Luxembourg and Russia: a close and collaborative · Luxembourg and Russia: a close and collaborative relationship “The Allen & Overy network is offering advanced solutions responding

Your perfect matchLuxembourg-Russia Desk

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Luxembourg and Russia: a close and collaborative relationship

“The Allen & Overy network is offering advanced solutions responding to the ever-increasing needs of a sophisticated clientele of corporates, banks, other (financial) institutions and private persons. Creating a special dedicated desk, and being the first law firm to do so, is an innovative step in order to address optimally growing inbound and outbound client demand into Russia and from Russia. It will inevitably further the relations between businesses established in Russia and Luxembourg. It will also enable, as a result of us being close to the Russian culture and mentality, a perfect match between client expectations and the provision of seamless legal services provided in Moscow, Luxembourg or in any of our offices worldwide.”

Marc Feider, Senior Partner, Luxembourg

© Allen & Overy LLP 2014

2 Your perfect match | Luxembourg-Russia Desk

The economic relations between Russia and Luxembourg have strongly developed in the recent past. Luxembourg companies rank now in prominent position as foreign investors into Russia and a number of them have a large client base or production facilities in Russia. Many major Russian companies already have a presence in Luxembourg. Numerous smaller Russian companies or even citizens have created small and medium sized companies in Luxembourg which are active in various sectors such as information technology, life sciences or import/export and which use Luxembourg as a hub for their international and in particular European Union activities and investments.

The Luxembourg stock exchange has an outstanding reputation among capital markets and finance professionals and is, for example, the first market in the world for the listing of Euro Medium Term Notes. Russian issuers who have securities listed on the Luxembourg stock exchange include corporates and sovereigns or sub-sovereigns.

The ties go beyond the mere economic aspects: around 3,000 Russians live and work in Luxembourg, different associations promoting Russian culture and business are active in Luxembourg and a Russian school is providing Russian language courses to Russian children living in Luxembourg.

Luxembourg, as a socially, economically and politically stable country, is a safe haven for investors generally. It is a secure and predictable gateway to Europe and beyond for Russian investors intending to structure their investments abroad. It also constitutes an excellent platform for foreign investors investing in the Russian market. We have a clear understanding of the opportunities in structuring investment streams and can provide our clients with tailor-made advice fitting their situation and needs.

The Luxembourg-Russia Desk’s aim is to better service our clients with business connections in both countries and to offer them a unique combination of Luxembourg, Russian, English and other legal expertise. Persons established in our various offices work together as a team thanks to, amongst others, fully integrated systems, uniform standards and best practices, shared business ethics next to a common working culture. The members of the Luxembourg-Russia Desk have in-depth knowledge of the legal and cultural aspects of doing business in both countries.

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“The Grand Duchy of Luxembourg and the Russian Federation have very strong political and economical ties which are reflected in their good trade relations but which go well beyond that. The bond between both countries is primarily a friendship between the people, rooted in trust and in the desire of a stable, mutually profitable long-term relationship.

Both countries have been strong allies in the past and are marching hand-in-hand towards a prosperous future. In this common endeavour, the Governments of the Grand-Duchy of Luxembourg and of the Russian Federation have decided to increase cooperation in numerous sectors, including, among others, the financial sector, competitiveness of companies and new technologies.

Currently, Russian entrepreneurs and companies of every size, benefit from Luxembourg’s regulatory framework, expertise and stability to form an integral part of their products. In this framework, Allen & Overy’s Luxembourg-Russia Desk certainly helps the Russian and Luxembourg business communities to strengthen their ties and combine the strengths of each jurisdiction through robust legal solutions.”Pierre Ferring, Ambassador of the Grand Duchy of Luxembourg in Moscow



Luxembourg: an open window to the world economy

Measuring the importance of the Grand Duchy of Luxembourg by its size of 2,586 square kilometres or by its population of about half a million people would do injustice to its political and, even more so, to its economic importance globally. Luxembourg is a founding member of the European Union and hosts the head offices of some of the most influential European Union institutions such as the European Court of Justice and the European Investment Bank. Luxembourg has developed into one of the most prominent and visible financial centres worldwide over the last 50 years. It is the first centre in the world for cross-border investment funds, first wealth management centre in the Eurozone and boasts a buoyant insurance and private banking sector.

