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- Russian tax legislation and regulations are complex, uncertain and often enforced in a manner that does not
- Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information may impact the Subsidiaries’ business, ﬁnancial condition and results of operations
- INDICATIVE TIMETABLE
- THE SPIN-OFFS Background to and the Reasons for the Spin-Offs
- Goals and Objectives of the Reform
- History and Development of the Restructuring
- Reorganization of RAO UES; Spin-Offs
Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and
inconsistent and selective enforcement
The Russian government has initiated reforms of the tax system that have resulted in some improvement
in the tax climate. The cornerstone of such reforms was a complete redrafting of the tax law into a new
Russian Tax Code. As well as providing greater clarity, this has included the reduction of the corporate
proﬁts tax rate from 35% for most companies (43% for ﬁnancial institutions, insurance and intermediary
companies) to 24% for all companies from January 1, 2002 and also allowed for a broader range of
expenses which are deductible from the tax base. Personal income tax has been reduced substantially for
individuals who are tax resident in Russia; the current tax rate for such individuals is generally 13%. The
standard rate of value added tax (‘‘VAT’’) has been reduced to 18%, and certain minor taxes have been
abolished, such as the road users’ tax (abolished from January 1, 2003) and sales tax (abolished from
January 1, 2004).
Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations
and inconsistent and selective enforcement. For example, under certain circumstances, the three-year
statute of limitations for the assessment of taxes pursuant to a tax audit can be signiﬁcantly extended.
According to the Constitution of the Russian Federation, laws which introduce new taxes or worsen a
taxpayer’s position cannot be applied retroactively. However, there were several instances when such laws
were introduced and applied retroactively.
Despite the Russian government taking steps to reduce the overall tax burden on taxpayers in recent
years in line with its objectives, Russia’s largely ineffective tax collection system and continuing budgetary
funding requirements increase the likelihood that the Russian Federation will impose arbitrary or onerous
taxes and penalties in the future, which could have a material adverse effect on the Subsidiaries’ business,
ﬁnancial condition, results of operations or prospects. Additionally, tax has been utilized as a tool for
signiﬁcant state intervention in certain key industries.
In addition to the usual tax burden imposed on Russian taxpayers, the conditions referred to above
complicate tax planning and related business decisions. The uncertainties caused by such conditions could
possibly expose the Subsidiaries to signiﬁcant ﬁnes and penalties and to potentially severe enforcement
measures despite its best efforts at compliance, could result in a greater than expected tax burden and
could have a material adverse effect on the Subsidiaries’ business, ﬁnancial condition, results of
operations and prospects.
It is expected that Russian tax legislation will become more sophisticated, which may result in the
introduction of additional revenue raising measures. Although it is unclear how these measures would
operate, the introduction of such measures may affect the Subsidiaries’ overall tax efﬁciency and may
result in signiﬁcant additional taxes becoming payable, which could result in an increase of the
Subsidiaries’ tax burden. Such additional tax burden could have a material adverse effect on the
Subsidiaries’ results of operations and ﬁnancial condition.
Russian tax legislation and regulations are complex, uncertain and often enforced in a manner that does not
favor taxpayers. The Subsidiaries therefore may be subject to greater than expected tax burdens that could
materially adversely affect the Subsidiaries’ business and results of operations
Russian tax law and practice is not as clearly established as that of more developed market economies and
the practice of the Russian tax authorities may not always be in accordance with the law. The Russian tax
authorities do not always apply the law evenly to all taxpayers, in certain instances due to political
motivations. It is possible that the current interpretation of the law or understanding of practice may
change or, indeed, that the law may be changed with retroactive effect, even though legislation with
retroactive effect that cause a deterioration in taxpayers’ positions is generally prohibited.
Generally, taxes payable by Russian companies are substantial and numerous. Such taxes include, among
• income tax;
• value-added tax (‘‘VAT’’);
• transportation tax;
• excise taxes;
• land tax;
• uniﬁed social tax;
• water tax; and
• property tax.
