THE NEW WORLD; HOW TO DO BUSINESS EFFECTIVELY

1
THE NEW WORLD HOW TO DO BUSINESS EFFECTIVELY

• Hotel Baur au Lac
• Zurich
• 18.09.07

2
Programme

• 14.30 Registration Coffee
• 15.00 Up-date from Intrust Group its
  partners David Sykes, Director Intrust
  Group of Companies
• 15.15 China Investment Structures Jack Flader
  GCSL Limited
• 15.45 Indo Swiss EU A growing
  partnership Vijay Goel Singhania Co,
  Solicitors Indian Advocates
• 16.15 Coffee Break
• 16.30 Russia Pitfalls to avoid when
  doing business with Russia Alexander Alexeev
• GSL Law Consulting
• 17.00 Comparative Analysis Cristiano Medori,
  The Benedict Partnership, LLP
• 17.20 Closing Remarks David Sykes,
  Director Intrust Group of Companies
• 17.30 Cocktail

3
Latest news developments from the Intrust Group
and its partners

• Benedict Intrust (Ireland) Limited
• inWEALTH TRUST sarl
• Cyp Intrust Limited
• Insail Services - Aircraft Services
• Benedict Partnership LLP - VAT Consultancy
• Western Mideast
• Global PTE Limited
• GCSL

4
China Investment Structures
OVERVIEW
China Investment Structures A Practical Discussion
Jack W. Flader, Jr.CEO Group Managing
DirectorThe GCSL Group of Companies
Jack W. Flader, Jr.CEO Group Managing
DirectorThe GCSL Group of Companies
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China Investment Structures
OVERVIEW

• Introduction to Jack
• Introduction to GCSL
• Current Events
• Representative Office
• Wholly Foreign Owned Enterprise
• Joint Venture
• Danone vs Wahaha
• Conclusion

6
China Investment Structures
INTRODUCTION - JACK

• Lived and worked in Asia since 1985 in the fields
  of law, financial and fiduciary services.
• Qualified attorney and counselor at law of The
  State Bar of California and the Northern District
  of California of the USA District Court.
• Independent director and consultant to several
  companies listed in Hong Kong and the USA with a
  focus on Asia and Greater China.
• Member of the Hong Kong General Chamber of
  Commerce, Hong Kong Securities Institute,
  American Bar Association, International Bar
  Association, International Tax Planning
  Association, Center for International Legal
  Studies and President of the Asia Offshore
  Association.

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China Investment Structures
INTRODUCTION - GCSL

• Global Consultants and Services Limited (GCSL)
  was established in Hong Kong in 2006 by a group
  of like-minded fiduciary services professionals
  who possess a wealth of experience in servicing
  the simplest to the most complex needs of our
  global clientele.
• GCSL has offices in Hong Kong, Anguilla, Belize,
  Cook Islands, Nevis, Samoa, Shanghai, Singapore.
• Services include Company, Trust, Foundation,
  Captive Insurance and Mutual Fund formation and
  establishment Company Secretarial Fiduciary
  Administration Consultancy Services.
• GCSL is partners with the Intrust Group since
  January 2007

8
China Investment Structures
China Investment Structures
CURRENT EVENTS

• Shanghai stock market minimal impact of
  sub-prime mortgage crisis.
• USA China trade disputes, RMB/USD rate (RMB5.5
  USD1 by 2010?).
• China colonization of Africa
• China has contributed USD364 million to the
  Africa Development Bank.
• Prime Minister declared 2007 is the year for
  China and Africa Partnership.
• National Development Bank created USD5 billion
  fund to support China enterprises to invest in
  Africa.
• China plans to setup 5 economic cooperative zones
  in Africa.
• China influence in Asia, ex Japan and Australia.

