Russian Parliament Passes Temporary Withholding Tax Exemption for Eurobonds

Morgan Lewis
Contact

[author: Carter Brod, Roman A. Dashko, and Vasilisa Strizh]

Amendments are more favorable to borrowers than those recently proposed by the Ministry of Finance, but they provide an exemption only for bonds issued before 1 January 2014.

On 6 June 2012, the Russian parliament (the Duma) passed amendments to the Russian federal Tax Code (the Tax Code) that provide an exemption from withholding tax for Eurobond offerings from Russia that are made prior to 1 January 2014. It is currently unclear to what extent, if at all, future changes to the Tax Code will be made that address the withholding tax treatment for offerings made on or after 1 January 2014.

Background

Currently, the most commonly used structures for Eurobond offerings by Russian companies are (i) loan participation notes issued by non-Russian special purpose vehicles (SPVs) and (ii) note offerings by subsidiary SPV issuers with guarantees by Russian parent companies. In both of these structures, the actual issuers of the Eurobonds are located outside of Russia, and the proceeds of the offering are transferred to the Russian companies, typically in the form of a loan. These structures benefit from double tax treaties between Russia and the jurisdiction of the relevant SPV issuer (typically Luxembourg or Ireland), which enable interest payments to be made by the Russian company to the SPV issuer free of Russian withholding tax. Similar offering structures have been used in the Russian market and other markets in emerging Europe for many years. Historically, market participants in Russian offerings have generally acknowledged and accepted that the Russian withholding tax treatment of these structures is subject to uncertainty and a corresponding risk that the Russian tax authorities could challenge the structures and impose Russian withholding tax on interest payments.

Ministry of Finance's Letter and Proposal

In December 2011, the Ministry of Finance of Russia (the Ministry of Finance) issued a letter to the Russian Federal Tax Service stating that interest payments to non-Russian SPVs, such as those made in the context of Eurobond structures, should not be eligible for double tax treaty relief, and confirmed its position in a 27 January 2012 press release. The issuance of the letter and press release raised the possibility of a 20% withholding tax being applicable to Russian Eurobonds, potential penalties being imposed on borrowers for past failure to withhold, and possible early redemptions of Eurobonds for taxation reasons. Understandably, these developments caused significant concern among market participants. According to press reports, following the issuance of the letter and press release, a number of major Russian banks and corporations engaged in lobbying efforts with the Ministry of Finance in an attempt to persuade it to retreat from its position.

Following consultations with Eurobond borrowers and investors and with the working group on the formation of the Moscow International Financial Center (MIFC), the Ministry of Finance published on 20 February 2012 a proposal, including draft amendments to the Tax Code, with respect to withholding tax on Russian Eurobonds. The proposal provided that, for bonds issued on or after 1 January 2013, a Russian borrower would not be required to withhold tax on interest payments made to a foreign SPV provided that (i) the SPV is incorporated in a jurisdiction that has a double tax treaty with Russia providing for no withholding tax on interest payments, (ii) the bonds are listed on an approved foreign stock exchange or clear through an approved international clearing system, and (iii) the relevant "first level" holders of the bonds in respect of which the interest payments are being made reside in jurisdictions that have double tax treaties with Russia providing for no withholding tax on interest payments. According to the proposal, "first level" holders means the relevant accountholders in the clearing systems rather than the ultimate beneficial owners of the Eurobonds.

While the Ministry of Finance's proposal represented a retreat from the positions it expressed in its letter and press release, there continued to be a degree of uncertainty and cause for concern in the market following the proposal. First, it was unclear how the provision of accountholder information by the clearing systems would work in practice, as arrangements would need to be made with the clearing systems to ensure that accountholder information could be provided in a timely manner prior to an interest payment being made on a Russian Eurobond. Second, even if Russian borrowers were able to obtain the necessary "first level" holder information from the clearing systems, to the extent that such holders resided in jurisdictions that did not have double tax treaties with Russia providing for no withholding tax on interest payments, Russian borrowers would have needed to withhold a certain amount of tax from interest payments and would have been required to "gross up" the relevant interest payments.

Tax Code Amendments Passed by the Duma

In May 2012, the Budget and Tax Committee of the Duma (the Committee) approved amendments to the Tax Code that would have effectively exempted Eurobonds from withholding tax indefinitely. These amendments did not include a requirement that the relevant "first level" holders of the bonds reside in jurisdictions that have applicable double tax treaties with Russia, which reflected a rejection of this central element of the Ministry of Finance's proposal.