Historically, the tax environment in the Russian Federation has been complicated by the fact that various
authorities have often issued contradictory or retroactive pieces of tax legislation. For example, tax laws
are unclear with respect to the deductibility of certain expenses. As a result, the Subsidiaries may have
taken positions in the past which management considered at the time to be in compliance with
then-current tax law, but such positions could be subject to challenge by tax authorities in the future.
Despite efforts at compliance, such uncertainty potentially exposes the Subsidiaries to the risk of
signiﬁcant ﬁnes, penalties and enforcement measures, and could result in a greater than expected tax
In practice, the Russian tax authorities often interpret the tax laws in a way that does not favor taxpayers,
who often have to resort to court proceedings to defend their positions against the tax authorities.
Differing interpretations of tax regulations exist both among and within government ministries and
organizations at the federal, regional and local levels, creating uncertainties and inconsistent enforcement.
Tax declarations, together with related documentation, such as customs declarations, are subject to review
and investigation by a number of authorities, each of which may impose individual ﬁnes, penalties and
interest charges. Generally, taxpayers are subject to inspection for a period of three calendar years
preceding the year in which an audit is carried out. Previous audits do not exclude subsequent claims
relating to the audited period and the statute of limitations is not entirely effective. In addition, in some
instances, new tax regulations have been given retroactive effect.
On July 14, 2005, the Constitutional Court of the Russian Federation issued a decision that allows the
statute of limitations for tax liabilities to be extended beyond the three-year period if a court determines
that a taxpayer has obstructed or hindered a tax inspection. Moreover, recent amendments to the ﬁrst part
of the Tax Code, effective January 1, 2007, provide for the extension of the three-year statute of
limitations if the actions of the taxpayer created insurmountable obstacles for the tax audit. Because these
terms are not deﬁned, tax authorities may have broad discretion to argue that a taxpayer has
‘‘obstructed’’, ‘‘hindered’’ or ‘‘created insurmountable obstacles’’ in respect of an inspection and
ultimately to seek penalties beyond the three-year term.
In addition, on October 12, 2006, the Plenum of the Supreme Arbitration Court of the Russian Federation
issued Ruling No. 53, which introduced a new concept of ‘‘unjustiﬁed tax beneﬁt’’, which is deﬁned mainly
by reference to speciﬁc examples of such tax beneﬁts (e.g. absence of business purpose), which may lead
to disallowance thereof for tax purposes. There is no guidance on how the tax authorities or courts should
interpret this new concept, but it is likely that the tax authorities will actively seek to apply this concept
when challenging in courts tax positions taken by taxpayers. Although the intention of Ruling No. 53 was
to combat abuse of tax law, in practice there is no assurance that the tax authorities will not seek to apply
this concept in a broader sense than may have been intended by the Supreme Arbitration Court.
Furthermore, the Resolution of Plenum of Supreme Court No 64 of December 28, 2006 ‘‘About practice
of the application of the responsibility for the tax crimes’’ is indicative of the trend to broaden the
application of the criminal responsibility for tax violations.
The foregoing conditions create tax risks in the Russian Federation that are more signiﬁcant than the tax
risks typically found in countries with more developed taxation, legislative and judicial systems. These tax
risks impose additional burdens and costs on the Subsidiaries’ operations, including management
resources. Further, these risks and uncertainties complicate the Subsidiaries’ tax planning and related
business decisions, potentially exposing the Subsidiaries to signiﬁcant ﬁnes, penalties and enforcement
measures, despite their best efforts at compliance, and could materially adversely affect the Subsidiaries’
businesses, ﬁnancial condition and results of operations and the value of the Subsidiary Shares.
The ﬁnancial results of Russian companies cannot be consolidated for tax purposes. Therefore, each of
the Subsidiaries’ Russian subsidiaries pays its own Russian taxes and may not offset its proﬁt or loss
against the proﬁt or loss of any of that Subsidiary’s other subsidiaries. In addition, intercompany dividends
are subject to a withholding tax of 9% if distributed to Russian corporate residents, and 15% if distributed
to foreign residents. If the company that receives the intercompany dividend is Russian and itself pays a
dividend to a Russian resident, the receiving company may offset the amount of withholding tax on the
dividend it receives against the tax the receiving company is required to withhold on the dividend it pays
to the Russian resident. However, these rules relating to intercompany dividends are expected to be
changed by new legislation, with effect from of January 1, 2008, whereby dividends received by a Russian
company from its Russian subsidiary will not be subject to withholding tax, provided that certain
conditions (such as holding period, share of participation, amount of investment and others) described in
the applicable legislation are met.