9
China Investment Structures
China Investment Structures
CURRENT EVENTS

• 5th Session of the National Peoples Congress
  (passed on June 29, 2007)
• The law states that the property of the state,
  the collective, the individual and other obliges
  is protect by law, and no units or individuals
  may infringe upon it. This is the first time
  that equal protection to state and private
  properties has been enshrined in a Chinese law,
  which analysts say marks a significant step in
  the country's efforts to further economic reforms
  and boost social harmony. China's state and
  private properties once suffered from serious
  violations due to a lack of respect for and
  protection of property rights.
• The law sets a unified income tax rate for
  domestic and foreign companies at 25.Prior to
  the new law, foreign enterprises averaged 15
  while domestic enterprises averaged 25. China
  says unfair and incompatible with WTO
  commitments. Preferential tax treatment for
  foreign invested enterprises resulted in 594,000
  such enterprises by the end of last year, which
  invested US692 billion of capital and paid
  approximately US102 billion in taxes
  representing approximately 21 of Chinas total
  tax revenue.

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China Investment Structures
China Investment Structures
CURRENT EVENTS

• Corruption and local issues
• Shanghai Pension Fund scandal hundreds of
  millions.
• Guangzhou Pension Fund scandal tens of millions.
• Property market manipulation According to the
  Ministry of Land Resources last year, between 60
  and 90 of land acquisitions for construction in
  China were illegal.
• Extortion by journalists A journalist was beaten
  to death after he tried to extort money from a
  mine owner by threatening to publicize his
  illegal operation.
• 25,000 cases of corruption investigation as at
  30th June with more than 5,500 involving
  government officials.
• Civil Unrest Every week a new story of unhappy
  workers, poor people, etc.
• Tax evasion 75 million registered tax payers,
  but only 1.37 million people filed.
• Litigation Danone in negotiations with JV
  partner regarding breach of contract for Wahaha
  brand.

11
China Investment Structures
China Investment Structures
REPRESENTATIVE OFFICE (RO)

• Established to represent the parent company in
  China. ONLY permitted to conduct non-profit
  making activities.
• It has NO legal rights in China.
• More than one representative office can be set
  up.
• RO is taxed on its expenses in China at rate of
  10. If RO receives funds from a company other
  than its parent, then it will be considered in
  violation of its license and the tax rate will
  increase from 10 to 33 (25 after January 1,
  2008). In addition, RO needs to file tax return
  and pay taxes every month.

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China Investment Structures
China Investment Structures
REPRESENTATIVE OFFICE (RO)

• GCSL Shanghai RO step-by-step.
• Completed the GCSL Order Form and formed an
  intermediary parent company in Hong Kong.
• Finding the office, registered address, for
  Representative office was the first step. The
  office was identified and we signed the lease
  agreement for 2 years. Since 2005, due to safety
  reasons, a RO must be located in an approved A
  class building. GCSL Shanghai office is located
  at Number 12 on The Bund.
• A RO must have a Chief Representative who may be
  a foreign person or a Chinese person, or other
  representatives. GCSL Shanghais chief
  representative is Johnson Chien, who is Taiwanese
  by birth, but a Belize citizen.
• We made an online application for name approval
  to the local districts (Shanghai has 18
  districts) Administrative Bureau for Industry and
  Commerce. The name of the RO does not need a
  name check for it is impossible to duplicate.
  The format of ROs name is county of
  incorporation (parent company) company name
  location type of entity. For example Hong Kong
  Global Consultants and Services (China) Limited
  Shanghai Representative Office. Name
  approval took about 5 working days.

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China Investment Structures
China Investment Structures
REPRESENTATIVE OFFICE (RO)

• Once the name approval was confirmed, the formal
  application with required documents was submitted
  to the Administrative Bureau for Industry and
  Commerce within 30 working days. Otherwise, the
  name approval process will need to be
  re-submitted.
• After we submitted the formal application and the
  required documents, the Administrative Bureau for
  Industry and Commerce issued the Registration
  Certificate of Foreign Enterprises Permanent
  Office in China within 15 working days.
• Once the Registration Certificate of Foreign
  Enterprises Permanent Office in China was
  issued, we processed the following
• engraving 3 official rubber seals,
• Enterprise Code Registration,
• Company Identification Code Certificate,
• statistic Registration Certificate,
• statement from Statement Administration of
  Foreign Exchange, (SAFE) Registration.
• State and Local Tax Registrations, and
• the opening of corporate bank accounts.
• Via a licensed recruitment agency, we hired a
  local staff member.

