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NSD ACTING AS A WITHHOLDING AGENT under the Russian Tax Code Moscow, 2013 1. NSD Acting as a Withholding agent In accordance with the Russian Tax Code, in 2013, NSD acts as a withholding agent when paying out income to NSD’s clients on securities subject to mandatory centralized safekeeping, as listed in 1 to 5 in the table below. 1 Russian federal government securities (regardless of the state Withholding agent since 01/01/2012 registration date) 2 Russian subfederal bonds with the state registration date after Withholding agent since 01/01/2012 01/01/2012 3 Russian municipal bonds with the state registration date after Withholding agent since 01/01/2012 01/01/2012 4 Russian corporate bonds subject to mandatory centralized safekeeping, Withholding agent since 01/01/2012 with the state registration date after 01/01/2012 5 Bonds of foreign issuers issued under the Russian laws, with the state Withholding agent since 01/01/2013 registration date after 01/01/2012 6 Bonds of foreign issuers (both government and corporate) issued under - the laws of foreign jurisdictions 7 Equities of Russian issuers Withholding agent since 01/01/2014 8 Equities of foreign issuers - 9 Russian and foreign mutual funds’ units - 10 Depository receipts (Russian and АDRs/GDRs) - It is expected that, starting from 1 January 2014, NSD will also be acting as a withholding agent when paying out income to NSD’s clients on Russian equities. The relevant amendments to the Russian Tax Code to be drafted by the Russian Ministry of Finance are expected to come into force since 1 January 2014. 2. Accounts NSD acts as a withholding agent when paying out income on securities to NSD’s clients who hold the following depository accounts with NSD: since Foreign owners’ securities accounts Bonds since Foreign owners’ securities accounts Bonds 01/01/2013 Foreign nominee’s securities accounts Bonds since Foreign owners’ securities accounts Bonds 01/01/2012 01/01/2014 Foreign owners’ securities accounts Equities Foreign nominee’s securities accounts Bonds since Foreign owners’ securities accounts Bonds 01/07/2014 Foreign owners’ securities accounts Equities Foreign nominee’s securities accounts Bonds Foreign nominee’s securities accounts Equities Foreign nominee’s securities accounts. Under Order No. 12-65/pz-n dated 27 July 2012 issued by the Russian Federal Service for Financial Markets, until 1 July 2014, the following types of securities are to be credited to foreign nominee’s securities accounts opened in 2013 by NSD for foreign organizations that are classified as international central securities depositories (ICSDs): - Russian federal government securities; - Russian subfederal bonds; - Russian municipal bonds; - bonds of other Russian issuers (corporate bonds); and - foreign securities. With effect from 1 July 2014, it will be possible to use foreign nominee’s securities accounts of ICSDs to credit also other securities kept by NSD (e.g. Russian equities). Other depository accounts. Under the Securities Accounts and Other Depository Accounts Opening and Maintenance Procedure approved by the Russian Federal Service for Financial Markets (Order No. 12-78/pz-n dated 30 August 2012), NSD may also open the following types of depository accounts for securities with respect to which NSD acts as a withholding agent: - trading securities accounts (Article 15 of Federal Law No. 7-FZ “On Clearing and Clearing Activities” dated 7 February 2011); - clearing securities accounts (Article 16 of Federal Law No. 7-FZ “On Clearing and Clearing Activities”); and - accounts of clients of nominees whose banking or depository license has been revoked. 3. Tax Calculation and Withholding by NSD Acting as a Withholding Agent in 2013 Types of Securities Withholding Agent since 01/01/2012 1 Russian federal government securities (regardless of the state registration date) + 2 Russian subfederal bonds with the state registration date after 01/01/2012 + 3 Russian municipal bonds with the state registration date after 01/01/2012 + 4 Russian corporate bonds subject to mandatory centralized safekeeping, with + the state registration date after 01/01/2012 5 Bonds of foreign issuers issued under the Russian laws, with the state registration date after 01/01/2012 Types of Securities + Tax Calculation Information and Disclosure in Withholding by 2013 for the NSD in 2013 Purposes of the Russian Tax Code 1 Russian federal government securities - - 2 Russian subfederal bonds - - 3 Russian municipal bonds - - 4 Russian corporate bonds subject to mandatory centralized safekeeping + + 5 Bonds of foreign issuers issued under the Russian laws + + Withholding tax scheme: As of 01/01/2013: 1. Executing withholding agent functions (calculating and withholding tax, submitting reports to tax authorities, etc.) can be described in the following schemes withregard the timeframes: 01/01/2012 OFZ __________________I______________________ Sub-federal and municipal bonds __________________I______________________ Corporate bonds __________________I______________________ Corporate Eurobonds* __________________I______________________ 2. Withholding of tax in accordance with the Tax Code of Russian Federation in 2013: 01/01/2012 OFZ __________________I______________________ Sub-federal and municipal bonds __________________I______________________ Corporate bonds __________________I______________________ Corporate Eurobonds* __________________I______________________I______ 01/01/2014 3. Tax is withhold by the tax agent only in cases of intersection of two schemes above: 01/01/2012 OFZ __________________I______________________ Sub-federal and municipal bonds __________________I______________________ Corporate bonds __________________I______________________ Corporate Eurobonds* __________________I______________________I______ 01/01/2014 *- At the same time a draft document “Main principals of tax policy of Russian Federation in 2014 and in planed period 2015 and 2016” is placed on MinFin web-site. 4. Withholding Tax Rates Applicable by NSD as a Withholding Agent in 2013 with Respect to Interest Income on Securities (without Application of Double Taxation Treaties) Types of Securities 4 Russian Resident Legal Entities Russian Resident Individuals Russian NonResident Legal Entities Russian NonResident Individuals - 13% 20%* 30% - 13% - 30% - 13% - - Corporate bonds with the state registration date after 01/01/2012: 4.1 Russian corporate bonds issued under the Russian laws, with the state registration date after 01/01/2012 4.2 Russian corporate bonds issued under the laws of foreign jurisdictions, with the state registration date after 01/01/2012 5 Bonds of foreign issuers issued under the Russian laws, with the state registration date after 01/01/2012 *- 15% for corporate mortgage-backed bonds As a withholding agent, NSD has the right not to withhold tax on income on securities kept on a securities account a foreign organization holds with NSD, or withhold such tax at a reduced rate, provided that under the double taxation treaty between the Russian Federation and the relevant foreign country income of a foreign organization or a Russian non-resident individual is exempt from taxation in the Russian Federation. Under Article 312 of the Russian Tax Code, in order to apply a double taxation treaty, a foreign organization has to provide NSD with a confirmation that such foreign organization is a permanent resident of the country with which the Russian Federation has the double taxation treaty. Such conformation has to be certified by a competent authority of the relevant foreign country. However, the said rule does not apply to the application by NSD of double taxation treaties in the cases set out in Article 310.1 of the Russian Tax Code, i.e. where income is paid on securities kept in foreign nominee’s securities accounts with NSD. No confirmation is, therefore, to be submitted (either in hard copy or in electronic format, and either by individuals or legal entities) to NSD as a withholding agent for the purposes of withholding tax on income on securities kept in foreign nominee’s securities accounts. 5. Disclosure of Information by Foreign Nominees in 2013 for the Purposes of the Tax Code Legal entities. In accordance with clause 5, Article 310.1 of the Tax Code, information on legal entities to be disclosed by a foreign nominee has to include the following details for each legal entity that either holds, or is authorized to exercise rights attached to, securities: 1) Full name; 2) Country of residence; 3) Grounds for the application of tax benefits (a reference to the Tax Code or to the relevant double taxation treaty); and 4) Quantity of securities. Individuals. In accordance with clause 5, Article 214.6 of the Tax Code, information on each individual to be disclosed by a foreign nominee has to include the following details: 1) Last name, first name, and middle name (if any); 2) Country of which the individual is a tax resident; 3) Grounds for the application of tax benefits (a reference to the Tax Code or to the relevant double taxation treaty); and 4) Quantity of securities. Where no information is submitted, or where information is submitted not in full, the 30% tax rate will apply. The disclosure on securities owners is to be made down to the level of managers of collective investment funds, i.e. it is not required to disclose information on the fund investors. However, the maximum tax rate provided for individuals and legal entities (30% (13%) and 20%, respectively) applies to such fund managers, and double taxation treaties will not apply. 6. Statutory Time Limits Time limits for disclosure of information for tax purposes. Information on securities owners or persons authorized to exercise rights attached to securities, as to be disclosed in accordance with clause 5, Article 214.6 or clause 5 Article 310.1 of the Russian Tax Code, has to be submitted by a foreign nominee before the income on securities is paid to the foreign nominee, within three business days following the disclosure by the depository of information regarding the payment to its clients of securities income. Payment date and date of receipt of funds. The depository pays distributions on securities to its clients (either nominees or trustees being professional securities market participants) within one business day following the receipt of the funds. However, the funds may be received to NSD’s correspondent account either earlier (-N) or later (+N). For example, day T is the date on which income is to be paid on securities in accordance with the relevant issuance documents. Then, the date when the funds are received to the depository’s correspondent account may be either day T, or T-N, or T+N (hereinafter, days mean business days in Russian Federation). Time limits for disclosure of the receipt of funds from the issuer. No later than 10 a.m. of the day next to the day when the funds are received from the issuer (i.e. no later than day T+1), the depository is obliged to disclose the receipt of funds for distribution. Time limits for payment of income. In accordance with the applicable laws, the depository is obliged to pay distributions received, upon withholding applicable taxes, to: - accounts of clients who are nominees or trustees being professional securities market participants (within one business day