Russian Federation: Tax Alert - 11/97 - Deductibility Of Management & Consultancy Fees

Last Updated: 3 September 1997
The tax authorities have been taking an increasing interest in the arrangements into which companies have entered in respect of management and consultancy agreements.

Because of the tendency for companies to incur significant expenditure outside Russia, such as for example expatriates salaries and recharge these as a management fee the amounts can be substantial.

Deductibility of management / consultancy fees

Following a number of cases where the deduction of management/consultancy fees for profits tax purposes has been challenged by the tax authorities we believe that it is important that companies review the documentation that they have in place to support the payment of management or consultancy fees. Because of the rigid approach adopted by the tax authorities, the cases of which we are aware in which the deductibility of such fees was disallowed have generally involved deficiencies in the documentation. It is therefore important that the documentation is watertight. In particular:

it is necessary to ensure that the service as described in the agreement is in accordance with the actual service provided;

the services should be deductible in accordance with specific and general requirements of Regulation 552, e.g.:

General requirements

The services must fall within the general items provided on regulation 552 ( i.e. management, consultancy, information services etc)

Specific requirements

  • the company's internal documents and operation should support the claim that the management function performed by the supplier cannot be performed internally. This is a requirement under regulation 552;
  • consultation received relates to deductible revenue expenditure and not capital or non-deductible expenditure, etc.;

appropriate, reasonably detailed and preferably Russian language documentation is in place, including:

  • an agreement (determining among other terms, the price or the way in which it is calculated);
  • giving-receiving acts confirming that a specific service was provided and accepted;
  • since the invoice is issued by a foreign company, it does not have to confirm the requirements of a schet factura (see Tax Alert 1/97 - 21 January 1997). However, in practice the authorities are more likely to accept it, the closer it is to a Russian invoice.

Apart from keeping the above documentation it is necessary to be able to provide documentary support concerning the character and the volume of the service received with an adequate description of the specific work performed sufficient to justify the amount on the invoice. Documentation should stress the service received rather than provide an analysis of the underlying component costs.

Management and secondment agreements

The Russian tax authorities are paying increasing attention to management and personnel secondment arrangements of foreign investors in Russia.

Usually multinational holding companies provide management assistance to their Russian subsidiary companies, including the provision of management personnel and other related services performed in the Russian territory. To reduce the risk of constituting a permanent establishment (taxable presence) in Russia it is advisable that a foreign management service company should have no presence and, in particular, no tax registration in Russia.

There is currently debate as to whether being a shareholder in the Russian company reduces the risk of the foreign company being regarded as constituting a permanent establishment in Russia. According to Instruction 34, a foreign company will not constitute a permanent establishment if it is a shareholder in a Russian company and is carrying out activities specified in the charter of the Russian company. There is some debate as to whether this means.

a) a company can avoid an activity which would normally be regarded as creating a permanent establishment if it becomes a shareholder and the activity is specified in the charter; or

b) a company which is carrying out an activity which would not normally be regarded as giving rise to a permanent establishment would not be deemed to give rise to a permanent establishment just because it is a shareholder in a Russian company.

While the wording of the legislation suggests the former, the latter is more logical. The tax authorities have expressed the view that this provision should not protect a company which is not carrying out an activity normally included in the charter. In view of this we do not advise that you place reliance on this provision and it is therefore important that the arrangements are documented as far as possible to minimise the risk of the foreign company constituting a permanent establishment. In particular it is important that

  • the secondees should work under the exclusive direction and control of the Russian company throughout the period of their assignment in Russia.
  • the secondees should not be entitled in any way to represent, execute contracts for or otherwise bind the foreign company during the terms of their assignment in Russia.

In order to subscribe for shares in a Russian company non-resident investors have previously had to:

a) either make sure that the Russian investor receives a CBR licence for foreign currency capital contributions, or

b) contribute to the charter capital from a rouble account (I-account) in a Russian bank.

In the past, before simplified regulations for the opening of an I-account for certain investments came into force, in order to open an I-account a non-resident company was required to have a full registration with the Russian tax authorities. As a result, many foreign companies providing management services to their Russian subsidiaries have been registered with the tax authorities solely for the purposes of opening I-accounts. This clearly conflicts with the requirement that the company should not be registered with the tax authorities.

Currently we are aware that some investigations of such foreign companies have been performed by the Russian tax authorities. They argue that since the foreign company has a registered representative office in Russia and performs management services in the Russian territory, this foreign company should become a payer of VAT, turnover taxes and, sometimes, profits tax in respect of income earned from the management services. In the case of VAT and turnover taxes the argument is difficult to challenge.

If a non-Russian company in your group is registered with the Russian tax authorities for the purposes of opening an "I" bank account in Russia and provides any services to Russian companies, it is important to be aware of the risks involved. Please do not hesitate to approach your usual contact person in the tax department of Coopers & Lybrand to discuss the issue in greater detail.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For further information contact Alla Shaulina on tel: +7 503 232 5511 fax: +7 503 232 5522 or e-mail directly: Alla_Shaulina@ru.coopers.com or enter a text search 'Coopers & Lybrand' and 'Business Monitor'.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions