Category: Russia

Ivanyan & Partners has represented the interests of the Russian Union of Railway Transport Operators and oil products transporter Transoil in antitrust proceedings against railway wheel manufacturer Vyksa Steel Works. 

According to Ivanyan & Partners, “the subject matter of the comprehensive investigation by the Federal Antimonopoly Service of Russia was the supplier’s activities in 2019, when, during unmet demand on the market, VSW sold solid-rolled wheels via competitive tendering. As a result, the price for wheels increased by over 40% for some customers by August 2019.”

“VSW’s actions caused a shock in the market,” explained Ivanyan & Partners Counsel Ekaterina Smirnova, who led the firm’s team on the deal. “Firstly, none of the players knew the volume of goods to be put up for competitive tenders and could not project their economic activity. Secondly, it was proposed that all buyers purchase wheels namely via the bidding procedure and not on the basis of [executed] supply contracts, which provoked additional speculative demand. Thirdly, the starting price at the auction was monopolistically high. What is more, in the eight days between the closing of the first auction and the beginning of the second one, VSW raised the price by another 25%, which had no production or economic grounds.”

Following the proceedings, which concluded on July 8, 2020, the FAS found Vyksa Steel Works guilty of price gouging in the market for solid-rolled wheels.

The existing ban on the state procurement of foreign industrial goods has been generalised under a Russian Government Decree* which came into force on 1 May 2020.

For certain groups of goods to be admitted for public procurement in Russia, the Decree establishes additional requirements over and above the confirmation that these goods have been produced in or originate from Russia or a Eurasian Economic Union member state.

Import substitution policy: new restrictions

In general, the Decree, although of a technical nature, is a logical step in the consistent implementation of the import substitution strategy. It is meant to encourage manufacturers to localise production in Russia. At the same time, as practice shows, in many cases, state purchasers have recourse to exceptions for procuring foreign goods despite the existing bans.

So, the Decree contains an extensive list of 125 types of goods to which restrictions apply. This ranges from clothes and shoes to telecommunications equipment and helicopters. Moreover, since 1 July 2020, the Decree also applies to automotive products and vehicles (e.g. cars and trucks).

A series of exceptions in the Decree provides state purchasers with room to manoeuvre. In particular, this ban does not apply to the purchase of industrial goods which are not produced in Russia. Nor does it apply to the purchase of one single good worth less than RUB 100,000 (EUR 1,231) or a set of goods with an aggregate total value of less than RUB 1m (EUR 12,310).

Finally, the ban on the purchase of foreign-made industrial goods does not apply when it is necessary to ensure the interaction of products with goods that the purchaser already uses (i.e. when the goods to be purchased are incompatible with goods bearing other trademarks), and when purchasing spare parts and consumables for machinery and equipment.

Determination of the country of origin of imported goods

To be authorised to take part in tenders for state or municipal procurement, a supplier must confirm that the goods originated or were produced in Russia or a Eurasian Economic Union member state. The relevant certificate and the confirmation that the goods are included in the Register of Industrial Products of the Russian Ministry of Industry and Trade will act as confirmation of the country of origin of the goods.

For some types of goods, further requirements are provided. In addition to confirming the production country and the country of origin of the goods, it is necessary to use components, raw materials or services that originate from Russia or a Eurasian Economic Union member state. For example, such requirements are provided for the production of certain types of automotive products, some types of products in the special engineering industry, as well as compressors and refrigeration equipment.

In practice, confirming the country of origin of a product can often be complicated (e.g. for goods containing components manufactured in different countries or when the production processes of a single product take place in several countries). In such cases, it is necessary to resort to a comprehensive analysis, which establishes the degree to which a given good was processed in a particular country and the effect of foreign components on its final production cost.

*in Russian

By Maxim Boulba, Partner, Hayk Safaryan, Partner, Maria Ermolaeva, Associate, and Anna Osmakova, Associate, CMS Russia

Debevoise & Plimpton has advised the NLMK Group on a EUR 600 million revolving credit facility from a group of international banks, with an accordion option allowing the borrower to increase the funding limit up to EUR 1 billion. Hogan Lovells reportedly advised the banks on the deal.

Credit Agricole Corporate and Investment Bank, NATIXIS, Intesa Sanpaolo Bank Ireland Plc, SGBTCI, AO Raiffeisenbank, Bank of America Merrill Lynch International DAC, Mizuho Bank, Ltd., Deutsche Bank AG, London Branch, Bank ICBC (JSC), ING Bank N.V., and UniCredit S.p.A. acted as mandated lead arrangers. ING Bank is the coordinator and documentation agent and UniCredit S.p.A. is the facility agent on the transaction.

Debevoise & Plimpton’s team included Moscow-based Counsel Dmitry Karamyslov and Associate Olga Panfilova and London-based Associates Patrick Fasoro and Heather Atkins.

Egorov Puginsky Afanasiev & Partners has advised the VIS Group on the refinancing of a public-private partnership project involving the construction of 12 social infrastructure facilities in Yakutsk through the placing of secured social bonds worth over RUB 5.6 billion. The refinancing was arranged by BKS, Otkritie Bank, DOM.RF Bank, and Sovcombank.

According to EPAM, “in 2015 a VIS Group entity entered into a public-private partnership agreement [involving the] construction of schools, kindergartens, a library, and a contemporary art and culture center in Yakutsk as the private partner. Sakha (Yakutia) Republic and Yakutsk City jointly acted as the public partner.” According to the firm, the refinancing was carried out through the issuance of bonds by the SFO for Social Development special purpose vehicle, “secured by the public partner’s liquidity under the PPP agreement.”

Three tranches of bonds with varied priorities were placed, EPAM reports, adding that “Expert RA rated the senior-tranche bonds as ruA.sf, and the mezzanine-tranche bonds as ruBBB+.sf.” According to the firm, “the senior- and mezzanine-tranche bonds are the first ones in Russia to have been qualified by the Moscow Exchange as social bonds of the Sustainable Development Sector. Proceeds from the placement of bonds have been used to refinance the project, which provided for the construction of the social infrastructure facilities.”

EPAM’s team was led by Partner Dmitriy Glazounov and included, among others, Senior Associate Vladimir Goglachev.

Dentons’ Moscow-based Partner Timothy Stubbs was a member of the firm’s multi-jurisdictional team advising the European Bank for Reconstruction and Development on the negotiation and execution of a 2002 ISDA Master Agreement for a swap transaction with the Central Bank of Azerbaijan worth a total of USD 200 million.

According to Dentons, “having secured reliable access to local-currency liquidity in Azerbaijani manat (AZN) (in the form of swap transactions), the EBRD intends to expand its lending to Azerbaijani businesses. Azerbaijani companies can now benefit from loans denominated in Azerbaijani manat provided by the EBRD thanks to the agreement. Of the USD 200 million, USD 50 million will be channeled this year to local companies, including smaller viable enterprises experiencing temporary difficulties.”

“The agreement is part of the EBRD’s efforts to step up support for Azerbaijani companies as the country’s economy faces the double challenge of the COVID-19 outbreak and the global oil market shock,” Dentons reports. “The EBRD has made available a Solidarity Package to help companies in 38 emerging markets deal with the economic impact of the pandemic. The EBRD stands ready to provide support worth EUR 21 billion over the 2020-21 period. The package includes short-term liquidity, working capital and restructuring of exposure for existing clients, as well as trade finance and an emergency support program for key infrastructure providers. The bank will also ramp up its local currency, capital markets and equity offers.”

Dentons’ team was led by Baku-based Partners Ulvia Zeynalova-Bockin and James Hogan.

There are currently multiple initiatives regarding the increase in rates for taxes retained at source under double taxation treaties (“DTTs”) between the Russian Federation and some foreign jurisdictions. The Ministry of Finance confirmed that it favours such increases. At the same time, the Russian State Duma reportedly favours maintaining reduced tax rates in DTTs for intragroup payments in order to mitigate any eventual adverse tax consequences by these new tax measures for foreign investors.

