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Hedge Fund Manager Denies Russian Tax Charges

by Tatiana Smolenskaya,, Moscow

26 June 2007

British investment fund manager William Browder has issued a public denial of tax evasion charges levelled against his hedge fund by the Russian authorities, dismissing them as a political act aimed at "discrediting" his company.

In an interview with the Financial Times published on Monday, Browder, who runs Hermitage Capital, Russia's largest foreign portfolio investment fund, commented: "This so-called tax allegation is completely fabricated and has nothing to do with any real taxes or violations."

Browder is currently excluded from Russia for reasons of "national security", but many observers believe that his fervent support of shareholder rights and exposure of corruption in some of Russia's largest companies led to his expulsion from the country in November 2005. Browder's attempts to re-enter Russia have so far failed, and he believes that the tax charges are an attempt by the Russian authorities to discredit both himself and Hermitage, to ensure that his visa application is refused.

The charges against Browder and Hermitage centre on a dividend payment to a Cypriot-registered firm by Kameya, a Russian company advised by Hermitage Capital. According to the Russian Interior Ministry, Kameya failed to pay the correct amount of tax on the dividend, paid to the controlling shareholder of the Cypriot firm in May 2006. Under the Russia/Cyprus tax treaty, companies in Cyprus with investments in Russia that exceed $100,000 can withhold 5% of taxes on dividends, as opposed to the normal 15% for other foreign investors. The company has said that the correct amount of tax was paid on the dividend, but the Russian authorities are insisting that Kameya should have withheld 15% rather than 5%, and that therefore it owes the government some US$22 million in back taxes.

The Russian authorities are of the view that there are stronger links between Hermitage and Kameya than that of a client relationship, but Hermitage has insisted that it is "completely independent" from Kameya and that it has no case to answer. "It's a nonsense case," a Hermitage spokesman was quoted as stating in an online report by Forbes, when news of the charges broke earlier in the month.

Browder told the FT that Kameya was 100%-owned by a Cyprus company, which itself was fully owned by an un-named international institutional investor, and that Hermitage had "no beneficial or ownership interests whatsoever in Kameya, the Cyprus company or the international institutional investor".

Hermitage has pointed out that the charges have, unusually, come from the Interior Ministry rather than the tax service which, according to a company spokesman quoted by Forbes, "never had an issue" with the transaction in question.

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