Flightman + Priest Flightman + Priest | Moscú-Rusia
On July 31, 2021, the Arbitrazh (Commercial) Court of Moscow passed a ruling on case No. А40-118073/19 on the invalidation of the decision of the Moscow Office of Russia’s Federal Tax Service adopted against Perekryostok Trading Company JSC as part of another on-site tax inspection.
This ruling is of great interest to medium-sized and large enterprises as it relates to debt funding between companies of the same group that are not residents of Russia, and is also based on an analysis of such companies entering between themselves into agreements on sale and purchase of shares in the authorised capital of Russian companies.
Below is a brief description of this situation.
Further to its another on-site inspection, the Moscow Office of Russia’s Federal Tax Service (the tax authority) adopted a decision under which Perekryostok JSC was requested to pay arrears on corporate income tax and tax on income of a foreign company earned from Russian sources. The arrears total nearly 1.6 billion rubles, with penalties of almost 800 million rubles charged.
The tax authority’s claims came after Perekryostok JSC (the Company) carried out a number of transactions (operations) during the corporate restructuring within the X5 Retail Group companies:
By doing so, 11,500,000,000 rubles owed to Speak Global Limited were offset, with 66,267,000,000 rubles novated into a loan subject to interest payment at a rate of 4.15% per annum, which was later assigned to X5 Retail Holding Limited, and the debt was repaid.
The Company took account of interest expenses so as to calculate and pay corporate income tax. When paying borrowed interest, the Company did not calculate and did not withhold tax at the source of payment as it was acting upon the Double Taxation Treaty between Russia and Cyprus as regards income and capital tax (clause 1 of article 11 of the Treaty).
The remaining 4,732,082,000 rubles owed to Speak Global Limited were novated into a loan subject to interest payment at a rate of 11% per annum, with the debt having then been offset.
The Company took account of interest expenses so as to calculate and pay corporate income tax.
The tax authority concludes that these transactions were carried out in order to withdraw funds from Russia in the interests of foreign companies without paying tax in Russia. The transactions also resulted in the tax authority resorting to the following measures:
The Company has contested the decision of the tax authority through legal proceedings.
Upon examination of the case, the court took the side of the taxpayer and made the following conclusions:
As a result, the court fully invalidated the decision of the tax authority.
It is worth mentioning that the court’s ruling has not yet taken legal effect and is being appealed by the tax authority. A session in the court of appeal is scheduled for October 25, 2021.
The decision of the tax authority has revealed the approach of the domestic fiscal department to “internal transactions” performed by a taxpayer within a group of companies for the redistribution of assets involving a foreign company.
With this approach of the tax authority to such kind of taxpayer transactions (purchase of a share in the authorised capital, provision of debt funding), there is a risk of requalification of payment in favour of a foreign company into “hidden” dividends with a subsequent charge of additional tax. Experience has shown that this and other risks must be considered when structuring transactions involving foreign companies
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