fivehundred magazine > > Interview with… Olga Sorokina, O2 Consulting

Interview with… Olga Sorokina, O2 Consulting

There are significant changes in the area of tax law, including the amendments and the renegotiations of double tax treaties (DTTs) with particular countries (for example, Malta, Cyprus, the Netherlands, Luxembourg). How do these amendments affect your clients and what steps are they taking in light of those?

During last year a number of significant amendments to the Russian tax legislation,  

Some of tax developments in response to the economic crisis caused by COVID-19. 

  • the personal income tax (13%) on interest income of individuals accured on capital exceeding 1 million RUBThese provisions apply from January 1 2021. 
  • Starting from 1 January 2021 personal income tax rate will be increased from 13% up to 15% for income exceeding 5 million RUB. According to our estimates only 1-1,5 % of taxpayers will be subject to increased taxation.   
  • tax deferral/ instalment for companies most affected by the crisis 
  • New CFC provisions. New amendments to the Russian Tax Code for the purpose of introduction of a fixed amount annual tax of 5 million RUB on the income of all controlled foreign companies (CFC) controlled by the same beneficial owner. The taxpayers would be eligible to choose between paying fixed annual rate on all the companies or to pay income tax for each one.  
  • DTT amendments 

On 25 March 2020 in an address to the nation, Russian President Vladimir Putin announced the increase of withholding tax rates on dividends and interest paid from Russia to «low-tax» jurisdictions. Mr. Putin specified that “this will require adjustments to be made to our double taxation agreements with certain countries. I ask the Government to arrange for that to be done» 

In April 2020, the Ministry of Finance of the Russian Federation sent official letters to Cyprus, Luxembourg and Malta with a proposal to review treaties and existing benefits for lower withholding tax rate on dividend and interest income and to increase such WHT rates to achieve minimum taxation of 15%. Later this year Russian Ministry of Finance has held negotiations with Ministry of Finance of Netherlands and proposed to amend double tax treaty offering similar amendments to those agreed with Cyprus, Malta and Luxembourg. In December 2020 Russian Ministry of Finance announced the beginning of a process of termination of a double tax treaty with Netherlands. Negotiations with Switzerland and Hong-Kong are in progress. 

The changes to Russia-Malta Tax treaty and Russia-Cyprus tax treaty shall become applicable from 1 January 2021 

These changes will seriously affect the cross-border tax structuring for both holding companies and individuals because the volume of financial transactions passing through companies registered in such countries, especially Cyprus, was significant. Holding companies registered in these jurisdictions were often used for optimization purposes to reduce tax on returns from Russian sources.  

During last year we were analyzing existing client’s structures and start adapting them to the new situation including restructuring of headquartering approaches.  

DTT amendments will certainly impact the attractiveness for investing in Russia through foreign holding mechanisms.  

We recommend to our clients to re-evaluate current strategies and to develop further approaches carefully based on a detailed analysis of a business situation taking into account not only new amendments but also potential developments of tax policies especially for businesses which have sales in one country, production – in another, IP and head office – in yet another. As a result of such analysis we offer an effective cross-border tax model and an optimal structure for investments. In some cases we can offer solutions related to relocation of holding companies to special administration regions in Russia (SARs). Foreign holding companies can be redomiciled from Cyprus, Malta, Luxembourg and Netherlands to the territory of Russky Island (Primorsky region) ord Oktyabrsky island (Kaliningradskiy region). 

Some of our clients are considering options of transformation into a publicly listed legal entity. 

It is very important to understand that behind all restructuring strategies shall be real economic background and not tax saving purposes. 

In any case, it is clear now that Russia is following the intention to choose the strictest possible policy by limitating all possible options to obtain tax benefits. Such approach will have a long-term effect on both Russian and foreign investors. 

For tax lawyers it is now time to think outside the box and to adopt their clients’ needs and requirements to the new tax strategies and global vision.   

The pressure from the international sanctions regime has been cooling off recently, since there was a reported uptick in M&A transactions during 2019. However, the Covid-19 pandemic brought a high level of uncertainty as well. Could you provide some insight into how the M&A market has been moving recently and what direction it is likely to take in the near future? 

