28 November 2013 Moscow

Efficient strategies for medium businesses in Russia

BASIC STRATEGIES How it works in Russia

RO/Branch in Russia Organic growth Russian Legal Entity Acquisition of Russian Distributor Acquisitions Acquisition of Russian Producer Joint Venture Joint Activities Franchising

Decision to enter the Russian market

ORGANIC GROWTH Russian regulatory environment differs from those in Europe

Choice of business partners Compliance

Form of presence

ORGANIC GROWTH Choice of key business partners

Forensic Check ! (shareholders have no criminal track record) Known in the market? (web site, office, available references) Bona fide taxpayer? (regular tax filings, not an SPV) Solid financial position? (realistic figures in statutory reports, audit opinion)

ORGANIC GROWTH Forms of business presence

Rep Office
Marketing, advertising and other support activities Subject to accreditation and registration with the tax authorities

Branch
Income generating activities Subject to accreditation and registration with the tax authorities

Russian Legal Entity

Material income generating activities, localization Should be incorporated and registered with the tax authorities

No audit requirements

No audit requirements

Statutory audit (under certain conditions)

ORGANIC GROWTH Whether incorporation could give an advantage

Form of presence ADVANTAGES DISADVANTAGES ! PE risks ! Unclear profit allocation rules ! Simplified tax regime not available ! PE status ! Unclear profit allocation rules ! Simplified tax regime not available ! Subject to currency control ! Transfer pricing issues re HQ payments

Rep Office ! No currency control

! Limited number of activities

Branch

! No currency control ! Difficulties with permits/ licenses

Russian Legal Entity

! Simplified tax regime available (under certain conditions) ! No or little difficulties with permits/licenses

ORGANIC GROWTH Compliance with local legislation

Key issues to consider Work permits and visas Customs requirements

Labour law compliance Tax and financial reporting compliance Certification and registration

ORGANIC GROWTH Recommendations

1)! Perform forensic check of key business partners (including suppliers, customers and lessors) 2)! Match the form of presence in Russia with your strategy 3)! Outsource regulatory compliance to reliable local providers 4)! Pay specific attention to compliance with customs regulations 5)! Consider requirements to keep detailed primary documentation for tax and statutory accounting purposes

ACQUISITIONS M&A process in Russia differs from those in Europe

Due diligence

Completion Holding structure

ACQUISITIONS Typical risks of a Russian distributor

Financial Risks
Distortion of key indicators (EBITDA, working capital, net debt) Slow moving inventories

Legal Risks

Tax Risks

Defects of rights for shares

Underpayment of salary taxes

IP not registered

Understatement of customs payments

Hidden liabilities

Regulatory compliance issues

Unjustified application of simplified tax regime

ACQUISITIONS Choice of the acquisition vehicle EU holding

How it works: 1)! Italian Parent established a EU holding company 2)! The EU holding company purchases shares in a Russian operational company Advantages: ! Safeguard the rights for shares ! Reduced withholding tax rates on dividend ! Reduced taxation of capital gains on exit Disadvantages: ! No right to apply for a simplified tax regime for the Russian operational company Alternatives: ! Russian holding company ! Direct acquisition of shares in the Russian operational company by Italian individuals

Italian Parent
1

Holding Company (EU)

2

Russian operational company

ACQUISITIONS Key issues to address on completion

Non-competing
(retention of key personnel; renewal of key contracts)

Issues

SPA protection
(deferred payment;warranties & indemnities)

Post-completion performance (share options, acquisition in stages, completion accounts )

ACQUISITIONS Recommendations
1)! Perform operational, financial, tax and legal due diligence of the Russian target 2)! Consider tax implications of the transaction structuring options (effective tax rates, capital gain taxation, etc.) 3)! Agree on non-competing with the sellers 4)! Properly address risks revealed in the course of due diligence in the SPA 5)! Consider post-completion performance as a price adjusting event

JOINT ACTIVITIES Partnerships in Russia differ from those in Europe

Choice of business partners Profits sharing & control Legal framework

JOINT ACTIVITIES Choice of business partners

! Critical factors
! Good reputation and acceptable quality ! Attractive market share and product lines ! Stable financial KPIs ! Sufficient regulatory compliance ! Comparable business culture ! Management is open & willing to change

Best fit Russian partner

! Pre-deal steps
! Market searches &forensic checks ! Operational due diligence ! Financial due diligence ! Legal due diligence ! Interviews with top management

JOINT ACTIVITIES Legal framework

Option Franchising ADVANTAGES DISADVANTAGES ! Requires less effort ! Reputation risks from HQ ! Understatement of KPIs management for royalty payments ! No or minimal investment ! Cheaper structure ! Underdeveloped civil legislation on SHAs ! Could be difficult to manage conflicts ! Significant investment

Russian Joint Venture

European Joint Venture

! Developed civil ! Additional costs to legislation on SHAs incorporate and maintain ! Easy to manage ! Significant investment conflicts

JOINT ACTIVITIES Profits sharing & control

Valuation of the partners shares & contributions (SPA)

Establishing profits distribution rules (SHA)

Monitoring currant performance and financial KPIs (SHA)

JOINT ACTIVITIES Recommendations

1)! Perform operational financial, tax and legal due diligence of the Russian JV partner 2)! Consider cultural differences when deciding on joint activities 3)! Consider tax implications of profits repatriation when structuring the JV 4)! Properly address profits sharing and control issues in the SHA 5)! Perform regular health checks of the joint activities

Thank you for attention

Maria Semenova
!"#. +7 916 332 5114 MSemenova@lawexpert.spb.ru www.lawexpert.spb.ru