Russia: First ruling on foreign company’s Russian tax residency for VAT
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

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

Russia: First ruling on foreign company’s Russian tax residency for VAT

Sponsored by

sponsored-firms-kpmg.png
russia.jpg

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.

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 management.

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 conclusion.

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 Russia.

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 dispute.

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.

more across site & bottom lb ros

More from across our site

Experts from TP tech provider Aibidia also warned ITR that companies ignoring pillar two is a ‘huge issue’ and a ‘red flag’
Hanno Berger was originally handed an eight-year sentence over an estimated $11 billion tax fraud; while in other news, France calls for minimum tax on the super-rich
Amount B is meant to increase simplicity and reduce uncertainty, but US TP specialists claim it may lead to controversy
Tax Foundation economist Alan Cole also signalled that pillar two has a 'considerable chance' of failing
The Labour Party is working hard to convince business that it will bring stability to tax policy if it wins the next UK general election. But it will be impossible to avoid creating winners and losers
Burrowes had initially been parachuted into the role last summer to navigate the fallout from the firm’s tax leaks scandal
Barbara Voskamp is bullish on hiring local talent to boost DLA Piper’s Singapore practice, and argues that ‘big four’ accountants suffer from a stifled creativity
Chris Jordan also said that nations have a duty to scrutinise the partnership structures of major firms, while, in other news, a number of tax teams expanded their benches
KPMG has exclusive access to the tool for three years in the UK, giving it an edge over ‘big four’ rivals
But the US tax agency’s advice is consistent with OECD guidance and shouldn’t surprise anyone, other experts tell ITR
Gift this article