The success of Luxembourg is due to a number of factors such as its capability to strike a sometimes subtle balance between safety and investor protection on the one hand and business friendliness, liberal foreign

investment policy and pragmatism on the other hand and, last but not least, one of the most competitive tax systems in Europe. In addition, the traditional social and political stability of the Grand Duchy, and a legal and regulatory framework that is continuously updated as a result of regular consultation between the government, the legislative bodies and the private sector, have contributed greatly to the attractiveness of the Luxembourg business environment and the growth of the Luxembourg financial sector.

Creative legal and protective regulatory frameworks associated with local expertise and know-how have boosted investment funds, pension funds, venture capital and private equity companies, securitisation vehicles, hedge funds, specialised investment funds, family offices, IP holding companies and covered bonds alike. The country’s corporate, investment, securities and tax laws, its strategic location in Western Europe and a

skilled multilingual workforce have made Luxembourg a top location for multinational companies. Major international corporations have established their European headquarters in Luxembourg or are operating out of Luxembourg via holding and finance companies.

Our Luxembourg office advises clients on all types of banking, capital markets, competition, corporate, intellectual property, insurance law, investment and pension funds, labour law, real estate and tax matters. Beyond technical expertise, our clients appreciate our commercially astute approach and the way we find practical solutions to their problems. Over the past 20 years of our presence in Luxembourg and 10 years as part of Allen & Overy, we have been closely involved in legal developments in the Grand Duchy, either by guiding our clients through pioneering transactions or by advising the government institutions on certain bills.

“With Luxembourg becoming an increasingly popular jurisdiction for financing structures, the Luxembourg-Russia Desk enhances our ability to offer the best structural solutions to our Russian clients.” Elena Tchoubykina, Banking Partner, Moscow.

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A few structures using some of the Luxembourg investment vehicles available

SICAR – Investment company in risk capital

Foreign investors

Luxembourg SICAR

Holding SPVPrivate equity

investment structureStart-up company

shares or bonds

shares/bondsshares/bonds shares/bonds


Your perfect match | Luxembourg-Russia Desk6 7

Over the last decade, Luxembourg has consolidated its position as a leading private equity centre. Various types of regulated and unregulated vehicles are available to the private equity industry. Whereas Luxembourg has been and still is very popular in the area of transaction-specific intermediary companies, it has succeeded in attracting private equity funds to Luxembourg since the introduction of the investment company in risk capital (société d’investissement en capital à risque, SICAR).

The SICAR was introduced to provide private equity houses with a regulated investment vehicle that is flexible from a structural point of view and attractive from a tax perspective. The introduction of this vehicle has proved to be a success as more than 300 SICARs have been launched since the entry into force of the act of 15 June 2004 relating to the investment company in risk capital (the SICAR Act).

A SICAR must have as its object the investment of funds in assets representing “risk capital” which means direct or indirect investment in entities in view of their launch, development or initial public offering.

According to the Commission de Surveillance du Secteur Financier (CSSF), the concept of “risk capital” is characterised by the coexistence of two key elements:

– the existence of a “high” risk associated with the relevant assets, and

– the intention to “develop” the target entity/assets. The concept of development of the value of the investments is considered by the CSSF as the main objective of a SICAR. The CSSF is looking for the creation of value at the level of the target companies.

Indirect investments in (private equity) real estate are also possible, in particular through entities holding, or investing in, real estate or via contributions to real estate companies. An indirect real estate investment must satisfy the risk capital test. The CSSF considers that the intention to develop and create added value for the underlying real estate asset(s) must exist.