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China Investment Structures
China Investment Structures
WHOLLY FOREIGN OWNED ENTERPRISE (WFOE)

• The most popular choice for international
  trading, manufacturing, processing, assembling or
  other profit-making activities in China.
• Limited liability company.
• Registered Capital is paid up capital. The
  minimum registered capital, which has to be paid
  up within 12 months of operations, is normally
  USD100,000. This amount varies depending on the
  industry, city, and place where the WFOE is
  registered and also on the business nature of the
  WFOE and can be significantly higher for certain
  heavily regulated industries. The registered
  capital can be paid up with a combination of
  equipment and cash. A minimum of 15 of
  registered capital initially must be deposited in
  cash from the parent company into the WFOEs
  capital bank account within 90 calendar days.
• Business tax of 5 on goods and services sold in
  China. Profits Tax currently between 15 - 33.
  Standardized at 25 on January 1, 2008. WFOEs
  formed before April 1, 2007 continue to enjoy
  special terms previously granted.

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China Investment Structures
China Investment Structures
WHOLLY FOREIGN OWNED ENTERPRISE (WFOE)

• GCSL client step-by-step in Guangzhou buying
  bicycle parts in China for sale to Russia.
• Completed GCSL Order Form and setup intermediary
  parent company in Hong Kong.
• Found an office,registered address, for the
  WFOE. Unlike RO, the office can be located at
  location where the property title is business
  permitted. Changing registered address is a
  difficult process so client chose permanent
  registered address separate from business
  address.
• WFOE must have a defined business scope. A
  feasibility study was prepared by client and GCSL
  and submitted with application.
• WFOE can have either a board of directors or a
  legal representative. Client chose a legal
  representative.
• Application was submitted to the Foreign Economic
  Relations Trade Commission for approval
  certificate before the official Business License
  application was submitted to the government
  authorities.

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China Investment Structures
China Investment Structures
WHOLLY FOREIGN OWNED ENTERPRISE (WFOE)

• The Business License was issued, which was
  followed by obtaining approval permit fromm local
  police department, Enterprise Code Registration,
  State and Local Tax Registrations, Financial
  Bureau Registration Certificate and the statement
  from State Administration of Foreign Exchange
  Registration.
• Bank accounts were set up to receive registered
  (paid up) capital. This is the capital account in
  foreign currency. A minimum of 15 of the
  registered capital in cash was remitted to the
  companys bank account within 90 calendar days
  from the intermediary parent company. A Financial
  Report on Capital Inspection for each injection
  of the registered capital was prepared by an
  authorized accounting firm in order to obtain the
  Capital Injection Certificate. An operating
  account in RMB was also setup.
• Upon receipt of the minimum registered capital,
  all the licenses and certificates were renewed.
• Applied for working visa for expatriates.
• For WFOE that has VAT status, there is additional
  VAT filing to be done every year on or before
  April 30th. Annual audited financial statements
  and report must be completed and submitted to the
  Foreign Economic Relationship Trade Commission,
  and tax authority renewal.

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China Investment Structures
China Investment Structures
JOINT VENTURE

• A legal entity in China composed of foreign and
  Chinese investor(s).
• The Chinese government favors and encourages this
  form of arrangement. Foreigners generally are
  careful in this regard.
• A Joint Venture may be more suitable for business
  activities deemed limited and prohibited by
  the Chinese government.
• This business arrangement is usually set up by
  equity or cooperative methods.
• A Sino-foreign equity joint venture (EJV)
• A Sino-foreign cooperative joint venture (CJV)
• A foreign-invested joint stock limited company
  (FISC)

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China Investment Structures
China Investment Structures
JOINT VENTURE