Vaguely drafted Russian transfer pricing rules and lack of reliable pricing information may impact the
Subsidiaries’ business, ﬁnancial condition and results of operations
Transfer pricing legislation became effective in the Russian Federation on January 1, 1999. Such
legislation allows the tax authorities to make transfer pricing adjustments and impose additional tax
liabilities in respect of all ‘‘controlled’’ transactions, provided that the transaction price differs from the
market price by more than 20%. ‘‘Controlled’’ transactions include transactions with related parties,
barter transactions, foreign trade transactions and transactions with unrelated parties with signiﬁcant
price ﬂuctuations (i.e., if the price of such transactions differs from the prices on similar transactions by
more than 20% within a short period of time). Transfer pricing adjustments are also applicable to the
trading of securities and derivatives. There has been no formal guidance (although some court practice is
available) as to how these rules will be applied, and moreover, Russian transfer pricing rules are vaguely
drafted, leaving wide scope for their interpretation to the discretion of the Russian tax authorities and
arbitration courts, and their use in politically motivated investigations and prosecutions. In addition, in the
event that a transfer pricing adjustment is assessed by Russian tax authorities, the Russian transfer pricing
rules do not provide for an offsetting adjustment to the related counterparty in the transaction that is
subject to adjustment. Due to the uncertainties in the interpretation of transfer pricing legislation, the tax
authorities may challenge the prices of certain Subsidiaries’ transactions and propose adjustments. If such
price adjustments relate to any Subsidiary or its subsidiaries and are upheld by the Russian arbitration
courts and implemented, the relevant Subsidiary’s results of operations could be materially adversely
affected. In addition, the Subsidiaries could face signiﬁcant losses associated with the assessed amount of
prior underpaid taxes and related interest and penalties, which could have a material adverse effect on the
Subsidiaries’ ﬁnancial condition and results of operations.
Moreover, the Ministry of Finance of the Russian Federation is in the process of drafting proposed
amendments to the transfer pricing legislation. Currently, a draft law is under discussion that will
potentially tighten transfer pricing rules further. At this time, it cannot be predicted what the effect on
taxpayers of the law, if enacted, may be.
The following timetable identiﬁes the key dates and time periods for the implementation of the Spin-Offs,
assuming that the Spin-Offs are approved. This timetable has been prepared based on the best estimates
of RAO UES’ management of when the following events will occur. The dates in the timetable are
indicative only. There can be no assurance that these events will occur or that the timing of these events
will be as described below. Signiﬁcant delays may be caused by the granting of regulatory consents, actions
by third persons, changes to Russian law or due to other circumstances.
July 27, 2007
Meeting of the Board of Directors of RAO UES at which it was resolved to call
the EGM for shareholder approval of the Spin-Offs and the RAO UES Merger.
At the meeting, the Board of Directors also set the price at which the RAO
UES Shares may be redeemed by dissenting and non-voting shareholders if the
Spin-Offs are approved.
August 31, 2007
Meeting of the Board of Directors of RAO UES at which it was resolved to
recommend to the shareholders to vote in favor of the Spin-Offs and the RAO
August 23, 2007
EGM Record Date.
September 26, 2007
EGM materials to be made available to RAO UES shareholders of record for
inspection in the ofﬁces of RAO UES and the RAO UES registrar.
October 6, 2007
EGM materials to be sent to holders of record of RAO UES ADRs and made
available to holders of record of RAO UES GDRs.
October 22, 2007
Deadline for holders of record of RAO UES GDRs to deliver EGM voting
instructions to the RAO UES GDR Depositary (by 12:00 pm New York time).