Initially, Russian President Vladimir Putin had proposed increasing the tax rate at source to 15% for cross-border distribution of income from the Russian Federation (i.e. for dividends and interest) as an anti-crisis measure to support the Russian economy.

Position of the Ministry of Finance

Ahead of the implementation of this initiative, on 29 April 2020, the Ministry of Finance issued letter No. 03-08-05/35110* explaining the reasons and goals behind such an increase. The letter states that the availability of preferential tax rates on income in the form of dividends and interest is the main condition for creating a favourable tax regime for foreign investors. However, the proposed changes were dictated by the difficult economic situation in Russia and around the world, and were caused by the measures taken to support Russia’s population and economy in the fight against the coronavirus pandemic.

The Ministry of Finance noted that the changes under consideration will affect only “transit jurisdictions”. As a rule, these jurisdictions are the locations of intermediate companies that do not conduct real economic activity and are used exclusively for tax evasion and the outflow of capital from Russia.

Relevant changes have already been initiated in DTTs concluded between the Russian Federation and Cyprus, Luxembourg and Malta.

The ministry also confirmed that these measures are aimed at combating tax evasion through the use of schemes where income is derived in Russia through transit jurisdictions.

This approach is already reflected in the draft amendments the Ministry of Finance requested in the DTT with Cyprus, which applies an increased tax rate on dividends and interest at source, not only when paying income directly to a resident in Cyprus, but also when effecting transit payments to a beneficiary in Cyprus.

It cannot be ruled out that an increase in tax rates at source for interest and dividends might affect good-faith taxpayers. For example, this could be the case for international groups of companies doing business in Russia, particularly when holding activities and financing within the group are connected with the jurisdictions mentioned above.

State Duma initiative

The Russian State Duma intends to avoid such a situation by facilitating access to reduced tax rates on DTTs for Russian companies which make cross-border payments within a group to foreign shareholders. According to media reports*, a bill to this effect has already been drafted. This bill equates the indirect participation of foreign shareholders in Russian companies with direct participation in such cases.

In practice, this will mean the following: when distributing income to a holding in a respectable jurisdiction through a subholding in an unfavourable jurisdiction like Cyprus, Luxembourg or Malta, the applicable DTT will be determined by reference to the jurisdiction where the indirect shareholder of the Russian company, which is the direct recipient of dividends, is located.

The Russian State Duma is expected to receive the corresponding bill in the near future.

* In Russian

By Hayk Safaryan, Partner, and Anna Osmakova, Associate, CMS Russia

CMS Moscow has successfully represented the interests of GE Healthcare in several court proceedings against the Russian healthcare regulatory authority Roszdravnadzor.

CMS reports that the firm was able to “invalidate the regulator’s refusal to register one of GE Healthcare products, a modern ultrasound diagnostic system, in Russia. The positive decision of the court of the first instance was awarded in July of 2020 and the regulator is bound to authorize the client’s product and allow its circulation in Russia.”

CMS’s team included Counsel Vsevolod Tyupa, Senior Associate Igor Sokolov, and Associates Alexey Shadrin and Anastasia Entyakova.

On 14 May 2020, the Russian Supreme Court issued a decision* in favour of a Russian taxpayer (the “Decision”), which contains detailed guidelines on how to assess the good-faith conduct of Russian taxpayers claiming VAT offset.

The Decision, which was issued in an online format, contains a careful and detailed digest of the positions and arguments that should be taken into account when justifying the VAT offset claimed.

In particular, the Decision switched the courts’ focus from the formalistic approach normally applied by the Russian tax authorities to the reality and commercial grounding of the operations giving rise to a VAT offset.

As a result, the Decision could set a precedent for resolving similar court cases on the recently codified concept of unjustified tax benefit in Russia. The arguments presented in the Decision may be instrumental for taxpayers attempting to prove their positions in court.

The facts

Russian tax authorities challenged the VAT offset claimed by a Russian joint-stock company “Specialised Production and Technology Base “Zvezdochka” (the “Taxpayer”) regarding the acquisition of construction tools and materials from a Russian limited liability company “SK-Logistic” (the “Supplier”).