• An EJV or CJV is a non-share-issuing limited
  liability company incorporated between one or
  more foreign entities, either natural or legal
  persons, with one or more Chinese legal entities.
  Generally, a CJV is allowed to be formed and to
  operate in a much more flexible manner than an
  EJV as long as the parties agree. For example,
  the law permits a CJV to operate with each party
  specifying their respective contributions,
  management matters, profit and liability sharing
  and how to handle properties at the time when the
  cooperation terminates. Foreign investors
  contributions can be repatriated before
  expiration of the term of a CJV. As such, CJVs
  are sometimes referred to as contractual joint
  ventures.
• EJVs and CJVs were common structures for foreign
  investment in the first two decades of Chinas
  opening up. Foreign investors usually
  contributed cash, technology and management
  know-how, while their Chinese counterparts
  contributed land use rights, buildings, equipment
  and labor. Gaining ownership and management
  control in the existing EJVs or CJVs by
  increasing equity ratio resulted in WFOEs.

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China Investment Structures
China Investment Structures
JOINT VENTURE

• A JV step-by-step
• Preliminary Agreements, i.e. Letter of Intent,
  Memorandum of Understanding, Non-Disclosure and
  Non-Circumvention Agreement
• Due Diligence
• Constituent and Approval Documents
• Ownership of Assets
• Obligations, Liabilities and Material Contracts
• Taxation
• Land Use rights
• Labor and Social Insurance-related Matters
• Environmental Matters
• Intellectual Property rights and Technology
  Transfer Matters
• Claims, Litigation and Arbitration
• Antitrust

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China Investment Structures
China Investment Structures
JOINT VENTURE

• Set up Registration
• The registration will vary depending on the type,
  i.e. EJV or CJV.
• The domestic Chinese entity should apply to the
  local State Administration of Industry and
  Commerce for change of registration and to obtain
  a new Foreign Investment Entity business license.
• The domestic Chinese entity should submit the
  genuineness and validity documents including
• An application for the change in registration,
• An agreement on the purchase of equity in or
  subscription to the increased capital of the
  domestic company,
• The revised articles of association or amendments
  to the original articles of association, and the
  contract,
• The Foreign Investment Entity approval document,

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China Investment Structures
China Investment Structures
JOINT VENTURE

• Certification for the qualifications of the
  foreign investor (China Embassy Authentication of
  the foreign investors ID or corporate
  documents),
• The amended list of directors,
• Other relevant documents and certificates as
  might be required by the authorities.
• Follow up Registrations
• Taxation, customs, land administration, foreign
  exchange administration within 30 days from
  issuance of the new business license.
• The revised articles of association or amendments
  to the original articles of association, and the
  contract,
• The Foreign Investment Entity approval document,
• Certification for the qualifications of the
  foreign investor (China Embassy Authentication of
  the foreign investors ID or corporate
  documents),
• The amended list of directors,
• Other relevant documents and certificates as
  might be required by the authorities.

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China Investment Structures
China Investment Structures
JOINT VENTURE

• Not Jacks favorite!!!
• If allowed to form a WFOE, why setup a JV?
• Example of Hong Kong Public Company of which
• Jack was an Independent Director.

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China Investment Structures
China Investment Structures
JOINT VENTURE DANONE VS WAHAHA

• 39 joint ventures 51 owned by Danone and 49 by
  Zong Qinghous company Hangzhou Wahaha.
• Zong started out in business in 1987, selling
  milk in a school store.
• The name Wahaha was meant to evoke a laughing
  child, combining the character for baby (wa) with
  the sound of laughter (haha).
• In partnership with Danone, Wahaha has risen to a
  dominant position in the bottled water market in
  China and sells milk and yogurt drinks,
  carbonated soft drinks, fruit and vegetable
  juices, sports drinks, congee and canned food.
• Zong had management disagreements with Danone and
  has argued the EJV agreement, despite being
  signed by both parties, was invalid as it has
  never been approved by China's trademark office.
  Zong accused Danone of attempting to strong-arm
  him in a manner reminiscent of the abuse of China
  by Western colonial powers and Japan a century
  ago.
• Danone claims it has been cheated out of USD100
  million by businesses set up by Zong that are
  selling Wahaha-branded products identical to
  those sold by their joint venture, using the same
  suppliers and distribution network.

