BEPS Requires Suspension of IP Regimes: Considerations for Russia

Tax Russia Legal Alert November 2015 www.bakermckenzie.com For more information please contact: Alexander Chmelev +7 495 787 27 00 alexander.chmelev@bakermckenzie.com Sergei Zhestkov +7 495 787 27 00 sergei.zhestkov@bakermckenzie.com Kirill Vikulov +7 495 787 27 00 kirill.vikulov@bakermckenzie.com Maxim Kalinin +7 812 303 90 00 maxim.kalinin@bakermckenzie.com Baker & McKenzie — CIS, Limited White Gardens, 10th Floor 9 Lesnaya Street Moscow 125047 Russia Tel.: +7 495 787 27 00 Fax: +7 495 787 27 01 BolloevCenter, 2nd Floor 4A Grivtsova Lane St. Petersburg 190000 Russia Tel.: +7 812 303 90 00 Fax: +7 812 325 60 13 BEPS Requires Suspension of IP Regimes: Considerations for Russia In November the G20 endorsed the OECD/G20 BEPS Final Report on Action 5 (Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance) (the "Final Report"). The Final Report sets up a framework for admissible IP regimes and requires suspension of non-compliant beneficial IP box regimes (e.g., in Luxembourg and Cyprus) by 30 June 2016 (although the current regimes may be grandfathered for five more years). Implications for taxpayers Multinational companies and companies having IP rights offshore may be forced to substantially reconsider tax planning for both existing and future IP to comply with the new rules and retain tax efficiency. What the Final Report says The Final Report requires OECD/G20 countries to bring their IP regimes (e.g., patent box regimes) in line with the new framework - the so-called "modified nexus approach". The new approach should prevent artificial transfers of taxable profits from IP rights out of countries where the IP value is created and requires that the tax benefits (e.g., reduced tax rates) can only apply to income arising from IP where the actual R&D activity is undertaken by the business itself. Capital contribution or expenditure on substantial R&D activity by someone other than the business (i.e., affiliates) will mean that income arising from that activity will not qualify for benefits and will be taxed at higher tax rates. Information on tax regimes and rulings should become more transparent. In view of the BEPS work, several EU countries, including Luxembourg, Cyprus, Malta, the UK, etc., and Switzerland, may suspend or substantially modify their current IP regimes, which are inconsistent with the nexus approach, as of 1 July 2016, but taxpayers will be allowed to continue using the current regimes until 1 July 2021 (grandfathering provisions). No new entrants (i.e. new taxpayers and new IP assets owned by taxpayers using current IP regimes) will be permitted in any existing IP regime not consistent with the nexus approach after June 30, 2016. Also, the tax benefits of the current non-compliant IP regimes may not apply to IP rights acquired by taxpayers from related parties as of 1 January 2016. This will effectively complicate IP restructuring as of next year. Actions to consider  Multinational groups developing IP in Russia may need to consider: (1) transferring or restructuring their current IP before 2016; and (2) tax planning opportunities for new IP, since it may not be eligible for the current IP regimes.  Given the substantial limitations of the nexus approach it may be beneficial for Russian companies engaged in the development of IP to Tax 2 Legal Alert November 2015 reconsider using local tax benefits for R&D and IP rights in Russia and to revise their offshore IP structures. This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases. ©2009 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.