International Tax Review is part of the Delinian Group, Delinian Limited, 8 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2023

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Russia: Court accepts a tax challenge based on the conduit company doctrine

russia2.jpg

The Federal Arbitration Court for the Moscow Region has ruled against Naryanmarneftegaz (a ConocoPhilips/Lukoil JV) in a thin capitalisation dispute.

This is a further development in the recent wave of attacks on what the tax authorities believe to be improper defences against the Russian thin capitalisation rules (including the infamous Severny Kuzbass case in late 2011 which denied non-discrimination defence against Russian thin capitalisation rules).

This is effectively the first precedent where the tax authorities succeeded in challenging the "sister company" defence against Russian thin capitalisation rules at the federal court level.

In this particular case the court decided that since the ultimate joint venture partners (ConocoPhilips and Lukoil) provided in their shareholder agreement for subsequent provision of what they called "shareholder loan" (either by them or their group companies), the actual loan provided by a US sister company affiliated with ConocoPhilips should be viewed as a single transaction together with the shareholder agreement. This logic provided the basis to apply Russian thin capitalisation rules as if the loan had been granted directly by the foreign shareholder.

This case is also the first precedent where the tax authorities succeeded in reclassification of interest into dividends for withholding tax purposes under a double tax treaty. Until recently such claims have been typically dismissed based on the literal interpretation of articles 10 and 11 (for example, Wintershall succeeded in recovering "excessive" withholding tax from the Russian treasury as late as December 2011).

This court case is also important in that it effectively introduces the "conduit company" concept into the Russian court practice, which until recently has never been defined in the law. The tests applied to determine whether the lender was a conduit company are however very dubious.

The decision was made at the cassation (final) level of the court and unless the Supreme Arbitration Court (SAC) decides to intervene, this decision is final. The taxpayer technically has three months (ie until the end of May) to apply to SAC, which will have another month to decide if it would want to reconsider the case.

This latest development confirms our previous recommendation: where applicable you should check and reinforce substance/business purpose of the foreign finance companies used to provide debt financing to your Russian operations.

Evgeny Timofeev (evgeny.timofeev@gblplaw.com)

Goltsblat BLP

Website: www.gblplaw.com

more across site & bottom lb ros

More from across our site

The forum heard that VAT professionals are struggling under new pressures to validate transactions and catch fraud, responsibilities that they say should lie with governments.
The working paper suggested a new framework for boosting effective carbon rates and reducing the inconsistency of climate policy.
UAE firm Virtuzone launches ‘TaxGPT’, claiming it is the first AI-powered tax tool, while the Australian police faces claims of a conflict of interest over its PwC audit contract.
The US technology company is defending its past Irish tax arrangements at the CJEU in a final showdown that could have major political repercussions.
ITR’s Indirect Tax Forum heard that Italy’s VAT investigation into Meta has the potential to set new and expensive tax principles that would likely be adopted around the world
Police are now investigating the leak of confidential tax information by a former PwC partner at the request of the Australian government.
A VAT policy officer at the European Commission told the forum that the initial deadline set for EU convergence of domestic digital VAT reporting is likely to be extended.
The UK government shows little sign of cutting corporate tax, while a growing number of businesses report a decline in investment as a result of the higher tax burden.
Mariana Morais Teixeira of Morais Leitão overviews Portugal’s new tax incentive regime designed to boost the country’s capital-depleted private sector.
Septian Fachrizal, TP analyst at the Directorate General of Taxes, outlines how Indonesia is relying heavily on the successful implementation of pillar one.