Maxim Alekseyev

On November 15, 2023 the Ministry of Industry and Trade has submitted to the authorized departments for approval a draft governmental decree (“Decree”) banning the use of polymer goods and packaging waste from which is not recyclable or inefficiently extracted. In case the draft Decree receives positive feedback, it will undergo further consideration in the Russian government and subsequently adopted. What will be banned? The list is not publicly available as of the current moment, and it is not clear when it will be finally adopted, but, according to press publications, the document includes a list of 23 types of packaging, 6 of which are proposed to be limited as of 2024, and the remaining 17 items — as of 2030. Contemplated to be banned as of 2024: translucent PET bottles of all colours, except blue, green, brown, and black (these colours preserve the consumer properties of products and increase the shelf life), opaque PET bottles, with the exception of white containers for dairy products (where the colour has a functional purpose), as well as PET packaging made using PVC labels that interfere with recycling, multilayer PET bottles, coffee capsules made of multicomponent materials, and plastic containers for canned food with a rolled metal lid. Contemplated to be banned as of 2030: multicomponent Bag-in-Box packaging, flexible vacuum packaging doypacks, flowpacks, multilayer toothpaste tubes, multicomponent bags in the form of a jug, polymer sachet bags up to 80 mm, nets for vegetables and fruits, food packaging made of expanded polystyrene, etc. Consequences of the reform The mentioned amendments may have** material influence** on both: Russian manufactures of goods; Foreign manufacturers and importers of their products to Russia both from the member and non-member states of the EAEU. Amendments may require substantial changes in manufacturing processes and re-equipment of production lines, as well as development of new production methods. In this regard, we would recommend keeping an eye on the further development of this Decree and other requirements related to the EMR. Aim of restrictions Thus, the contemplated measures should stimulate the transition from opaque PET containers to transparent ones, from multilayer materials to single-layer ones, and from multicomponent to monomaterial ones, which will facilitate the processing of these materials. According to the public discussions, further reforms in this regard are underway. The planned reform is conducted in line with the developing of the extended manufacturer's responsibility (“EMR”) system, which was adopted on August 4, 2023 by the amendments (“Amendments”) to Federal Law No. 89-FZ dated June 24, 1998 “On Production and Consumption Waste”. The EMR system was introduced in Russia in 2015 in order to create an incentive for manufacturers and importers to recycle waste from the use of goods and packaging that they market in the territory of the Russian Federation. We will keep you updated on the development of the EMR system in Russia, and our team is ready to provide you with full legal support in this regard (from advising on the applicable requirements to communicating with Russian state authorities and filing necessary documents).

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.

On 12 July, Maxim Alekseyev, Senior Partner, Anton Dzhuplin, Partner, and Sergey Milanov, Of Counsel and Co-Head of the firm’s Asia-Pacific Desk, held a seminar for members of the Japan Association for Trade with Russia and the Newly Independent States (ROTOBO) in Tokyo. Our lawyers told the Japanese audience about the business operations of companies from “unfriendly” countries on the Russian market, as well as explained the regulations covering exit transactions involving the sale of shares or stakes in the Russian companies by foreign shareholders. They also shared practical advice on the legal aspects of implementing such transactions. In the seminar, the following topics were covered: {{1.}} "Current trends and strategies of actions of companies from “unfriendly” countries in the Russian market. What foreign companies that continue to operate in the Russian Federation should keep in mind" (speaker - Maxim Alekseyev). {{2.}} "Developments in the regulation of transactions involving the sale by foreign shareholders from 'unfriendly' countries of shares or stakes in their Russian companies" (speaker - Anton Dzhuplin). {{3.}} "A summary of the procedures for the liquidation of a Russian subsidiary and the closing of a Russian branch by a foreign company from an 'unfriendly' jurisdiction'" (speaker - Sergey Milanov). The above topics were followed with a high interest by the audience.