However, as a result of political confrontations over this issue that took place in May and early June, the amendments that had been approved by the Committee in May were revised to provide that the exemption would apply only in respect of bonds issued before 1 January 2014, rather than indefinitely. The amendments were passed in this form by the Duma on 6 June 2012.

The amendments provide that, for offerings that close prior to 1 January 2014, there is no requirement for withholding of income tax in a Russian Eurobond structure if the following two conditions are met:

  • The SPV issuer is incorporated in a jurisdiction that has a double tax treaty with Russia (providing for no withholding tax on interest payments).
  • The bonds are listed on an approved foreign stock exchange and clear through an approved international clearing system.

The exemption is applicable to both loan participation notes structures and guarantee structures involving SPV issuers, and applies retroactively to interest payments in connection with Eurobonds made on or after 1 January 2007.

A list of approved stock exchanges and clearing systems for this purpose is to be adopted by the Ministry of Finance and the Russian Federal Service for the Financial Markets (FSFM). Until this list has been approved, listing on any foreign stock exchange and clearance through any foreign clearing system will be acceptable for purposes of this exemption.

In order to become effective, the amendments to the Tax Code that were passed by the Duma need to be approved by the Federation Council of Russia and signed by the President of Russia. According to Russian law, the Federation Council has two weeks in which to approve the amendment into law and the President has two weeks in which to sign the amendments into law.

Impact

The Eurobond market has been, and likely will continue to be, an important source of financing for Russian corporations. However, for the time being, the question of the withholding tax treatment of Eurobonds from Russia remains unsettled. If they become effective, the amendments to the Tax Code will temporarily resolve the confusion and anxiety in the market that began in December 2011 with the Ministry of Finance's letter. On one hand, market participants will be relieved by the amendments, as the new regime proposed by the Ministry of Finance in February would likely have been cumbersome and may have increased borrowing costs and, as a result, could have adversely affected the Russian Eurobond market. On the other hand, as the exemption only applies until 1 January 2014, the amendments provide only a temporary solution, and there will continue to be uncertainty in the market regarding what the position will be after that date.

The Ministry of Finance's positions expressed in its December 2011 letter and January press release were based on a view that, in order for interest payments under a Eurobond structure to benefit from a double tax treaty, the actual owner of the interest (rather than the SPV issuer) should be resident in a qualifying jurisdiction. This position was significantly watered down in the February proposal, which required looking to "first level" holders in the clearing systems rather than actual owners, as the latter approach would have been impracticable. The recently passed Tax Code amendments temporarily reverse the Ministry of Finance's positions entirely by indicating that only the SPV's jurisdiction of incorporation is relevant to the withholding tax treatment.

The manner in which—within a period of approximately six months—the Ministry of Finance took a sudden and dramatic position on the Russian Eurobond withholding tax issue, then largely retreated from its position and subsequently had its position temporarily reversed by the Duma is an indication of the unpredictability that exists in the general Russian legislative and tax system. The recently passed amendments will provide clarity regarding the withholding tax treatment of Eurobonds—but only on a temporary basis. While there will be a lower level of withholding tax risk associated with Russian Eurobond transactions that close before 1 January 2014, there continues to be uncertainty about the future beyond that date.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morgan Lewis | Attorney Advertising

Written by:

Morgan Lewis
Contact
more
less

Morgan Lewis on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide

JD Supra Privacy Policy

Updated: May 25, 2018:

JD Supra is a legal publishing service that connects experts and their content with broader audiences of professionals, journalists and associations.

This Privacy Policy describes how JD Supra, LLC ("JD Supra" or "we," "us," or "our") collects, uses and shares personal data collected from visitors to our website (located at www.jdsupra.com) (our "Website") who view only publicly-available content as well as subscribers to our services (such as our email digests or author tools)(our "Services"). By using our Website and registering for one of our Services, you are agreeing to the terms of this Privacy Policy.

Please note that if you subscribe to one of our Services, you can make choices about how we collect, use and share your information through our Privacy Center under the "My Account" dashboard (available if you are logged into your JD Supra account).