The arrival of the COVID-19 pandemic has affected economy worldwide and dramatically influenced many industries.  The pandemic and the lock-down measures the states took globally have caused burst of investors’ interest not only in pharma and biotech (experiencing revolutionary outbreak), but in technology sectors that procure daily demands with social distancing  – education technologies , solutions for comfort online shopping and delivery, online communication tools.  

We have not seen more than just a temporary pause in the deal activity in the early 2020. Only a few deals that barely started in January-February 2020 were put on hold because their parties obviously tried to access the uncertainties of this new phenomenon. At the same time, active players in the Private Equity and Venture segments rushed to explore new COVID-related needs, seize most opportunistic targets and build their investment strategies around the new reality and its demands. EdTech, AI-based AgroTech, on-line platforms and ecosystems of various sorts, neo-banking, TMT generally, a few other sectors – anything that minimizes people’s exposures to social contacts – into which many invested actively in the last few years, in 2020 became even more attractive. Other investors rushed to acquire distressed companies at huge discounts in sectors that suffered heavy blows from COVID-19.  We see more and more entrepreneurs launching new startups offering new COVID-inspired products and services. And I think this trend will continue.  

As regards facilitation of legal support of M&A transactions, many companies managed to more of less quickly switch to a fully remote work starting from negotiation stage till transaction close. In this aspect the pandemic situation has stimulated creativity and accelerated organizational part of work. 

Yet another trend to define the legal environment of M&A landscape in Russia is a large number of corporate conflicts. Isolation-caused limitations of personal communication, the inconsistency of antivirus measures, economical problems, lack of investments — all of these have led to numerous tensions that businesses were not prepared to face. As a result of this, many companies started numerous inconsistent and sometimes contractionary initiatives and were stuck in deadlocks instead of making decisions to move forward. It was not a very pleasant but a very important experience and now we can explain to our clients using their own example and example of their partners how important for companies to understand that they need to get ready for such turbulent situations during the ‘calm’ periods by preparing their management and corporate structure and by negotiating effective shareholders agreements or similar mechanisms. 

What sort of impact has the Covid-19 pandemic had on the growth of work with a nexus to technology? Has this affected any practice areas in particular?

One of our leading practices is practice of M&A and cross-border transactions which is normally cover both private equity and endure capital markets. The total value of mergers and acquisitions on the Russian market dropped by approximately 30%, in the meantime the value of transactions in venure sector (technologies and innovations) rose by 13.5%. 

It is evident that the technological market became a real hotspot for law firms offering new and interesting work opportunities.  Since the beginning of 2020, we’ve closed about 25 deals, being busier than ever in the last 5 years. I suppose, it was our mostly thanks to our clients portfolio with significant number of technological companies and venture capital funds that led to such results even with the backdrop of the pandemic and the related restrictions. This growth, however, can only be observed in certain technological spheres – e-commerce (online shops etc), EdTech, AgroTechFoodTech, online entertainment etc. Lots of such businesses were not ready for such skyrocketing growth and were forced to undergo rapid legal and tax restructuring, and also to increase their capacities for investments. 

Fintech industry has also attracted significant investor interest and was growing intensively during last year, so the growth of legal work for our FinTech legal practice also rose by 35%. Russian legislation had a number of significant amendments related to digital assets and even digital currencies which stimulated innovation and competition in the financial sector and created new working possibilities for law firms.  

It is very important to note that during the pandemic period, technological companies were also among the most successful in terms of gaining foreign investments so all legal practices engaged in cross border transactions, international holding structuring were really busy.  

Which practice area/s do you think will be the driving force/s for work in Russia in the near future?

I am sure that significant part of technological sector will continue its growth in 2021. Such industries that have already increased their share in Russian market benefiting from social distancing and remote work will continue to develop, namely media, digital infrastructure, and telecom.  

and will be real driving force for M&A practice and other practices related to technologies like IP, TMT and FinTech practices. 

I think that another practice area that has a real potential is private wealth capital practice and private clients practice. It started its development this year which was unexpected on the Russian market, as these industries were practically in their infancy. 