The Inter-Pacific Bar Association Journal ('IPBA') published an issue of «Cross-Border Fraud, Law and Investigations» focusing on cross-border cybercrime with examples from various countries. Maxim Alekseyev, Senior Partner of Tax Practice, and Magomed Gasanov, Partner of Dispute Resolution Practice, prepared the article «International Fraud in Current Russian Realities» on cyber-fraud in current realities with reference to Russia. The experts gave examples of cybercrime cases encountered by Russian companies, told about protective measures, as well as shared some rules and advice on how to avoid becoming a victim of a cybercrime.

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.

On 28 April 2023, a new law was adopted on additional restrictions on devices for the consumption of nicotine-containing products (the “Law” and “Devices”, respectively). The Law introduces special new aspects on the retail, advertising and manufacturing of Devices as well as further restrictions on turnover of nicotine-containing products. The Law envisages the following key amendments: Ban on the retail sale of Devices and their components at fairs and exhibitions, remotely and through vending machines or delivery Ban on the release and circulation of nicotine-containing products with flavourings and additives enhancing nicotine addiction in order to reduce the attractiveness of these products for minors. The Russian government should determine the list of such flavourings/additives to be in force starting from 1 September 2023 Ban on the open display and demonstration of Devices in stores and any kind of discount on them, including coupons Non-nicotine liquids are subject to the vast majority of restrictions and requirements applicable to nicotine-containing products The Law sets forth minimum prices for nicotine-containing products, which should be applied starting from 1 September 2023 The Law also restricts advertising with images, descriptions or occasional references to the Devices and prohibits showing them to children under 12 years old Several years ago, the Russian government banned the advertising and sale of nicotine-containing products via the Internet and introduced requirements for the maximum nicotine content in vaporizer liquids and a number of other restrictions and requirements. However, these regulatory changes did not extend to such Devices. Now similar restrictions have been imposed on such Devices, thus the Law continues the trend of restricting the consumption of tobacco and alternative products. Stronger enforcement of the Law should be expected as well. Considering all this, we believe it would be advisable for all manufacturers, importers, distributers and advertisers to ensure compliance with the new requirements and closely monitor the further development of nicotine-related regulations and practice.

On 1 September 2023, the legal framework for seed farming in Russia will take effect. At present, lawmakers are preparing highly controversial regulations, which essentially aim to limit foreign investments in the Russian seed farming sector. The central idea is to implement a set of rules that require Russian companies involved in the production of agricultural plant seed varieties and hybrids to localize their activities (“Localization Rules”). Although the final version of the Localization Rules has not yet been approved, it is already possible to identify some key provisions that are likely to be adopted: {{1.}} Russian companies owned by foreign investors are seen as the initial target of the Localization Rules. They will be obliged to set up JVs with Russian investors that control at least 51% of the company’s shares to be able to continue seed farming in Russia. NB! However, the wording is still unclear, and we cannot rule out the possibility that all Russian investors will have to stick to the Localization Rules as well. {{2.}} The development and production of agricultural plant seed varieties and hybrids in Russia will be subject to additional localization requirements, including the availability of land plots, local production and research facilities, among other things. {{3.}} Each company involved in these activities will have to prepare its own localization plan that must be agreed with the Russian Ministry of Agriculture. Carve-outs A transition period for foreign investors to comply with the new rules is being discussed. It might be possible to hire Russian contractors for localization work. Producers might also be able to buy foreign raw materials (germplasm) to create seed varieties and hybrids in Russia. Conclusion Even though there are still many unanswered questions in the existing draft of the Localization Rules, it is highly likely that access of foreign investors to the seed market in Russia will be limited in the near future.

According to The Private Client Global Elite Directory 2023, Maxim Alekseyev, ALRUD Senior Partner, ranked in the top 250 global lawyers in the areas of family business, wealth management, and tax consulting. ALRUD is the only Russian law firm mentioned in the global directory. Launched in 2017, the Private Client Global Elite serves as a highly respected annual directory focusing on the private client sector and recommending best advisors in this practice area. Each year The Private Client Global Elite Directory receives more than 6 000 entries from advisors. Global lawyers enter the top upon recommendations of their peers, not of a third party.