Collection of Information

Registration Information. When you register with JD Supra for our Website and Services, either as an author or as a subscriber, you will be asked to provide identifying information to create your JD Supra account ("Registration Data"), such as your:

  • Email
  • First Name
  • Last Name
  • Company Name
  • Company Industry
  • Title
  • Country

Other Information: We also collect other information you may voluntarily provide. This may include content you provide for publication. We may also receive your communications with others through our Website and Services (such as contacting an author through our Website) or communications directly with us (such as through email, feedback or other forms or social media). If you are a subscribed user, we will also collect your user preferences, such as the types of articles you would like to read.

Information from third parties (such as, from your employer or LinkedIn): We may also receive information about you from third party sources. For example, your employer may provide your information to us, such as in connection with an article submitted by your employer for publication. If you choose to use LinkedIn to subscribe to our Website and Services, we also collect information related to your LinkedIn account and profile.

Your interactions with our Website and Services: As is true of most websites, we gather certain information automatically. This information includes IP addresses, browser type, Internet service provider (ISP), referring/exit pages, operating system, date/time stamp and clickstream data. We use this information to analyze trends, to administer the Website and our Services, to improve the content and performance of our Website and Services, and to track users' movements around the site. We may also link this automatically-collected data to personal information, for example, to inform authors about who has read their articles. Some of this data is collected through information sent by your web browser. We also use cookies and other tracking technologies to collect this information. To learn more about cookies and other tracking technologies that JD Supra may use on our Website and Services please see our "Cookies Guide" page.

How do we use this information?

We use the information and data we collect principally in order to provide our Website and Services. More specifically, we may use your personal information to:

  • Operate our Website and Services and publish content;
  • Distribute content to you in accordance with your preferences as well as to provide other notifications to you (for example, updates about our policies and terms);
  • Measure readership and usage of the Website and Services;
  • Communicate with you regarding your questions and requests;
  • Authenticate users and to provide for the safety and security of our Website and Services;
  • Conduct research and similar activities to improve our Website and Services; and
  • Comply with our legal and regulatory responsibilities and to enforce our rights.

How is your information shared?

  • Content and other public information (such as an author profile) is shared on our Website and Services, including via email digests and social media feeds, and is accessible to the general public.
  • If you choose to use our Website and Services to communicate directly with a company or individual, such communication may be shared accordingly.
  • Readership information is provided to publishing law firms and authors of content to give them insight into their readership and to help them to improve their content.
  • Our Website may offer you the opportunity to share information through our Website, such as through Facebook's "Like" or Twitter's "Tweet" button. We offer this functionality to help generate interest in our Website and content and to permit you to recommend content to your contacts. You should be aware that sharing through such functionality may result in information being collected by the applicable social media network and possibly being made publicly available (for example, through a search engine). Any such information collection would be subject to such third party social media network's privacy policy.
  • Your information may also be shared to parties who support our business, such as professional advisors as well as web-hosting providers, analytics providers and other information technology providers.
  • Any court, governmental authority, law enforcement agency or other third party where we believe disclosure is necessary to comply with a legal or regulatory obligation, or otherwise to protect our rights, the rights of any third party or individuals' personal safety, or to detect, prevent, or otherwise address fraud, security or safety issues.
  • To our affiliated entities and in connection with the sale, assignment or other transfer of our company or our business.

How We Protect Your Information

JD Supra takes reasonable and appropriate precautions to insure that user information is protected from loss, misuse and unauthorized access, disclosure, alteration and destruction. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. You should keep in mind that no Internet transmission is ever 100% secure or error-free. Where you use log-in credentials (usernames, passwords) on our Website, please remember that it is your responsibility to safeguard them. If you believe that your log-in credentials have been compromised, please contact us at privacy@jdsupra.com.

Children's Information

Our Website and Services are not directed at children under the age of 16 and we do not knowingly collect personal information from children under the age of 16 through our Website and/or Services. If you have reason to believe that a child under the age of 16 has provided personal information to us, please contact us, and we will endeavor to delete that information from our databases.

Links to Other Websites

Our Website and Services may contain links to other websites. The operators of such other websites may collect information about you, including through cookies or other technologies. If you are using our Website or Services and click a link to another site, you will leave our Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We are not responsible for the data collection and use practices of such other sites. This Policy applies solely to the information collected in connection with your use of our Website and Services and does not apply to any practices conducted offline or in connection with any other websites.

Information for EU and Swiss Residents

JD Supra's principal place of business is in the United States. By subscribing to our website, you expressly consent to your information being processed in the United States.