following the receipt of funds, but not earlier than the date set by the issuer (T) and not later than day T+1); - accounts of other clients (within five business days following the receipt of funds, but not earlier than the date set by the issuer (T) and not later than day T+5). NSD’s Securities Income Payment Procedure: STEP 1. NSD makes payments to the following clients no later than day T+1: - nominees and trustees being professional securities market participants; - Russian resident legal entities; - Russian non-resident legal entities, provided that documents confirming the legal entity’s country of residence and the right to use tax benefits have been properly submitted to NSD in advance; and - foreign nominees and Russian non-resident legal entities, where, in accordance with the Russian Tax Code, the withholding agent is not required to calculate and withhold tax on securities income. Where the funds are received from the issuer to NSD’s correspondent account before 5 p.m. (Moscow time) of the required payment date, payments to the above clients are made on day T; otherwise, payments are made on day T+1. STEP 2. As a general rule, in accordance with the applicable laws, income on securities is paid to foreign nominees and Russian non-resident legal entities within five business days following the receipt of funds from the issuer. If the withholding agent is required to calculate and withhold tax on securities income, then, for the purposes of taxation: - a Russian non-resident legal entity has to submit, in the manner prescribed, to NSD hard-copy documents confirming the legal entity’s country of residence and the right to use tax benefits (the “Documents”); and - a foreign nominee has to disclose information required by Articles 214.6 or 310.1 of the Russian Tax Code within three business days following the disclosure by the depository of information regarding payments to its clients (STEP 1). Russian non-resident legal entities. Payments to a Russian non-resident legal entity holding an owner’s securities account with NSD are made on the day when the hard-copy Documents are submitted by the legal entity to NSD, provided that such Documents are received by NSD no later than 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays). Where the Documents are received by NSD later than 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays), payments are made on the next business day. Where a client fails to properly submit the Documents by 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays) of day T+5 (the last payment date provided for by the Russian laws), NSD applies general tax rates provided for by the Russian Tax Code for Russian nonresident legal entities. Foreign nominees. Payments to a foreign nominee are made on the date of disclosure of information required for calculation of taxes, provided that such information in electronic format is received by NSD no later than 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays). Where the required information in electronic format is received by NSD later than 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays), payments to the foreign nominee are made on the next business day. Where a foreign nominee fails to properly submit the required information in the manner prescribed by the Russian Tax Code and/or such information is not received by NSD by 4 p.m. (Moscow time) (or 3 p.m. (Moscow time) on Fridays or days immediately preceding Russian public holidays) of day T+5 (the last payment date provided for by the Russian laws), NSD applies the 30% tax rate provided for by the Russian Tax Code. Note: When submitting information required by the Russian Tax Code, a foreign nominee should bear in mind that information may only be disclosed, and payments may only be made, on Russian business days (i.e. days other than Saturdays and Sundays and public holidays in the Russian Federation). Accordingly: no later than day T or T+1: 1. NSD discloses information on the receipt of funds for distribution (by 10 a.m. (Moscow time) for day T+1); 2. NSD identifies clients to whom payments are to be made; 3. NSD calculates amounts payables and makes payments to the eligible clients (STEP 1); 4. If taxes are to be withheld, NSD withholds and pays taxes to Russian tax authorities on the date of payment of securities income; no later that day (T/T+1) + 1 (by 10 a.m. (Moscow time)): 5. NSD discloses information on payments to be made to NSD’s clients (STEP 1); within 3 days following the disclosure of information on payments under STEP 1 (i.e. (T/T+1)+1)+3): 6. The foreign nominee discloses information required by the Russian Tax Code; no later than day T+5: 7. NSD calculates payments to be made to NSD’s clients (STEP 2); 8. NSD automatically determines, monitors, and records applicable tax rates; 9. NSD calculates, or monitors the calculation of, taxes and withholds the same, and records such withholdings in NSD’s accounting records; NSD pays income on securities (less the taxes withheld) to the eligible clients; 10. NSD pays the taxes withheld to Russian tax authorities on the date of payment of securities income to the clients. General Example of NSD’s Securities Income Payment Procedure with maximum timeframes of disclosure (The disclosure in earlier terms, but not earlier than Day-T, is possible) Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Т Т+1 Т+2 Т+3 Т+4 Т+5 NSD receives funds for distribution, fixing date Disclosure of funds receipt Disclosure of funds receipt Payments (STEP 1) Payments (STEP 1) Disclosure of payments (STEP 1) on day Т 1 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Payments to the foreign nominee 2 