On June 11, 2015, Moscow District Arbitration Court handed down
its ruling in the controversial Oriflame case. In the case, the tax
authorities challenged the lawfulness of a Russian organization
deducting VAT and expenses (for profit tax purposes) on royalties
paid to an affiliated foreign company for use of a trademark, trade
name and know-how. According to the judgments, the rights holder (a
Luxembourg tax resident) is a 100% grandparent of the Russian
sublicensee, while payments were made via a Dutch sister company
(formally, the Russian organization concluded a subfranchise
agreement with the Dutch sister company, which in turn had a
franchise agreement with the Luxembourg rights holder).
Sadly, the court of cassation instance did not accept the
arguments by the Russian taxpayer and refused to set aside the
judgments of the first and appeal instances. The court based its
decision against the appeal on the following conclusions:
Affiliation of the rights holder and the Russian
Participation of employees of the Luxembourg rights holder in
management of the Russian organization, supervision of that
organization's activities by the Luxembourg company (including
by introducing common corporate standards, policies and business
procedures), accountability of employees of the Russian
organization to officers of the Luxembourg company. As a result
– the Russian organization was not an independent
The Russian organization resold goods purchased from the
The Russian organization positioned itself commercially
(including before customers) as a division of the Luxembourg
The Dutch sister company's activities were transitory (the
Dutch sister company transferred practically all revenue received
from the Russian organization to the Luxembourg rights
In the opinion of the court, these reasons are sufficient to
ignore the presence of the Dutch sister company in the operational
structure and to treat the Russian organization as conducting
business on behalf and in the interests of the Luxembourg company,
that is, as a dependent agent of the Luxembourg company.
Consequently, the court recognized the Russian organization as a
permanent establishment of the Luxembourg company, and the payment
of royalties to the Dutch sister company as inconsistent with
reasonable business purposes.
Besides changing the treatment of the relations between the
Russian organization and its affiliated foreign structures
(effectively the grounds for tax reconstruction), the court
advanced other arguments for its decision concerning the
subfranchise agreement itself:
The information containing commercial experience transferred to
the Russian organization was publicly available (and therefore does
not qualify as know-how);
Permission to use the trademark was not required, since the
rights thereto were exhausted by putting the goods into the
commercial cycle in the RF.
Finally, in substantiation of the Russian organization's
receipt of an unjustified tax benefit, the court indicated that the
royalties received from the Russian organization were practically
untaxed in either the Netherlands or Luxembourg.
At present we can only speculate as to how the Oriflame case may
affect Russian law enforcement practice, however, it should be
noted that any effect is unlikely to be positive. A significant
portion of the professional community is critical of the
court's approach to applying the doctrine of unjustified tax
benefit in this case, as well as to the interpretation and
application of Russian tax law and international tax treaties
concerning the creation and taxation of permanent establishments of
foreign organizations through so-called dependent agents.
Specialists are also concerned by the way the courts are
essentially diluting the entire notion of permanent establishments
of foreign organizations (the established notions of when a foreign
organization has a permanent establishment and how the tax base is
formed), as well as the increasingly bad habit of courts of
selectively applying OECD guidance on the interpretation of
international tax treaties. All of this undermines the efficacy and
predictability of the Russian tax system.
Time will tell whether these concerns are justified.
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.
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.
The “Work 4.0. The labor market, the Labor Code, salaries and social security in the XXI century” conference will be held in Centrum Zielna in Warsaw on 5-6 December. The event’s institutional partners include the Social Dialogue Council and the Polish Agency for Enterprise Development. Dentons is one of the conference’s partners.
During the first day of the event, experts including Henryka Bochniarz, the Social Dialogue Council’s president and Lewiatan’s president, Prof. UG dr hab. Marcin Zieleniecki, chairman of the Labor Law Codification Committee, Dr hab. Jacek Męcina, member of the Labor Law Codification Committee and advisor to Lewiatan’s Board, together with representatives of the Polish Ministry for Development and Ministry of Family, Labor and Social Policy, will discuss current trends and changes in the labor market.
The second day of the conference is to include 12 workshops on topics related to the labor market: work time, outplacement, hiring managers, building a culture of diversity and belonging, structuring salaries and wages, corporate restructuring and delegating employees among other.
This is the masterclass rescheduled from 19 October 2016. As the last negotiations masterclass on Monday 5 September was such a success we are repeating the workshop for anyone who was unable to attend the first one.
In the wake of the 2016 Presidential election and the unexpected November Surprise election of Donald J. Trump, who has indicated an intention to repeal the 'death tax,' the estate planning community is trying to digest exactly what a repeal of the estate tax would look like, ..
This article deals with the tax considerations arising out of tax treaties when dealing with passive income, in particular the manner in which Contracting States share jurisdiction to tax when negotiating tax treaties.
Jonathan Sheehan gives an Irish perspective in the October 2016 edition of The American Lawyer on the European Commission's decision that Ireland granted undue tax benefits of up to EUR13 billion, plus interest, to Apple.
In a recent decision, the SFSC ruled that a Swiss regulated and tax-exempt pension fund is entitled to reclaim Swiss federal withholding tax deducted from dividends of publicly traded shares of Swiss companies.
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”
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).