The SICAR may be constituted with multiple compartments, each compartment corresponding (in principle) to a distinct part of the assets and liabilities of the SICAR while not being subject to the principle of risk diversification. It is hence possible to segregate specific investments within separate compartments. It is in particular possible to create a compartment for one single asset.

“Being one of the leading regulated private equity investment vehicles, the SICAR may also be convenient for the development of real estate projects as it offers multiple fiscal and legal advantages with a reasonable level of regulation.”James Roe, Head of Russia Capital Markets, Moscow

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The SIF was introduced to provide institutional, professional and experienced investors with an investment fund that is subject to less stringent regulations than investment funds sold to retail investors. The introduction of the SIF has proved to be a real success well in excess of 1,000 SIFs have been launched since the entry into force of the act of 13 February 2007 relating to SIFs (the SIF Act).

A SIF may invest in virtually any type of asset provided that it complies at all times with the principle of risk diversification.

SIFs may be set up either as a contractual co-ownership scheme (fonds commun de placement or FCP-FIS) having no legal personality or as an investment company with variable capital (sociétés d’investissement à capital variable or SICAV-FIS) having a legal personality. It is also possible to set up other forms of vehicles that are not expressly defined by the SIF Act.

The SIF may be constituted with multiple sub-funds, each sub-fund corresponding (in principle) to a distinct part of the assets and liabilities of the SIF.

The SIF benefits from a favourable tax regime: 0.01% annual subscription tax and, where incorporated as a SICAV/F, it may in principle benefit from a certain number of tax treaties concluded by Luxembourg, including the double tax treaty concluded between Luxembourg and Russia.

SIF – Specialised Investment Fund: the one size fits all vehicle?

SICAV-SIF

Real estate

Listed stock

Art …

Board of Directors

Sub-fund 1 …Sub-fund 2

Nominee (Private Bank)

Bearer shares booked on the nominee account

Profit shares (no voting right)

Shares with voting right

“The combination of a pragmatic and customised regulation with high level flexibility on legal structuring makes the SIF one of the preferred vehicles for hedge fund managers, real estate managers, private equity houses, private banks and family offices.”Jean-Christian Six, Investment Funds Partner, Luxembourg



The vast majority of Russian corporations use foreign companies (and, in particular, Luxembourg companies) to tap international markets.

In the traditional structure, the Luxembourg company issues notes and on-lends the proceeds thereof to the Russian operating company. The payments under the notes issued by the Luxembourg company are directly linked to the interest and principal payments received from the Russian company under the loan agreement. It is also market standard to have the Russian company issuing a guarantee for the benefit of the noteholders in relation to the payments under the loan agreement.

Traditionally, a regular Luxembourg financing company (SOPARFI) would be used. Investors have long been familiar with this type of company which has many advantages: flexibility, eligibility for double tax treaty benefits, reduced taxation of an arm’s length margin in Luxembourg, etc.

Nowadays, many arrangers tend to use securitisation companies which enable them to benefit from the very favourable legal and tax provisions of the Luxembourg securitisation regime. When using a securitisation undertaking, the issuer enjoys, inter alia, the possibility of creating compartments, protection of limited recourse and non-petition provisions and, when correctly structured, a nil or a very low taxation.

“Luxembourg, as the main financial place for the listing of eurobonds, has always been the natural jurisdiction for Russian corporations wishing to tap the international markets. The constant legislative innovations and reactivity of the authorities there ensure that Luxembourg remains the preferred jurisdiction for many of our clients.”James Roe, Head of Russia Capital Markets, Moscow

Eurobonds

Luxembourg Soparfi or

Securitisation Company

Guarantee for repayment of the loan

Bonds

MarketSecurity trustee

Russian operating company

US$

Security trustee holds guarantee for the benefit

of the noteholder

Repayment of principal + interest

Grants loan

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“The Luxembourg IP regime is highly competitive and it demonstrates not only Luxembourg’s commitment to innovation and research, but also its ability to offer one of the most competitive tax environments within the European Union.”Patrick Mischo, Tax Partner, Luxembourg

The Luxembourg government has identified research and development activities as one of its priorities. As a consequence, in 2007, it introduced one of Europe’s most favourable tax regimes of intellectual property (IP) rights.