Russian courts in three instances supported the position of the tax authorities. They stated that the Taxpayer had not performed with due diligence the “know your counterparty” (“KYC”) procedures in respect to the Supplier and had not requested sufficient documentation proving the reality of the economic activity or business reputation of the Supplier. They also stated that the Taxpayer had not checked the authority of the persons signing documents in the name of the Supplier.

The courts specifically indicated that immaterial tax payments made by the Supplier did not constitute a sufficient economic source for VAT offset by the Taxpayer in the Russian budget.

After an in-depth analysis of the arguments presented by the tax authorities and the Taxpayer, the Supreme Court held that the facts and legal grounds behind the decisions rendered by the lower courts had been misinterpreted, and the case has been sent back for a new investigation on these grounds.

The Decision

In its Decision, the Supreme Court presented its interpretation of the criteria that should be taken into consideration when assessing the economic justification of VAT offset claimed by Russian taxpayers.

The Supreme Court confirmed that account should be taken as to whether a sufficient economic source for VAT offset in the Russian budget is available for VAT offset justification purposes, given the specifics of indirect tax withdrawal procedures.

However, if such an economic source in the budget is insufficient, this will not as such predetermine the outcome of the VAT offset claimed. Instead, this consideration, along with other arguments proving the intention of both parties to perform the operations with the sole or main aim of optimising taxes, should be considered.

In this context, a taxpayer claiming the VAT offset will not automatically be held liable for the tax misconduct of its counterparties. In fact, the opposite approach supported by the Russian courts results in a taxpayer being financially liable for the actions of other companies, which the taxpayer claiming the VAT offset usually does not control.

The Supreme Court stated that the following key circumstances should be analysed by the courts, as determined by a precedential resolution* of the Plenum of the Russian Supreme Commercial Court in 2006:

• whether the operations behind the VAT offset claimed are real; and
• whether the taxpayer claiming the VAT offset intends to evade tax or is negligent.

The Decision stated that, in terms of normal commercial activity, entrepreneurs usually assess the business reputation, resources and experience of their counterparties together with the commercial terms of any specific transactions.

In this context, taxpayers may be reasonably expected to conduct certain due diligence procedures on their counterparties before entering into commercial transactions, checking in particular whether the counterparties concerned have fulfilled their tax obligations.

However, the level and form of KYC procedures performed by a taxpayer should depend on the materiality and nature of the transaction involved, and following this logic may be limited to the reasonable efforts normally made by entrepreneurs in the context of their commercial activity.

When a taxpayer claiming VAT offset receives sufficient justification of its counterparty’s ability to properly fulfil its obligations under the analysed transaction, the burden of proof is shifted to the tax authorities challenging the VAT offset. 

According to the Decision, the fact that a counterparty involved third parties to perform some obligations of the analysed transactions should not as such jeopardise the VAT offset.

Finally, tax authorities should base their conclusions on specific circumstances proving that the investigated counterparty intentionally underpaid taxes. In their analysis, they should not rely solely on formalistic criteria, such as the ratio between input and output VAT or the proportion of costs to revenues, resulting in small amounts of tax to be payable to the Russian budget.

CMS comments

The Decision tries to align KYC procedures in a tax context with those normally conducted by businesses as part of their ordinary commercial activity. Currently, tax authorities frequently expect taxpayers to conduct burdensome and formalistic procedures when checking their counterparties, which not only go beyond those reasonably required for commercial purposes, but may in the end interfere with the timely and proper fulfilment of contractual obligations on both sides.

The Decision also contains important statements, which would allow taxpayers claiming VAT offset to be released from liability for their counterparties’ tax misconduct to the extent that they could not reasonably anticipate such misconduct based on the data normally requested and provided in KYC procedures.

However, having a good KYC policy in place together with documents proving the fulfilment of KYC procedures remains the centrepiece for taxpayers claiming VAT offset to justify their good faith. It is hoped that the arguments provided in the Decision will reduce the formalities and corresponding administrative burden associated with KYC compliance in the tax context, and avoid the shifting of tax liability to good-faith taxpayers.

