ANNUAL REPORT 2005 - Lukoil

TAXATION OF DIVIDENDS AND CAPITAL GAINS
The following discussion is a summary of certain tax consequences under the laws of the Russian Federation and the
United Kingdom for holders of our ordinary shares, including those ordinary shares that trade in the form of depositary
shares, or DSs, whether in the form of American DSs or global DSs. The summary is general in nature and is based on
the laws of the Russian Federation and the United Kingdom in effect as of the date of this annual report and is subject
to any change in law that may take effect after such date. It does not purport to be a complete analysis of all tax considerations
relating to DSs or ordinary shares, whether in those countries or elsewhere. You should consult with your tax
advisors with respect to the precise Russian and UK tax consequences of acquiring, owning and disposing of our
ordinary shares or DSs. The applicability of any double tax treaty relief will depend on the particular circumstances and
facts relating to each relevant holder. In this regard, however, it is noted that there may be practical difficulties involved
in claiming double tax treaty relief.
Under no circumstances should you view this summary as tax advice.
CONSOLIDATED FINANCIAL STATEMENTS
RUSSIAN TAX CONSIDERATIONS
This summary does not seek to address the applicability of any double tax treaty relief. With the enactment of the Profits
Tax Chapter of the Russian Tax Code which became effective 1 January 2002 the advance treaty clearance procedure
has been eliminated. However, this does not eliminate a risk of the tax authorities disputing the relief from withholding
tax when they carry out a tax audit and requiring the tax agent to make payment of tax, penalties and interest.
Non-resident holder
For the purposes of this summary, a "non-resident holder" in relation to an individual means a physical person, physically
present in the Russian Federation for less than 183 days in a given calendar year that holds and disposes of DSs or
ordinary shares.
For the purposes of this summary, a "non-resident holder" in relation to a legal entity is a legal person or organisation, in
each case not organised under Russian law, that holds and disposes of DSs or ordinary shares otherwise than through a
permanent establishment in Russia. Current Russian tax legislation does not provide for definition of residency, applicable
to legal entities. In practice, it is possible to use the definition above as term, describing residency of legal entities in Russia.
The Russian tax rules applicable to securities, and in particular to those held by non-resident holders, are characterised
by significant uncertainties and by an absence of interpretative guidance. Russian tax law and procedures are not well
developed and rules are sometimes interpreted differently by different tax inspectorates and inspectors. In addition both
the substantive provisions of Russian tax law and the interpretation and application of those provisions by the Russian tax
authorities may be subject to more rapid and unpredictable change than in a jurisdiction with more developed capital markets.
The relevant chapters of Part Two of the Tax Code that set out the regulatory framework for the taxation of the
income of individuals and the profits of Russian and foreign legal entities do not regulate all the issues arising in connection
with the purchase, ownership and disposition of shares and DSs by non-resident holders. In particular, the Russian
tax authorities have not provided profound guidance regarding the treatment of the share deposit arrangements of the
type relating to DSs.
Taxation of Dividends
Dividends paid to a non-resident holder generally are subject to Russian withholding tax, which will be withheld by us
acting as a tax agent. The applicable tax rate on dividends will depend on whether the dividend recipient is a legal
entity or an individual. Dividends paid to a non-resident holder that is a legal entity generally will be subject to Russian
withholding tax at a rate of 15%. Dividends paid to non-resident individuals are subject to Russian withholding tax at a
rate of 30%, according to the Tax code of the RF. Russia has current double tax treaties (DTTs) with quite a wide range
of countries, where the respective rates for the taxation of dividends are lower. For instance, according to DTT between
Russia and the UK, the relief tax rate for non-resident individuals is 10%.
Russian tax reporting obligations of a non-resident individual
If income received by a non-resident-holder (who is an individual) is treated as taxable in Russia but has not been withheld
for any reason (e.g. paid by foreign company) such an individual is technically liable to declare his or her income to
the Russian tax authorities and pay the tax.
Withholding tax may be reduced under the terms of a double tax treaty between the Russian Federation and the country
of residence of the non-resident holder. For example, the Convention Between the Government of the Russian Federation
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