Meanwhile it is important to take into consideration the fact that 83% of wealth in Russia is owned by 5% of families in first generation. About 70% of beneficial owners are older than 60 years. Quite soon many private businesses and cash and non-cash assets would have to change hands. It is now time to think about structuring of best ways to involve the new generations to management and ownership of family businesses, to negotiate strategies for investments balancing interests of current principals and new successors. These are new opportunities for law firms to create legal products and to develop their services in this area.  

Do you feel that either full-service or boutique firms offer particular advantages for clients?

I always had an opinion that full service law firm has significant advantage for the clients. It is very comfortable for a client to obtain services with «one-stop-shop» approach. Most of client’s cases need to be covered by several practice areas and standard project team includes corporate lawyers, tax specialists, IP advisors and commercial lawyers. Cooperation with specialists from different law firms creates lots of inconvenience and lack of effective communication between advisors. Also, the approaches and working processes of different law firms are not the same and it is very difficult to create effective project team.  

I know that most of the clients do not understand the additional value a boutique firm with narrow specialization may bring. It can be only effective for limited practices like family law or employment. 

Do you predict that some of the new working practices (eg, working from home) implemented due to the Covid-19 pandemic in the past year are likely do have a long-term impact on the way you handle local mandates? What about international ones?

Our firm’s partners live in different locations so quite a few of my colleagues were used to working on our clients’ deals (Russian and international) remotely in the pre-Covid-19 times. Now it became a new trend. After many firms shifted 100% to remote working fears that it may negatively affect performance are all gone. Among our clients, even big corporations shifted to remote working except for jobs where personal presence is technologically required. We noticed that remote working helped us to achieve more for our clients and at the same time spend more time with our families and less time in public commute. It looks like a win-win thing to me.  

Earlier this year Russian President Mr. Putin signed the new Law on Digital Financial Assets which will come into force in January 2021. In October 2020 the Central Bank of Russia has released a report on the prospects of introducing a “digital rouble” as an alternative to cryptocurrencies. What kind of impact such new developments would have on Russian regulatory and tax system? Can we conclude that the law legitimizes the operations of digital currencies?  

We can say that the Law on Digital Financial Assets (entering into force starting January 2021) has provided for merely a framework on operations of digital (virtual) currencies. The Russian lawmakers have experienced difficulties with their basic approach towards virtual currencies (ban or permission). Finally, they opted not to allow circulation of virtual currencies on Russian market – they cannot be used as consideration for goods or services. However, ownership of virtual currencies is not prohibited – it is allowed in limited cases whereas the title is legally protected only subject to prior declaration to the tax authorities. The amendments to the Tax code have been recently introduced for consideration at the State Parliament. According to them, the digital currency (like Bitcoin) are considered as an asset (property) for taxation purposes, the operations with them and VAT exempt. Besides, the tax authorities impose control over the operations of the Russian tax residents through all kind of digital wallets. 

At the same time the Bank of Russia has announced its plans to introduce “the Digital Ruble” being called on one hand as an alternative to cryptocurrencies, and on the other hand as  digital form of the Russian ruble in addition to national cash and cashless money. The regulator expects that the Digital Ruble will be supporting online transactions like cashless money but more fluently. The project is in its early stages, so the potential impact is not clear. 

Legal technology industry has been actively evolving in the last couple of years.  What do you think about innovative legal projects and Russian legal technology market? How active is the interest of law firms in adopting of legal tech products to their business?

 The LegalTech is on demand of every profound law firm in Russia. Though the integration of a particular technology varies depending on the firm, we can say that a lot of instruments have been successfully introduced and are now of daily use. Some services are being quickly automated and even go online, for example, legal databases, smart searches through legal abases, creation of simple legal documentation, online court documentation submission, digital notarial services etc.   

The legal advice stepwise goes online, e.g. onto various types of digital platforms, chat-bots. It is time for changes in the field of interaction with clients, especially with the hi-tech companies, which expect their lawyers to speak the same language and appreciate them being cutting-edge.  

The interest of law firms to adopting new legal tech instruments expands, because nowadays it is a matter of survival due to tough competition. 

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