On 22 July 2016 the Commercial Court of Samara Region delivered
a decision in case No. А55-11332/2016.
In that case, the court considered a dispute between SMARTS JSC
and the Samara Region Interdistrict Federal Tax Service of Russia
Inspectorate for major shareholders that was connected with
accusations that SMARTS JSC had received an unjustified tax benefit
without intending to engage in actual economic activity.
The taxpayer received grant financing from its foreign
subsidiary and treated the financing that had been received as not
subject to profit tax (the exemption under Article 251(1)(11) of
the RF Tax Code was used).
The tax authority established that several years before the
grant financing was received from the foreign subsidiary, the
taxpayer had transferred its shares in Russian companies to that
foreign company as a contribution to charter capital. Later, the
foreign company sold those shares to a third party and transferred
part of the funds received from sale of the shares to the taxpayer
as grant financing.
The tax authority considered all of these facts together and
the foreign subsidiary had been
created by the taxpayer as an artificial entity and was intended
solely for channeling transactions for sale of the shares held by
the taxpayer, thereby concealing income from sale of the shares
from taxation in Russia;
the grant financing received by the
taxpayer from its foreign subsidiary was essentially a transfer to
it of part of the income from sale of the subsidiaries'
The taxpayer managed to prove in court that it had not received
an unjustified tax benefit. Furthermore, the taxpayer proved that
there were three purposes of creating a foreign company and
contributing the subsidiaries' shares to its charter
to protect subsidiaries' shares
from the possibility of illegal seizure;
to ensure the possibility of raising
bank financing with a suretyship of the foreign company;
to ensure that it was possible to
sell the subsidiaries' shares to those buyers who require as a
mandatory condition of the transaction that the sale be performed
according to the provisions of foreign law with the involvement of
a "foreign element" in the transaction.
The taxpayer's successful defense of its position in court
does not cancel out the fact that the tax authorities pay a lot of
attention to grant financing amounts received by taxpayers,
considering them together with other facts of business life. And,
if the tax authorities discover that the taxpayer has transferred
any assets to foreign companies of the group, the risk of claims
being brought that the taxpayer has received an unjustified tax
benefit is multiplied. The taxpayer will need to prove that it has
a business purpose for each of its transactions.
We recommend reevaluating tax risks having to do with the
receipt of grant financing from foreign companies of a group,
especially in situations associated with disposal of assets in
favor of such foreign companies.
Based on their considerable relevant experience of advising and
representing in court, the lawyers of Dentons' Tax practice are
prepared to analyze tax risks related to Russian companies
receiving untaxed income from foreign companies of a group, and to
devise approaches and recommendations to confirming the business
purpose of the operations, enabling the client to considerably
mitigate any risks.
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