Russian Federation: Development Of Russian Court Practice On Tax Liabilities Of Permanent Establishments That Accept Expenses From Theirs Foreign Head Offices

On 29th of June 2016 the Commercial Court of Moscow delivered a judgement in case No. А40-51925/16 under the claim of the Austrian company Strabag AG (the "Company"), which carries out business in Russia through a permanent establishment. The case is a logical continuation of a series of cases previously considered by the Russian commercial courts on determination of tax base for foreign entities' permanent establishments(such as, for example, the Freshfields case, the Gide Loyrette Nouel Vostok case, and the MI Drilling Fluids UK Limited case). The court ruled against the Company.

The court held that Russian permanent establishment of the Company illegally accounted costs transferred from its foreign head office, which the head office incurred with respect to the permanent establishment. The court delivered the judgement basing on the following:

  • The Company submitted to tax authority the documents, which were not signed by director of the head office. Therefore, the documents may not be treated as a primary accounting records and may not confirm the figures stated in them. In particular, the tax authority examined the Company's accounting policies, the certificate of transfer of the Company's head office expenses, the estimates statement from the audit company, the copy of the head office's expense report.
  • The documents presented to tax authorities do not identify particular projects, employees, time spent, salary expenses and theirs relevance to activity of the Russian permanent establishment.
  • The certificates of transfer of the head office's expenses do not contain information about business transactions for which the Company incurred expenses. Moreover the certificates do not contain the title of the person who signed them.
  • The head office's expenses calculation and description of the method of expenses calculation were not verified by the Company's director and do not bear corporate seal.
  • The certificates of transfer of the head office's expenses and head office's expense reports do not determine which expense items comprise the administrative and general expenses mentioned in them. Moreover the documents confirming the figures in the certificates and the reports are absent.
  • The Company failed to confirm a connection between the disputed expenses and the activities of the permanent establishment.

Furthermore, the court stressed that the Company must submit to tax authority foreign-language documents with due translation into Russian language. According to court's opinion, the Company knowingly had not exercised its right to present evidence to defend its position, since the Company submitted to tax authority foreign-language documents without a due translation.

Obviously, decisions similar to the analyzed Strabag case set new standards for taxation of permanent establishments in Russia, especially in terms of expenses accounting. Without clear legislative regulation of the analyzed issue of permanent establishment's expenses taxation shall be guided by the courts judgements.

Dentons' Tax practice team has an extensive experience in structuring Russian permanent establishments' activity for foreign companies, as well as in supporting during tax authorities' audits. Dentons' Tax practice team will be happy to analyze your foreign company's activities in Russia to determine whether such activity might lead to creation of a permanent establishment. Dentons' Tax practice team will be ready to assist you with determination of the tax base for such activities, including how to account, confirm income and expenses, especially in light of the most recent trends in Russian case practice.

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