Dear Ladies and Gentlemen! On 5 December 2022 the Order “On the Approval of the List of States (Territories) That Automatically Exchange Financial Information” (the “Order”) was published. The Order will come into force on 16 December 2022. It means that individuals holding Swiss accounts should reconsider the use of such accounts in order to avoid transactions that violate the currency control regulations of the Russian Federation. To learn more about the details of the changes, the impact of the updated regulation on transactions with accounts opened by individuals in countries which do not automatically exchange financial information with Russia, and possible strategies please see newsletter. ALRUD experts have vast experience in supporting clients with currency control compliance issues and will be glad to analyse your situation and develop an action plan that takes into account the latest legal requirements and helps to meet your needs. We hope you have found this information helpful. If any of your colleagues would also like to receive our newsletters, please send us their email address in response to this message. If you would like to learn more about our Tax Practice, please let us know in a reply email. We will be glad to send you our materials. Notice: Please note that all information was taken from public sources. The author of this letter is not responsible for any consequences resulting from your decisions based on this information.

On 5 October 2022, the Russian Federal Tax Service published the draft Order “On the Approval of the List of States (Territories) That Automatically Exchange Financial Information” (the “Draft Order”). The existing list of countries and territories that exchange such information is to be extended to include Kazakhstan, Maldives and Oman. At the same time, a proposal has been made to exclude the Cayman Islands and Switzerland, which previously announced it would suspend all forms of tax information exchanges with Russia, including automatic exchange under the CRS standard. The Draft Order is under public discussion, which will last until 19 October 2022. If the document is adopted, it will come into force 10 days after the date of its official publication. The explanatory note to the Draft Order indicates that 96 countries and territories have declared their willingness to exchange information with Russia. What will change? Given that many of Russia's HNWI actively use Swiss accounts for portfolio investments and other transactions, the adoption of the Draft Order would require significant changes in the structure of transactions performed using such accounts. The absence of automatic exchange with a particular country significantly limits the list of transactions that can be performed by currency residents with accounts opened at banks in such a jurisdiction. In particular, holders of the accounts opened in Switzerland, which has traditionally been used for portfolio investments, would be prohibited from crediting funds in the form of dividends or interest on securities, as well as proceeds from sell/redemption of securities and other financial assets. Transferring funds between personal accounts, crediting interest on the balance of funds deposited in an account, crediting funds received from non-residents under employment contracts for work outside of Russia and certain other transactions would be allowed. What strategies are available? Holders of the Swiss private bank accounts may be advised to: Review transactions that are planned to be executed via such accounts Assess the feasibility of selling existing financial assets before the new list of exchanging countries takes effect Transfer funds/investment portfolios to their accounts in countries that will continue to automatically exchange information with Russia Assess the possibility of transferring funds/investment portfolios to controlled foreign companies (taking into account restrictions imposed by the counter-sanctions) Redirect cash flows associated with crediting funds (e.g., under lease agreements) to other jurisdictions. What’s next? The refusal of Switzerland and other countries to cooperate with Russia on tax issues may lead to changes in another list – the list of countries that do not exchange tax information with Russia. In particular, depending on whether a specific country is on this list, CFC owners determine whether an audit is required of CFC financial statements that should be submitted to the Russian tax authorities together with the annual notification on controlled foreign companies, as well as assess the possibility of applying certain exemptions from the taxation of CFC profits (e.g., based on the effective tax rate criterion). If a country is included in the list of non-exchanging countries, CFC owners may, for example, incur additional costs for auditing financial statements, and may have to declare CFC profits and claim an offset of foreign tax instead of claiming the exemption of such profits from taxation. ALRUD experts are monitoring developments and will be glad to analyse your situation and develop an action plan that takes into account the latest legal requirements and helps to meet your needs. We hope that the information provided herein will be useful for you. If you or any of your colleagues would like to receive our newsletters via e-mail, please fill in the 'Subscribe' form at the bottom of the page. Note: Please be aware that all information provided in this letter was taken from open sources. Neither ALRUD Law Firm, nor the author of this letter bear any liability for consequences of any decisions made in reliance upon this information.