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Payment to the foreign nominee 3 DAY Information disclosure by the foreign nominee Payment to the foreign nominee NO DISCLOSURE Payment to the foreign nominee NO DISCLOSURE Disclosure of payments (STEP 1) on day Т+1 1 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Payment to the foreign nominee 2 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Payment to the foreign nominee 3 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Disclosure of payments (STEP 1) on day Т+2 1 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Payment to the foreign nominee 2 DAY Information disclosure by the foreign nominee NO DISCLOSURE Payment to the foreign nominee Payment to the foreign nominee Payment to the foreign nominee 3 DAY Information disclosure by the foreign nominee Payment to the foreign nominee Expected time limits for payments and information disclosure in 2014. It is expected that terms of disclosure for taxation purposes will be changed since 01.01.2014. One of the purposes is changing of record date related to income payments for securities owners and parties executing the rights on securities, 7. Information Disclosure Methods In accordance with the current laws, foreign nominees may submit information required for tax calculation and withholding purposes in hard copy only. The Order drafted by the Russian Federal Tax Service in January 2013 provides that foreign organizations will have the right to submit information for tax purposes either: - in hard copy; or - in the form of an electronic document signed with an encrypted qualified electronic signature in accordance with Federal Law No. 63-FZ “On Electronic Signatures” dated 6 April 2011, without submitting such information in hard copy. 8. Communication Channels It is expected that foreign nominees will be able to submit information to NSD in electronic format using the following communication channels: 1. NSD’s Electronic Data Interchange (EDI) System with the use of WEB Access. WEB Access allows a foreign nominee to have direct access to NSD’s automated recordkeeping systems to submit information without having a special automated software workstation (interface). 2. NSD’s EDI System with the use of WEB Service. WEB Service provides a foreign nominee with technical capabilities to access NSD’s automated recordkeeping systems using a special automated software workstation (interface) (WEB Client) either developed by the client themselves in accordance with NSD’s technical guidelines or developed for the client by NSD. 3. SWIFT System with the use of standard free format messages for transmission of separate and minimum details (SWIFT Fin). Transmission of information in the form of standard messages MT565 or MT599 may be complicated if the amount of information being transmitted is medium or large. 4. SWIFT FileAct that allows to exchange files (rather than standard SWIFT messages) for transmitting information. The use of SWIFT FileAct may be complicated due to the undefined structure of a file to be transmitted (i.e. if information is transmitted in free format). Summary NSD has assessed the available options for electronic data interchange between NSD and foreign nominees for the purposes of disclosing information required to enable NSD to act as a withholding agent, and concluded that all of the above options may be usable by foreign nominees, given that they are domiciled in different jurisdictions and also given different level of standardization and automation of their processes, as well different extent to which they are prepared for the process of disclosure. However, the first two of the above options are more desirable, given: - the extensive list of information to be disclosed in accordance with the current versions of Articles 214.6 and 310.1 of the Russian Tax Code; and - global trends towards the simplification of financial procedures connected with tax barriers, as well as trends towards the improvement of disclosure procedures, information exchange acceleration and streamlining, mitigation of tax risks, and minimization of investors’, intermediaries’, tax authorities’, and depositories’ costs. To standardize information transmission processes, it is recommended to use XML and XBRL formats that provide more capabilities for fast transmission. The said cost-efficient and speedy technology can be used as a bridge between different systems, as not all banks and tax authorities are members of SWIFT. The use by NSD of the promising XML and XBRL formats and NSD’s EDI System for data interchange (i.e. information transmission options listed under clauses 1 and 2 above and that require to use certified cryptographic tools (Microsoft CSP) and RSA electronic signature keys) will, therefore, be possible provided that the Russian laws would allow transmitting information in the form of electronic documents signed with an encrypted electronic signature (either a qualified or a non-qualified one). In this case, it will be possible to use the following communication channels: - E-mail; - WEB Channels; - WEB Access (direct access to NSD’s recordkeeping systems with the use of any browser (e.g. Internet Explorer) and XML formats); and - WEB Service (transmission of information in the XML format using the HTTPS protocol and a client’s software). Should it be required to use exclusively an encrypted qualified electronic signature to disclose information required by the Russian Tax Code, NSD would be able to receive such information either in hard copy via courier services (such as DHL) or in electronic format via SWIFT Fin (using standard messages MT565 or MT599), as well as via Swift FileAct (with the transmission of files).