80% of the revenues generated by certain IP rights, such as patents, trademarks, software copyrights, designs, models and domain names are exempted from income taxation in Luxembourg. In addition, qualifying IP rights benefit from a wealth tax exemption. As of today, this entails an effective tax rate for a Luxembourg company set up for the purpose of holding or managing IP rights of less than 6%. In addition, a Luxembourg IP holding company may benefit from the EU Council directive 2003/49/CE of 3 June 2003, as amended, on interest and royalty payments, which allows, under certain conditions, withholding tax-free payments of the royalties to the Luxembourg IP holding company.

Accordingly, this structure is of particular advantage for Russian companies to manage their patents and other IP rights revenues as the tax leakage at the Luxembourg level will be minimal and all benefits may be distributed from the Luxembourg company to the Russian mother company in the form of dividends free of withholding tax under the Luxembourg participation exemption.

Managing IP rights

Russian company

Luxembourg IP holding company

Licencee

shares

Licencee

dividends

licence royalties licence royalties



“For our Russian clients, Luxembourg is one of the most important natural gateways to the world and so we decided to establish the Luxembourg-Russia Desk to bring to their doorstep and in the meeting rooms in Moscow the expertise which they need. So far, they have felt this to be tremendously helpful.”Edwin Tham, Managing Partner, Global Head of Russia/CIS Practice Group, Moscow

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Robust Russian office

For over 40 years, we have been supporting our clients advising on transactions in the Russian Federation and the CIS, showing high performance in the region since 1991.

Allen & Overy Legal Services opened its Moscow office in 1993 and has eight partners and 50 lawyers on board who give exceptional advice on multi-jurisdictional transactions and daily compliance on all aspects of English, Russian and U.S. law, focusing, in particular, on corporate and mergers and acquisitions, banking and finance, capital markets and real estate.

Global Russia-CIS Practice Group

Being the chosen legal partner of leading corporates and financial institutions, we have developed a multi-location team of 150 Russian proactive lawyers working in areas from major bank financings (including acquisition, structured, trade, real estate and project finance), securitisation, bond issues and IPOs to cross-border M&A, derivatives and international arbitration. Our people deliver rich advice in all important industry sectors including energy, oil, natural resources, infrastructure, real estate, communications, media and technology (CMT), life sciences and leisure.

We have the knowledge and capabilities to work on matters whether they originate in Russia or elsewhere in the world. Our offices in Moscow, London, New York, Frankfurt, Milan, Brussels, Amsterdam, Luxembourg, Tokyo and Central and Eastern Europe all have collaborative individuals who deliver commercial advice that enables our clients to drive their business forward.

Deal of the Year 2011 AwardTrade Finance Magazine

EKF and SACE backed facilities to Taneco and guaranteed by Tatneft

Deal of the Year 2011 AwardTrade Finance Magazine

VSMPO-Avisma, the world’s largest vertically integrated manufacturer of titanium products, on a USD120 million financing arranged by Credit Agricole CIB, BNP Paribas, Société Générale CIB, WestLB

Allen & Overy is in Top Ten Law firms in RussiaThe Lawyer and Legal Insight

Pro Bono National Award 2010

“Allen & Overy Legal Services represents most of the main players in the Russian banking and finance sector.”

Legal 500 2012

A long-standing presence in Russia and the CIS States

“Clients appreciate that they are in safe and experienced hands with deals that have an international aspects.”