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China Investment Structures
China Investment Structures
JOINT VENTURE DANONE VS WAHAHA

• Significant Company Act issues regarding form of
  paid up capital and trademark law.
• After rounds of negotiations and an offer to
  buyout the side ventures, Danone finally filed a
  lawsuit in May 2007 in Sweden to settle the
  dispute.
• Danone recently filed another lawsuit in the USA
  against two companies linked to Zong and two
  individuals, one a USA citizen and one a USA
  green card holder, who it claimed were Zong's
  daughter and her mother.
• Zong recently resigned as chairman of Wahaha, and
  Danone appointed a replacement who sought to
  pacify Wahaha workers, who have been supporting
  Zong in his battle with Danone, issuing a
  statement saying that Danone would guarantee
  their job security.
• Open letter from Wahaha distributors that accused
  Danone of humiliating Zong and seeking to destroy
  Wahaha. The distributors threatened to cease
  carrying Danone products.
• The dispute has brought Danone substantial
  negative publicity in China

25
China Investment Structures
China Investment Structures
CONCLUSION

• Global economy means it is virtually impossible
  to ignore China.
• Confusing?
• GCSL is ready to help! Please visit us in Hong
  Kong or in Shanghai at No.12 on The Bund.

26
THANK YOU
Tel [phone] Fax [phone] Email
intray_at_gcsl.info Web www.gcsl.info
27
Indo-Swiss-EU A Growing Partnership

• By
• Vijay Goel
• Singhania Co. London UK.

28
India facts and figures-General.

• Political system- Parliamentary Democracy.
• India comprises of 28 States and 7 Union
  territories.
• With two tier government system at Centre and
  local levels.
• National language- Hindi. Main languages 22,
  dialects- More than 2000.
• Land area- Ranked in the world at 7th place with
  3,287,590 km² of total land area.
• Population- 1.1 Billion.

29
India facts and figures-Economic.

• GDP growth Rate-9.4 expected to grow beyond
  10.
• Components of GDP- Agriculture 18.5
  Manufacturing 26.4 Services 55.1
• Inflation rate - Around 5.
• Forex reserves as on July 20-USD 222.043
  billion.
• Gross domestic savings as a proportion of GDP-
  Well above 30.
• Of these corporate savings are at- 8.1.

30
Bilateral trade and Economic ties

• On 28th June 2007, India and the EU began
  negotiations on a broad-based bilateral trade and
  investment agreement in Brussels, Belgium.
• This is pursuant to the commitment made by
  political leaders at the India-EU Summit held in
  Helsinki on 13 October 2006.
• Objective is to move towards negotiations of a
  broad-based trade and investment agreement.
• India and the EU expect to promote bilateral
  trade by removing barriers to trade in goods and
  services and investment across all sectors of the
  economy.

31
Bilateral trade and Economic ties

• EU nations primarily import textiles and
  clothing, agricultural products and chemicals
  products from India.
• Exports from EU to India cover machinery,
  chemical products and gems and jewellery.
• EU is major destination of Indian FDI with one in
  four dollars invested by an Indian company going
  to the EU.
• There is enormous growth potential in a number of
  other fields, such as financial services,
  especially banking and insurance mechanical
  engineering, and biotechnology.

32
Indian growth sectors.

• Infrastructure (Roads, ports, airports, railways,
  electricity generation and distribution, bridges
  and dams, telecom etc.)
• Organized Retail.(Reliance, Bharti-Wall Mart,
  Tesco, Swiss supermarkets like Migros and Coop
  have termendous opportunity at hands.)
• Real Estate.( Development of megacities,
  townships, commercial complexes, SEZ, STP, etc.)
• Banking and Insurance. (Zurich is known name in
  India.)
• Consumer goods. (Swiss watches are treasured
  possession for decades.)
• Consumer goods. (Exponential rise in cash rich
  middle class is potentially huge market for white
  goods.)