October 22, 2007
Deadline for holders of record of RAO UES ADRs to deliver EGM voting
instructions to the RAO UES ADR Depositary.
October 26, 2007
EGM is held by absentee ballot voting.
Distribution by the Redemption Agents of redemption materials to holders of
record of RAO UES DRs who voted against or did not vote on the Spin-Offs
November 30, 2007
Last day for holders of record of RAO UES DRs to deliver redemption
requests and to surrender their RAO UES DRs to the relevant
December 10, 2007
End of Redemption Election Period.
December 15, 2007
Meeting of Board of Directors of RAO UES to approve the results of the
surrender by RAO UES shareholders (including the Depositaries) of their
RAO UES Shares for redemption.
Gencos establish Regulation S GDR Facilities.
January 9, 2008
Last day for RAO UES to redeem shares surrendered by dissenting and
non-voting shareholders and holders of RAO UES DRs.
Certain of the Subsidiaries obtain, as applicable, anti-monopoly approval of the
FAS for the merger with relevant Holdcos.
Sochinskaya TES and HydroOGK establish Regulation S GDR Facilities.
Spin-Offs Record Date.
The FSK establishes a Regulation S GDR Facility.
State registration in the USRLE of creation of the Holdcos, followed in the
case of State Holdcos, Minority Holdcos and InterRAO Holding by the
immediate state registration of their termination in connection with their
merger into the relevant Subsidiaries (this is also referred to in this Information
Statement as a Reorganization Date). The Subsidiary Shares are distributed to
the RAO UES shareholders, including the Depositaries, in the manner and on
the terms set forth herein. See ‘‘The Spin-Offs — Description of the Spin-Offs’’.
RAO UES Merger into the FSK and conversion of RAO UES Shares into
ordinary shares of the FSK. RAO UES ceases to exist.
Background to and the Reasons for the Spin-Offs
The Spin-Offs are part of the overall restructuring of the Russian power industry as mandated by the
Electric Power Industry Law and the Federal law ‘‘On peculiarities of functioning of the electric power
industry during the transitional period and on amending certain legislative acts of the Russian Federation
and abolishing certain legislative acts of the Russian Federation in connection with the adoption of the
Electric Power Industry Law’’ No. 36-FZ of March 26, 2003. These laws, together with other related
legislative acts, set forth a legal framework for the restructuring, outline the new roles of regulatory
agencies and other participants after the restructuring, and provide guidelines for the trading of power
and energy in the wholesale and retail markets.
Goals and Objectives of the Reform
The aim of the electricity sector reform is to create a uniﬁed wholesale electricity (capacity) market in the
European part of Russia, Ural and Siberia, excluding some isolated energy systems and energy systems
not included in the pricing zones of the Russian Federation. The reforms are intended to result in
competitive wholesale electricity trading through long and mid-term bilateral contracts, one-day-ahead
bidding for electricity supply on an hour-by-hour basis, and a balancing system, which functions in real
time to manage deviations between the planned and actual volumes generated and consumed, as well as
permitting the purchase and sale of capacity in auctions for annual and long-term supply up to several
years ahead. The reforms are also aimed at the creation of competitive ancillary services, including the
competitive selection of service providers.
As a result of these reforms, the overall structure of the Russian electricity industry is expected to be
completely transformed. The reform plans also contemplate that the competitive segment of the
wholesale electricity market will be gradually expanded, and consequently there will be a reduction in the
percentage of output subject to regulated tariffs. It is envisaged that the sector reform will result in the
development of a fully liberalized wholesale market for electricity generation, supply and related services
by 2011, in which all prices will be established on the basis of supply and demand. The reforms do not
currently contemplate the creation of a free market for electricity transmission, distribution or dispatch
activities and for certain electricity (for example, electricity supplied to households), nor do they
contemplate the liberalization of the heat sector.
The restructuring of RAO UES Group has led to the creation of separate companies carrying out speciﬁc
lines of businesses: generation, transmission, distribution and supply of electricity to customers, and repair
and servicing. These separate companies have been or will be merged with other companies with the same
business proﬁle, with the resulting merged companies providing the relevant speciﬁc services for a number
of regions of the Russian Federation. Generation, supply and repair companies are expected to engage
in competition with each other. At the same time, the reforms envision retention of state control over the
electricity transmission and distribution networks and dispatch activities. See ‘‘Industry Overview —
Current Market Structure.’’