Chambers Global 2012, CEE

Our key strengths on both sides

Leading Banking & Finance Practice in Russia for nine consecutive years Legal 500, Chambers Global and IFLR1000

“A top-notch global finance name with a strong reputation in Russia”

Chambers Europe 2011



Luxembourg Law Firm of the Year IFLR Awards 2007, 2009 and 2010, International Financial Law Review

Luxembourg Tax Firm of the Year European Tax Awards 2010 & 2011 International Tax Review

“Steadily developing its funds practice in Luxembourg, A&O benefits from its international offices in attracting high-profile clientele. In Luxembourg, the team’s core expertise lies in the setting up of new and innovative structures; the practice also advises on all corporate, banking and regulatory aspects of transactions related to the structuring, setting up and registration of SICAVs, SICAFs, FCPs, SICARs and SIFs. According to market sources, the firm is ‘technically well prepared and always responsive to client needs.’”

Chambers Global 2010

Corporate

The knowledgeable Luxembourg team has an independently-recognised standing among clients and peers. Our main areas of expertise are joint ventures, M&A, private equity and venture capital. But we are also trusted for acquisition finance, corporate restructurings, corporate set-ups, equity listings and stock exchange-related work, public and private corporate compliance issues, redomiciliations and expatriations. In addition, we regularly advise our clients on all other aspects of corporate law including corporate pre-litigation, contracts and regulatory matters.

Funds

Our investment funds practice in Luxembourg is well known for advising on all aspects of structuring, managing, servicing and distributing regulated funds. We have a particularly strong track record in alternative investment strategies funds including hedge funds, private equity funds, real estate funds, infrastructure funds and funds of funds. Known for handling complex and innovative structures, we have advised on several breakthrough transactions – including the first note issuance programme by a Luxembourg investment fund and the first SICAR listed on the Luxembourg stock exchange.

Tax

Luxembourg is a major centre for international tax planning, serving various industries including commercial and investment banks, corporate groups, private equity and real estate funds and hedge funds, as well as mutual and pension funds. Our enterprising and knowledgeable tax team advises clients on tax aspects for Luxembourg investments and the structuring of international acquisitions via Luxembourg regulated and non-regulated vehicles. We are also experts in cross-border investments for institutional investors, private equity and real estate funds, acting for clients throughout Europe, the United States, the Middle East and Asia.

Debt Capital Markets

Our market-leading Luxembourg ICM team of lawyers is experienced in all traditional ICM products including debt capital markets, securitisation, derivatives and structured finance. Outward-looking clients rely on us for a range of issues, such as listings of debt and equity securities on the Luxembourg Stock Exchange. Our lawyers deal with all aspects of ambitious securitisation and repackaging programmes launched via Luxembourg special purpose vehicles. We also offer high-performance advice on fiduciary bond issues to arrangers and fiduciaries.

“Allen & Overy Luxembourg is commended for its market-leading expertise in cross-border transactions, investment funds and structured finance products. The firm recently advised on the first Sharia-compliant Luxembourg securitisation platform.”

Legal 500 EMEA 2010

An outward looking office in Luxembourg

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The Luxembourg-Russia Desk contacts


Marc FeiderSenior & Corporate Partner, Luxembourg

Tel +352 44 44 55 [email protected]

Patrick MischoTax Partner, Luxembourg

Tel +352 44 44 55 429 [email protected]

Jean-Christian SixInvestment Funds Partner, Luxembourg


Jacques WantzTax Associate, in charge of the Luxembourg-Russia Desk



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Elena Tchoubykina Banking Partner, Moscow


Edwin Tham Managing Partner, Global Head of Russia/CIS Practice Group Moscow


James Roe Head of Russia Capital Markets, London



Luxembourg

Allen & Overy33 avenue J.F. KennedyPO Box 5017L-1050 Luxembourg

Tel +352 44 44 55 1 Fax +352 44 44 55 222

Moscow

Allen & Overy Legal Services Dmitrovsky pereulok 9 107031 Moscow Russian Federation

Tel +7 495 725 7900Fax +7 495 725 7949

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FoR MoRE InFoRMATIon, PLEASE ConTACT:

Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee

or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP’s affiliated undertakings.

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Luxembourg and Russia: a close and collaborative · Luxembourg and Russia: a close and collaborative relationship “The Allen & Overy network is offering advanced solutions responding