Legal risks

Since the Company operates in Russia and does not export goods and services abroad, there are legal risks occurring during domestic operations typical for the majority of companies operating in Russia. Legal risks, particularly, are related to ambiguous interpretation of legislation that may lead to wrong tax calculation and payment. To decrease the risks our accounting department cooperates with legal department to improve the methodology for tax payables calculation and to control its compliance with the existing legislation. Besides, there are risks related to changes in legislation, wrong legalities and legal advices. To minimize the risks almost all operations undergo an obligatory preliminary legal expertise. The Company has risks related to changes in legislation regulating shareholder and corporate relations. As an issuer, the Company is vulnerable to risks related to the appeal of major and interested-party transactions of the Company by shareholders (if such transactions are made without a proper preliminary approval by the Board of Directors or General Shareholder Meeting as well as if they are approved with violations of procedures). To minimize the risks there is an obligatory preliminary legal analysis of transactions to check whether reasons for preliminary corporate procedures stipulated by the legislation or charter exist. If required, such transactions are submitted for the review by competent management bodies of the Company. Risks regarding shareholder relations include, particularly, risks related to the registration of rights for shares, risks of corporate greenmail, risks of actions taken by unfriendly shareholders to put General Shareholder Meetings under jeopardy. To minimize the risks our register is administered by a professional registrar with a good background. We also work in close cooperation with shareholders.

Risks, related to changes in legislation on currency regulation and control, have almost no impact on our operations since we have no plans for outside operations. Our prices are in RUR and our settlements cannot be acknowledged as settlements with foreign suppliers. Like any other company we are taxpayers. Taxes in Russia are regulated by the Tax Code, several federal laws approved in accordance with the Russian Tax Code, regional and municipal laws. These laws always have unclear wording or use terms and notions with no accurate definition. Besides, the Russian Ministry of Finance and Federal Tax Service, authorized for official interpretation of the legislation, often provide explanations or comments contradicting tax legislation and existing legal practice. Tax authorities are at the same time guided by such regulations and explanations focused on the replenishment of the budgets and often violate rights and interests of a taxpayer. Preparation and submission of tax books alongside with other elements of tax regulation system is primarily the competence of tax authorities entitled to charge additional taxes and levies, penalties and fines. As a result, the tax risks in Russia are higher than the similar risks typical for countries with developed economy and tax legislation. Tax risks may have several symptoms: a possibility of new taxes and levies, of increased existing taxes, expansion of tax base, changes in terms and procedures for tax payments, submission of tax books. The risk of increased taxes is the most important risk for the Company. The senior management reckons that the Company complies with the legislation in full, but still this does not eliminate potential risks of tax prosecution in case of changes in fiscal policy on taxes and levies and changes in court practices negative for taxpayers. Tax legislation changes in 2013 had no significant changes on financial interests of the Company. These changes include modification of appeal procedures, inspection procedures, legislation on related-party transactions and on invoicing procedures, changes in the determination of depreciation value of fixed assets (calculation of income tax), depreciation charges, mobilization cost record and other changes related to the Russian Tax Code. The Company plans its operations with regard to the above-mentioned changes.

At present and as of the reported period the Company’s operations do not include operations regulated by the legislation on custom and currency checks. Therefore, changed rules of custom and currency checks are not significant legal risks for the Company. Our key operations - energy transmission and connection – are not subject to licensing. Changes in the legislation in this respect did not impact our operations. In case there is a requirement to have a license, the Company shall take all possible measures to obtain it.

Decree of the Federal Tariff Service #209-e/1 dd. 11.09.2012 approved new methodic recommendations on the determination of connection fees effective since 11.12.2012. There were significant changes in principles and approaches to the calculation of connection fees. During the calculation of a fee, existing connection tariff rates were lower than previous ones since new methodology does not include the following:

  1. Accounting of the following costs as a part of a connection fee:
    • installation of automatic metering;
    • installation of telemetric systems;
    • installation of relay protection and emergency automation systems, communication channels and compensation of capacity current.
  2. Accounting of income tax.

Besides, Federal Tariff Service and regional regulators declare a right of applicants to independently select a connection fee – fees calculated under payment formula based on standard rates or under maximum capacity rate. At present it creates considerable risks for the Company, since an applicant shall always select the cheapest fee calculation and rate. Applicant’s fee shall not compensate connection expenses incurred by the grid company in full resulting in negative financial figures on connection. In 2012 the Government approved Decree #442 dd. 04.05.2012 stipulating key statements for operations of retail energy markets; rules of full and/(or) partial consumption limitations and changes introduced into Government documents on retail market operations.