33
Biotechnology

• One of the main areas of Indo-Swiss cooperation
  is in the Biotechnology Sector.
• Switzerland is one of the leading nations for
  innovation.
• Swiss Institutes like Federal Institutes of
  Technology in Lausanne and Zurich amongst top
  rankers.
• Cooperation between Indian and Swiss Research
  Institutes launched under Agreement on Scientific
  and Technological Cooperation signed in November
  2003.
• We need to carry our cooperation further in this
  area

34
Common Values and Interests

• Our two countries have a deep-rooted democratic
  system, Multilanguage and diverse cultural
  setup.
• Switzerland has a market-driven economy
  established long ago, and India has been rapidly
  transforming its economy to open-market
  conditions. Indian rupee is fully convertible on
  current account very soon it will be convertible
  on capital account.
• The services sector plays a major role in both
  our economies and is showing a tremendous
  performance.
• Over the years, Switzerland and India have been
  able to establish a flourishing relationship that
  covers diverse fields - economic, social,
  cultural and political.

35
Advantage of doing business in India.

• Well trained and low cost labour force.
• Highly-skilled mechanical electronics engineers
  . English speaking and western thinking.
• Quality conscious industry with rapid learning
  curve.
• Effective environment for RD.
• Strong Universities (engineering and medicine).
• Industry is investing in RD and moving to
  high-end products.

36
Advantages continued-

• Governments patents recognition (Intellectual
  Property Right laws).
• Price competitive raw materials (pharma,
  textile).
• Advanced legal and financial systems, no
  bureaucracy.
• Special Economic Zones (SEZs).
• Duty free enclaves for trade operations.
• Compliance and infrastructure advantages.
• Tax exemption for first ten years.
• Around 60 active SEZs, and recently 341 formally
  approved.

37
Advantages of doing business in Switzerland.

• Switzerland one of the preferred destinations for
  foreign investors due to a series of advantages.
  
• Strategic location in the center of Europe,
  long-term stability, legal security, dedicated
  professional labour force, liberal market
  conditions, reliable and highly developed
  financial center, high-tech infrastructure,
  modest tax system, Switzerland offers all these.
  
• This is why, in spite of a small domestic market,
  Switzerland has attracted big names from Indian
  IT companies, such as Tata consultancy Services,
  Infosys, Wipro, Satyam and Polaris

38
Opportunities for Swiss-EU companies.

• Almost all manufacturing sectors. (Engineering,
  pharmaceutical, chemical, white goods ..)
• Petrochemical (Including exploration and
  refining.)
• Infrastructure projects. (Roads, Bridges, Dams,
  Electricity distribution, etc.)
• Retail, Food processing. (Distribution, shopping
  malls, multiplex, etc.)
• Real Estate. (Townships, Mega cities.)
• Insurance and Banking. (Including retail banking.)

39
Opportunities in Retail.

• Indian retail industry size is 230 bn USD, with
  penetration of organized retail of only 3 (7 bn
  USD) Organized retail is expected to grow to 35
  bn USD by 2010
• Due to favorable socio-economic conditions Retail
  industry is set to witness 50 million sq.ft. of
  floor space addition over 2007-10, with a huge
  growth in number of shopping malls, hypermarkets.

40
EU companies in India.

• Companies from Germany, France, Italy, Spain are
  active in India.
• They operate in diverse fields such as
  engineering and industrial equipment, chemical
  and pharmaceutical, precision instruments,
  services and textile etc.
• Swiss companies-Nestle, Ciba, ABB, Sulzer, EMS
  Inventa, Specialty Chemicals, Rieter,
  Electrowatt, Novartis, Alusuisse, Bühler,
• Italian companies-Alitalia Ansaldo Caldaie
  Boilers Banca Monte Dei Paschi Di Siena SPA
  Banca Popolare Di Vicenza Banco Popolare Di
  Verona E Novara Benetton India Bisazza India.
• We can name equal number of companies from
  France, Germany, Denmark and other EU countries.

41
Indian companies in EU.

• Several Indian Companies are also making their
  mark in EU such as TATA AG, Birla AG, Ramco,
  Infosys, Wipro and TCS.
• Main focus is on Outsourcing. More surprising
  outsourcing is not limited to IT and IT enabled
  sector. India is providing excellent outsourcing
  opportunities in diverse sector such as Precision
  Engineering, Auto Components, Textiles and others.

