rate for distribution of profit (other than dividends) (instead of tax exemption). The latter change may have an underestimated effect as the tax authorities will have more opportunities and fiscal reasons to requalify any suspicious payments and/or payments with low economic justification (even “active types” of income such as payments for the intragroup services) into distribution of profit subject to 20% WHT rate at the source of income in Russia. These standard tax rates will apply irrespective of the amounts of payments and existence / absence of the special approvals of the Governmental Commission (i.e., even payments with the amounts below RUB 10 mln per month, which does not require the special approval, will be subject to the WHT). This list of negative tax effects of the DTTs’ suspension is not exhaustive as other mechanisms will also be affected (e.g., international transportation services, opportunities for the tax credits, rules for the permanent establishments, exchange of tax information, etc.). In line with the temporary suspension of the DTTs the Ministry of Finance of Russia considers increase of the tax liabilities of Russian companies for non-submission or late submission of the special reports on payments of income to the foreign companies (the cash penalties will be from 5% to 30% of the amount of WHT mentioned in the report, depending on the term of delay). What is a “windfall tax”? On 10th of May 2023 the Ministry of Finance of Russia has published information about strong increase of the deficit of the State budget. Temporary suspension of the DTTs and application of the standard WHT rates shall have a positive effect for increase of the budget, however, as announced this will not be the main tool for the budget replenishment. In this regard the Ministry of Finance of Russia has prepared the Draft Law introducing a new tax obligation for the larger Russian companies (with minor exemptions) and foreign companies having permanent establishments in Russia for the tax purposes (the so-called “windfall tax”). The object of taxation will be the “excess profit”, defined as the difference between the average profit for 2021–2022 and the average profit for 2018–2019 (the pandemic year 2020 will not be considered). The amount of excess profit shall be determined according to tax accounting data (the sum of tax bases for the corporate income tax). The “windfall tax” shall apply, if such difference will be equal to or greater than RUB 1 bln. The tax rate will be 10% and the tax will be due in January 2024. At the same time, the tax rate can be discounted by 5%, if the funds are voluntary transferred to the budget by the taxpayers in October-November 2023. The Government expects that “windfall tax” will increase the budget by approx. RUB 300 bln. The Draft Law is now on consideration with the business representatives and trade associations and the final version is not published yet. It is expected that the Draft Law will be inserted to the legislative bodies for their consideration until the end of May 2023. The “windfall tax” is announced as one-time payment. However, the Russian Tax Code will be shortly amended by the general term “taxes of an extraordinary nature', which may indicate the opportunity to introduce and collect similar taxes in the future. Our recommendations Considering expected changes, it might be reasonable for the international group of companies with Russian subsidiaries to check: {{1)}} anticipated payments of dividends, interest, royalties and other similar types of income and review possible increase of tax burden; {{2)}} the contractual structures (in particular, loan agreements and license agreements), whether they provide for the “gross-up” provision (if applicable); {{3)}} amounts of profit before taxes for 2021-2022 and 2018-2019 for their compare and assessment of potential application and figures of the “windfall tax”. This analysis shall help with better understanding of the further tax position of Russian subsidiaries, new tax implications and possible tax risks.