  • Our Legal Basis for Processing: Generally, we rely on our legitimate interests in order to process your personal information. For example, we rely on this legal ground if we use your personal information to manage your Registration Data and administer our relationship with you; to deliver our Website and Services; understand and improve our Website and Services; report reader analytics to our authors; to personalize your experience on our Website and Services; and where necessary to protect or defend our or another's rights or property, or to detect, prevent, or otherwise address fraud, security, safety or privacy issues. Please see Article 6(1)(f) of the E.U. General Data Protection Regulation ("GDPR") In addition, there may be other situations where other grounds for processing may exist, such as where processing is a result of legal requirements (GDPR Article 6(1)(c)) or for reasons of public interest (GDPR Article 6(1)(e)). Please see the "Your Rights" section of this Privacy Policy immediately below for more information about how you may request that we limit or refrain from processing your personal information.
  • Your Rights
    • Right of Access/Portability: You can ask to review details about the information we hold about you and how that information has been used and disclosed. Note that we may request to verify your identification before fulfilling your request. You can also request that your personal information is provided to you in a commonly used electronic format so that you can share it with other organizations.
    • Right to Correct Information: You may ask that we make corrections to any information we hold, if you believe such correction to be necessary.
    • Right to Restrict Our Processing or Erasure of Information: You also have the right in certain circumstances to ask us to restrict processing of your personal information or to erase your personal information. Where you have consented to our use of your personal information, you can withdraw your consent at any time.

You can make a request to exercise any of these rights by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

You can also manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard.

We will make all practical efforts to respect your wishes. There may be times, however, where we are not able to fulfill your request, for example, if applicable law prohibits our compliance. Please note that JD Supra does not use "automatic decision making" or "profiling" as those terms are defined in the GDPR.

  • Timeframe for retaining your personal information: We will retain your personal information in a form that identifies you only for as long as it serves the purpose(s) for which it was initially collected as stated in this Privacy Policy, or subsequently authorized. We may continue processing your personal information for longer periods, but only for the time and to the extent such processing reasonably serves the purposes of archiving in the public interest, journalism, literature and art, scientific or historical research and statistical analysis, and subject to the protection of this Privacy Policy. For example, if you are an author, your personal information may continue to be published in connection with your article indefinitely. When we have no ongoing legitimate business need to process your personal information, we will either delete or anonymize it, or, if this is not possible (for example, because your personal information has been stored in backup archives), then we will securely store your personal information and isolate it from any further processing until deletion is possible.
  • Onward Transfer to Third Parties: As noted in the "How We Share Your Data" Section above, JD Supra may share your information with third parties. When JD Supra discloses your personal information to third parties, we have ensured that such third parties have either certified under the EU-U.S. or Swiss Privacy Shield Framework and will process all personal data received from EU member states/Switzerland in reliance on the applicable Privacy Shield Framework or that they have been subjected to strict contractual provisions in their contract with us to guarantee an adequate level of data protection for your data.

California Privacy Rights

Pursuant to Section 1798.83 of the California Civil Code, our customers who are California residents have the right to request certain information regarding our disclosure of personal information to third parties for their direct marketing purposes.

You can make a request for this information by emailing us at privacy@jdsupra.com or by writing to us at:

Privacy Officer
JD Supra, LLC
10 Liberty Ship Way, Suite 300
Sausalito, California 94965

Some browsers have incorporated a Do Not Track (DNT) feature. These features, when turned on, send a signal that you prefer that the website you are visiting not collect and use data regarding your online searching and browsing activities. As there is not yet a common understanding on how to interpret the DNT signal, we currently do not respond to DNT signals on our site.

Access/Correct/Update/Delete Personal Information

For non-EU/Swiss residents, if you would like to know what personal information we have about you, you can send an e-mail to privacy@jdsupra.com. We will be in contact with you (by mail or otherwise) to verify your identity and provide you the information you request. We will respond within 30 days to your request for access to your personal information. In some cases, we may not be able to remove your personal information, in which case we will let you know if we are unable to do so and why. If you would like to correct or update your personal information, you can manage your profile and subscriptions through our Privacy Center under the "My Account" dashboard. If you would like to delete your account or remove your information from our Website and Services, send an e-mail to privacy@jdsupra.com.

Changes in Our Privacy Policy

We reserve the right to change this Privacy Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our Privacy Policy will become effective upon posting of the revised policy on the Website. By continuing to use our Website and Services following such changes, you will be deemed to have agreed to such changes.

