Place-of-supply rules state that consulting and legal
services are deemed to be provided in Russia (and therefore
VATable) if the purchaser carries out its activities in Russia.
There are several criteria for determining where activities are
carried out, with one being the place of the purchaser's
Usually, when rendering consulting and/or legal services to
foreign recipients, Russian providers treat their services as
non-VATable if the purchaser can prove that it has legal and
tax registration in a foreign country.
However, in a recent arbitration court case the court ruled
that foreign purchasers of consulting services provided by
their Russian affiliate are deemed for VAT purposes to be
Russian residents because they are managed from Russia. This
was the first case of this nature, and the following
circumstances led the tax authorities and courts to their
The results of the services have not been used in countries
where the affiliated foreign purchasers were located. Thus, the
authorities concluded that, because the foreign buyers were
controlled foreign companies (CFCs) and did not use the
services purchased abroad, the services were consumed in
The official stamps of the foreign purchasers were kept in
the service provider's Russian office. Examination of the
stamps revealed that they had been used on the contracts and
certificates that evidenced the acceptance of services between
the Russian provider and foreign purchasers. The court,
therefore, concluded that the foreign purchasers' documents
were formalised in Russia.
The foreign purchasers' contracts with third parties were
also kept in the Russian provider's office, despite the fact
that the Russian provider was not a party to the contracts. The
tax authorities showed that the Russian provider's office has
been used by couriers to deliver correspondence mailed to one
of the foreign purchasers. In the authorities' view, this
proved that the Russian provider was engaged in, and managed
and controlled, the foreign company's workflow.
Additionally, the authorities judged that there were an
insufficient number of employees in the foreign companies (they
only employed 'directors') and that the employees had
inadequate professional qualifications. The foreign companies
employed only two or three directors, which the authorities
said indicated that the companies were firms in name only.
Their activities were in fact carried out by the Russian
provider's employees, who had the appropriate qualifications.
The authorities supported their statement by using consulting
and legal contacts – a move which is under
The authorities also noted that bank accounts were opened in
the same banks and that, more importantly, internet protocol
(IP) addresses used to manage the bank accounts were identical
to the Russian services provider's IP addresses.
There were various other arguments, including the absence of
cash flows associated with the payment of employee remuneration
or rental fees by the foreign purchasers of the services.
As a result of the above, the tax authorities managed to
convince the courts of the first two instances that the foreign
purchasers' place of effective management was Russia and that,
therefore, the consulting and legal services acquired should
have been subject to VAT in Russia.
KPMG in Russia
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