42
Main challenges.

• What EU companies need to encounter in India.
• Market complexities.
• Logistics.
• Geography.

43
Success recipe.

• A long term commitment/investment view.
• Adapt the whole business system to local
  conditions.
• Products and supply chain must be redesigned to
  cut costs/adapt to the market.
• Product decontenting, if needed, to compete
  with local players lower price points.
• Get distribution right using third party
  distributor to overcome rural divide.
• Educate the consumer shape the market.

44
Legal structure.

• India has strong judiciary that is above
  government.
• India has strong well developed contract law,
  company law, intellectual property law,
  employment laws and economic legislation. India
  has well documented Foreign Direct Investment
  Policy.
• All legislation and policies are transparent,
  well documented and followed to the letter of law
  and spirit.

45
Entry strategies.

• EU companies can carry business in India either
  though-
• Liaison office.
• Branch office.
• Project office.
• Joint Venture with Indian partner.
• Wholly owned subsidiary.
• Entire investment and Income earned on
  investments are fully repatriable subject to
  payment of Indian income and capital gains tax as
  applicable.

46
Thank You.

• Singhania Co.24, Buckingham Gate,London SW1E
  6LB.
• Phone- 44 (0) 207 233 5511.Fax-     44 (0)
  207 233 5522.Web- http//www.singhania.com
  Email- info_at_singhaniauk.com

47
PITFALLS TO AVOID WHEN DOING BUSINESS IN RUSSIA

• Alexander Alexeev
• GSL Law Consulting Ltd.

48
PITFALLS TO AVOID WHEN DOING BUSINESS IN RUSSIA
Doing Business in Russia frequent pitfalls
and unexpected joys

• A Local Perspective by
• Alexander Alexeev
• GSL Law Consulting Ltd.

49
Investment Climate

• Credit Rating
• SP Investment grade
• Fitch Investment grade
• Moody's BBB-
• Direct Investments
• motor industry (GM, BMW, Ford, Renault)
• banking sector (RZB, CitiGroup, SG, CS, UBS, BNP)
• retail sector (Metro, Ikea, Ramstore)
• wines spirits (Sun Interbrew)
• food industry (Danone)
• Cosmetics (Oriflame)
• Luxury products (available)
• Changing Policy in Raw materials sector (Shell,
  BP)

Examples Credit Swiss Case,
50
Russia is a Corrupted Country
You might think
And You are right
Partly
51
Corruption

• 86th of 130 acc. to CPI of Transparency
  International
• Corruption Services
• export and quotas
• federal budget
• privatization
• tax transfers
• custom duty

Examples American Businessman Case,
52
Commercial Bribery

• Rates vary from
• 20 to 50
• Art. 204, Chapter 23 Criminal Code
• Kickbacks less quality for double price

Examples Cell Phone retailer and Cell Phone
Brand Case,
53
Personnel

• Well-educated, motivated hard-working
• Labor law protects employees
• Employees indifferent to their legal rights

Examples Kelly Services Case, Greythorne Case
54
Customers and Business Partners

• Two and more diplomas of higher education,
  European diplomas included
• Good command of English
• Foreign business experience
• Understanding the western mentality

Examples Coca Cola Case, Mars Case
55
Moscow and Province

• Moscow is not Russia!
• Moscow draws the best labor resources
• Moscow accumulates up to 95 of all financial
  resources

Examples Arcelor Case, Wood Industry Case,
56
Real Estate

• investment in commercial real estate, brings from
  10 to 25
• Moscow is the 5th in the world as regards office
  rent rates
• the portion of unoccupied A-class office space
  makes 2,5
• there are still no strict regulations as to the
  terms of construction
• you should decide upon the office rent one year
  before you plan to occupy it

Examples Knight Frank Case, Kushman Wakefield
Case,
57
Legal System

• The total wealth of legal provisions is
  overwhelming
• Legal collisions and blind spots
• Russian legislation updates constantly
• Tax laws make 25 to 33 of the whole bulk of the
  Russian laws
• The laws are strict and bulky, but optional

Examples Wolf Systems Case,
58
Exchange Control Abolishment

• No exchange control

Examples Blocked Share Capital Case,
59
Vodka Business Style

• Russian practice of conducting negotiations with
  vodka.
• Is this practice alive now ?

