The biggest tax case in Russian history, Tax Office v Yukos, is receiving significant attention. The Yukos decision raises several important points of Russian tax law.
The profits made by companies related to Yukos and registered in Russian internal offshore zones were 'allocated' to Yukos. Yukos was asked to pay profit tax on the amounts accruing to those companies, as this profit was made by Yukos. The Russian tax law does not recognize the concept of a holding for fiscal purposes; therefore, the reallocation of profits in the Yukos Case from one company of the holding to another is unprecedented in Russian tax law, and is not based on provisions in either the Tax Code or the Civil Code.
The Yukos Case has also introduced a distinction between a 'diligent' taxpayer and a 'non-diligent' taxpayer. The judgment clarifies that the rights of taxpayers will be honoured only in regards to diligent taxpayers. Since the law does not define what is meant by 'diligent', the term is to a large extent open to interpretation by different judges.
While the Yukos Case is still being heard, there is little reason to expect that the first instance decision will be overturned. The implications of Yukos for Russian tax law cannot be overestimated.
Nevertheless, in the fight against tax evasion the Tax Office recently issued a list of tax avoidance schemes in the Russian oil industry, among others. The purpose of the paper is to assist the Tax Office in identifying and tackling tax evasion. However, the paper does not advise the tax authorities to fight oil companies such as Yukos by analyzing the operations of a holding as a whole. Instead, the paper advises that separate transactions be reviewed on the grounds of existing provisions in the Tax Code or Civil Code, such as the transfer pricing provisions. This affords some hope that the findings of Yukos will not become binding on every taxpayer.
Prom Line v Tax Office
On April 8 2004 the Russian Constitutional Court decided in Case 169-O that a company is allowed to claim value added tax (VAT) back from the government only if the purchased goods or services were paid for with the company's own funds, as opposed to borrowings. If the payment was made from borrowed funds, a VAT return will be available only once the loan has been fully repaid.
If a payment was made in the form of bonds or bills of exchange, these must be fully paid before a VAT offset is allowed. Likewise, if a payment was made by way of any property which a company received free of charge, VAT again cannot be offset.
The Prom Line decision constitutes a significant obstacle to doing business in Russia. Both the Ministry of Finance and the business community have voiced concerns. However, neither the Ministry of Finance nor anyone else can force the Russian Constitutional Court to admit that it has made a mistake. The Russian State Duma is reportedly considering amending the Tax Code in order to negate the damaging effects of the Prom Line decision.
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On September 30, 2016, the VAT authorities confirmed that VAT shall apply to directors' fees.
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