* In Russian

By Dominique Tissot, Partner, and Maria Kabanova, Senior Associate, CMS Russia

CMS has helped money transfer provider MoneyGram register as an operator of a foreign payment system with the Central Bank of the Russian Federation.

According to CMS, “in 2019 the Russian Duma passed a law introducing registration and regulatory requirements for foreign payment systems operators acting in Russia.  To comply with the new requirements, foreign payment systems operators have to open representative offices in Russia and report their operations to the CBR. MoneyGram became the first foreign payment system registered by the CBR in April 2020.”

CMS’s team was led by Partner Konstantin Baranov and included Associates Darya Lukoyanova, Alexander Zhuravkov, Elizaveta Volkodav, Irina Skvortsova, Elizaveta Rakova, and Ophelia Amirova.

Even though data localisation requirements were already introduced in Russia back in 2015, their effects on cross-border reporting channels in the whistleblowing systems of multinational companies have so far received relatively little attention. Due to the recent increase in the fines for violations, we have compiled the most important questions and answers below:

Why are cross-border reporting channels in Russia critical?

Cross-border reporting channels for Russia may violate the Russian data localisation requirements. In particular, this is the case where the personal data of Russian citizens is collected and saved for the first time outside of Russia upon the receipt of reports. Reporting channels with foreign telephone numbers as well as e-mail addresses or websites with data storage on servers abroad are therefore not permitted. That means that group-wide whistleblowing systems cannot be extended to Russia without problems.

What happens if data localisation requirements are violated?

In the event of violations of the data localisation requirements, the Russian supervisory authority Roskomnadzor may block websites and impose fines. These fines were increased significantly at the end of last year from previously insignificant amounts to approximately EUR 80,000 for initial and EUR 240,000 for repeated violations. Roskomnadzor closely monitors compliance with the localisation requirements and performs hundreds of compliance audits each year. During a compliance audit, Roskomnadzor checks all information systems used by the company, including any whistleblowing systems. Using non-localised reporting channels therefore entails a high risk of being penalised at any time.

What exactly are the Russian data localisation requirements?

To comply with the Russian data localisation requirements, whistleblower reports from Russia must be stored initially in Russia, as they may contain the personal data of Russian citizens. This is the only option to ensure compliance with the main requirement of the Russian data localisation rules, which is to place the primary database with the personal data of Russian citizens on a server in Russia. Any database abroad can only be a copy of the Russian database; the Russian database must always be updated before an update is made to the foreign database.

Should companies do without reporting channels for Russia?

Multinational companies operating in Russia face the difficult choice to either set up reporting channels on the ground or to leave Russia out of the group-wide whistleblowing system. However, for most companies it will hardly be acceptable to operate in a country with a high risk of bribery and corruption such as Russia without being able to receive whistleblower reports. In that case, they would be exposed to significantly increased liability risks under Russian and, in particular, foreign law (such as the US FCPA and UK Bribery Act, or the upcoming German Act on Corporate Sanctioning).

Can reporting channels at the Russian subsidiary be an alternative?

Companies with offices on the ground would usually consider setting up internal reporting channels to Russian personnel (e.g. to the local general director or compliance function). Such internal reporting channels, however, will likely suffice only in exceptional cases. Since a legislative initiative aimed at the protection of whistleblowers ultimately failed in June 2019, whistleblowers enjoy almost no protection under Russian law. Fear of retaliation and concerns regarding the objectivity of case management would limit whistleblower activity in many local offices right from the outset.

What can multinational companies do?

In most cases, companies will be able to set up a functioning local whistleblowing system in Russia only at external ombudspersons. These ombudspersons can receive reports on the ground and feed them into the group-wide whistleblowing system, in compliance with the data localisation requirements. The relevant criteria for selecting the ombudspersons will be the availability of the technical infrastructure, the ability to handle case management as well as their integrity. In particular, the last criterion will likely cause the most difficulties when selecting ombudspersons in Russia.

By Hannes Lubitzsch, Associated Partner, and Vyacheslav Khayryuzov, Counsel, Noerr