Examples ExxonMobile Case,
60
The Russian Tax Law

• The Tax Code taxpayers, tax base, maximum tax
  rates, tax exemptions, tax administration, tax
  liabilities, special tax regimes
• Other Codes and subordinate laws
• International tax treaties DTAs with 66
  countries, most of them follow OECD model
• Tax law interpretations applicability and
  enforceability

61
Three levels of taxation
Federal taxes
Regional taxes
Local taxes

• VAT
• Excise tax
• Personal income tax
• Unified social tax
• Corporate tax
• Mining tax
• Water tax
• State tax

• Corporate property tax
• Transport tax
• Gambling tax

• Personal property tax
• Land tax

There is also tax administration powers
distribution foreseen for certain
taxes Example 24 of standard profits tax rate
includes invariable federal portion of 6.5 and
regional budget portion of 17.5, reducible to
13.5
62
Corporate Profits Taxes
Table 1
Due for permanent establishments of foreign
companies
63
Cross-border payments

• Royalties WHT 20 (in the absence of DTA)
• Royalties attributable to a PS in Russia
  (permanent establishment) the WHT does
  not apply 24 of profits tax is due
• Thin Capitalization Rules max. debt to equity
  ratio 31
• Transfer Pricing Rules general rule price
  adjustment criteria (arms length rate test)

64
Moscow Traffic

• Moscow traffic as a visual reflections of the
  Russian business people's psychology

Examples UBS Case,
65
Taxation of Dividends
Physical Persons
Legal Body
Residents
Non Resisdents
Russian
Foreign

• 9
• (art. 224(4)
• Tax Code)

• 9 From Russian
  legal bodies (??. 284 (3.1) Tax Code)
• - 15 from foreign legal bodies (art. 284(3.2)
  Tax Code)

• 15 from Russian legal
  Bodies (art. 284(3.2) Tax Code)

• 30
• (art. 224 (3) Tax Code)

66
Russian Girls

• Are they
• pitfalls to avoid or
• unexpected joy

67
Registration of Foreign Companies for Tax
Purposes

• If the business activity is carried through
  branches, ROs,
• and other special offices over 30 days p.a.

In the tax authority assigned to the place of
business
(ii) If the company holds real estate or
transport vehicles placed in Russia, on the
title of ownership/custody/disposal
In the tax authority assigned to the place of
location or registration of the property
(iii) If the company opens bank account in rubles
or foreign currency in the Russian banks
In the tax authority assigned to the bank
location
In the tax authority of the place of source of
payment and in the Russian Tax Ministry
(iv) If the company receives income from the
sources in Russia, independently on its Russian
subsidiaries
(v) When the companys activities meet the
criteria of permanent establishment under the
national laws or DTA
In the tax authority specialized on foreign
companies and in the Russian Tax Ministry
(vi) When the company is tax liable, being
entitled to hold personal property, on the basis
of ownership/custody/ disposal
In the authority assigned to the place location
of the real estate
In the tax authority assigned to the place of
location of subsurface recourses, made available
under the production sharing agreement
(vii) Investing companies, acting under the
production sharing agreements, including the
function of Contract operator
68
And now you can ask your questions,

• and you will see that the English you've just
  heard is not my asset, it just shows the
  professional level of GSL translators who
  translated this speech for me.

Alexander Alexeev GSL Law Consulting Ltd.
69
Comparative Analysis
Cristiano Medori Partner The Benedict
Partnership, LLP
70
Comparative Analysis China
71
Comparative Analysis India
72
Comparative Analysis Russia
73
THANK YOU

• The Benedict Partnership LLP
• Hotel Baur au Lac
• Zurich 18 September 2007