Contacting JD Supra

If you have any questions about this Privacy Policy, the practices of this site, your dealings with our Website or Services, or if you would like to change any of the information you have provided to us, please contact us at: privacy@jdsupra.com.

JD Supra Cookie Guide

As with many websites, JD Supra's website (located at www.jdsupra.com) (our "Website") and our services (such as our email article digests)(our "Services") use a standard technology called a "cookie" and other similar technologies (such as, pixels and web beacons), which are small data files that are transferred to your computer when you use our Website and Services. These technologies automatically identify your browser whenever you interact with our Website and Services.

How We Use Cookies and Other Tracking Technologies

We use cookies and other tracking technologies to:

  1. Improve the user experience on our Website and Services;
  2. Store the authorization token that users receive when they login to the private areas of our Website. This token is specific to a user's login session and requires a valid username and password to obtain. It is required to access the user's profile information, subscriptions, and analytics;
  3. Track anonymous site usage; and
  4. Permit connectivity with social media networks to permit content sharing.

There are different types of cookies and other technologies used our Website, notably:

  • "Session cookies" - These cookies only last as long as your online session, and disappear from your computer or device when you close your browser (like Internet Explorer, Google Chrome or Safari).
  • "Persistent cookies" - These cookies stay on your computer or device after your browser has been closed and last for a time specified in the cookie. We use persistent cookies when we need to know who you are for more than one browsing session. For example, we use them to remember your preferences for the next time you visit.
  • "Web Beacons/Pixels" - Some of our web pages and emails may also contain small electronic images known as web beacons, clear GIFs or single-pixel GIFs. These images are placed on a web page or email and typically work in conjunction with cookies to collect data. We use these images to identify our users and user behavior, such as counting the number of users who have visited a web page or acted upon one of our email digests.

JD Supra Cookies. We place our own cookies on your computer to track certain information about you while you are using our Website and Services. For example, we place a session cookie on your computer each time you visit our Website. We use these cookies to allow you to log-in to your subscriber account. In addition, through these cookies we are able to collect information about how you use the Website, including what browser you may be using, your IP address, and the URL address you came from upon visiting our Website and the URL you next visit (even if those URLs are not on our Website). We also utilize email web beacons to monitor whether our emails are being delivered and read. We also use these tools to help deliver reader analytics to our authors to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

Analytics/Performance Cookies. JD Supra also uses the following analytic tools to help us analyze the performance of our Website and Services as well as how visitors use our Website and Services:

  • HubSpot - For more information about HubSpot cookies, please visit legal.hubspot.com/privacy-policy.
  • New Relic - For more information on New Relic cookies, please visit www.newrelic.com/privacy.
  • Google Analytics - For more information on Google Analytics cookies, visit www.google.com/policies. To opt-out of being tracked by Google Analytics across all websites visit http://tools.google.com/dlpage/gaoptout. This will allow you to download and install a Google Analytics cookie-free web browser.

Facebook, Twitter and other Social Network Cookies. Our content pages allow you to share content appearing on our Website and Services to your social media accounts through the "Like," "Tweet," or similar buttons displayed on such pages. To accomplish this Service, we embed code that such third party social networks provide and that we do not control. These buttons know that you are logged in to your social network account and therefore such social networks could also know that you are viewing the JD Supra Website.

Controlling and Deleting Cookies

If you would like to change how a browser uses cookies, including blocking or deleting cookies from the JD Supra Website and Services you can do so by changing the settings in your web browser. To control cookies, most browsers allow you to either accept or reject all cookies, only accept certain types of cookies, or prompt you every time a site wishes to save a cookie. It's also easy to delete cookies that are already saved on your device by a browser.

The processes for controlling and deleting cookies vary depending on which browser you use. To find out how to do so with a particular browser, you can use your browser's "Help" function or alternatively, you can visit http://www.aboutcookies.org which explains, step-by-step, how to control and delete cookies in most browsers.

Updates to This Policy

We may update this cookie policy and our Privacy Policy from time-to-time, particularly as technology changes. You can always check this page for the latest version. We may also notify you of changes to our privacy policy by email.

Contacting JD Supra

If you have any questions about how we use cookies and other tracking technologies, please contact us at: privacy@jdsupra.com.

- hide

This website uses cookies to improve user experience, track anonymous site usage, store authorization tokens and permit sharing on social media networks. By continuing to browse this website you accept the use of cookies. Click here to read more about how we use cookies.