History and Development of the Restructuring
The reform process began in 2001, when the Russian government determined, pursuant to Resolution No.
526, that reform of the electricity industry in Russia was necessary, and decided to reorganize the existing
Energos based on the principle of separation of core activities into different companies. Pursuant to this
resolution and on the basis of the model approved by the Board of Directors of RAO UES, each of the
Energos have been or are in the process of being reorganized into new companies that carry out one of
the following speciﬁc activities: electricity generation, transmission, distribution, and supply. In the
reorganization, the shareholders of the Energos have received, or are expected to receive, a pro rata
distribution of the shares of the newly-established companies. The reorganization of the Energos by type
of activity is now nearly complete. Currently, the reorganization focuses on the inter-regional consolidation
of the new companies.
The reorganization process was launched in 2003, when the ﬁrst ‘‘pilot’’ projects, in which Kalugaenergo,
Orelenergo, Bryanskenergo, and Tulenergo were reorganized, were implemented. By the beginning of
2004, the reorganization process involved more than 30 Energos. By April 2004, the reorganization of the
ﬁrst Energo (Kalugaenergo) was completed, and by the end of 2004, ﬁve Energos had been broken up into
new entities. By 2005, the restructuring process involved most of the Energos, and a signiﬁcant number
of them had been reorganized by the end of that year. By June 30, 2007, the RAO UES Board of Directors
had approved restructuring projects for 71 out of the 72 Energos and the restructuring of the one
remaining Energo, Yantarenergo, is expected to take place in the near future. Of the 72 Energos, 65 have
been fully separated into 263 newly-established companies by June 30, 2007.
The second stage of the reorganization involved the inter-regional consolidation of newly-created
companies. By June 30, 2007, all seven OGKs and all fourteen TGKs had been established and the ﬁnal
corporate structure of all the OGKs, except HydroOGK, and eleven of the fourteen TGKs, has been
completed. The three remaining TGKs whose formation had not been completed by June 30, 2007 are:
TGK-10, TGK-11 and Eniseyskaya TGK. It is intended that by the end of 2007, the ﬁnal corporate
structure of these TGKs will have been completed.
The spin-off of the facilities relating to the Uniﬁed National Energy Grid, which is operated by the FSK,
has been essentially completed. By March 31, 2007, all of the 56 high-voltage trunk grid companies
(MSKs) and all of the seven inter-regional transmission (trunk grid) companies had been established, and
they are expected to be merged into the FSK.
Pursuant to the current plan of reform, the consolidation of distibution companies will take place on the
basis of 11 MRSKs, 10 of which have already been established, and the Board of Directors of RAO UES
are expected to decide on the structure of the ﬁnal MRSK by the end of 2007. Currently, the primary
activity of these companies is managing the distribution grid companies (RSKs), which will be merged into
the MRSKs in 2008. RSKs carry out distribution of electricity through electricity grids other than the
trunk electricity grids. As at June 30, 2007, 58 distribution grid companies (RSKs) had been established
as a result of Energos in speciﬁc sectors.
It is expected that the Reorganization of RAO UES will be the ﬁnal step in Russia’s power sector
Reorganization of RAO UES; Spin-Offs
The reorganization of RAO UES is a two-stage process. The ﬁrst stage involved the spin-off of
RAO UES’ equity interests in OGK-5 and TGK-5 and the second stage involves the Spin-Offs described
in this Information Statement. The RAO UES shareholders approved the ﬁrst stage, the spin-offs of
OGK-5 and TGK-5, at an extraordinary general shareholders meeting held by absentee ballot voting on
December 6, 2006, and the state registration of these spin-offs was completed on September 3, 2007. As
a result, OGK-5 and TGK-5 are no longer controlled by RAO UES. The Spin-Offs will represent the
second and ﬁnal stage of the RAO UES reorganization.
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