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Russia: Supreme Court issues decision on allocation of costs to income

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Dmitry Garaev and Anastasia Avdonina of KPMG discuss the Supreme Court’s decision A47-9881/2017 of August 26 2019, which is of specific interest for companies receiving both operating profit and dividend income.

The Supreme Court's decision, A47-9881/2017 of August 26 2019, is of specific interest for companies receiving both operating profit and dividend income.

In the case in question, the tax authorities undertook an on-site tax audit of the company's activities for 2013, 2014 and 2015. As a result of the audit, the authorities challenged the company's deduction of certain costs on the basis that:

  • It had failed to allocate costs between taxable and non-taxable activities (specifically, the receipt of dividends, which are taxed at the 0% income tax withholding (WHT) rate); and thus

  • It had inappropriately deducted costs related to non-taxable dividend income.

The company appealed in vain against the authorities' decision to a higher tax office, so it then took the authorities to court. However, the first three instances of court supported the authorities. Finally, the company brought the case to the Supreme Court which, eventually, supported the company's position and sent the case for re-examination to the Court of First Instance.

The Supreme Court's judges supported the company for the following reasons. First, the company was not obliged to allocate its costs to different types of activities, as stated by Article 272 (the procedure for the recognition of expenses where the accrual-basis method is used) of the tax code. The court took the view that the receipt of dividends was not an activity, whereas the requirement to allocate costs applied only if different activities were carried out. Secondly, the company was not required to determine its tax base separately for operating and holding activities. Article 274.2 (tax base) provides that, for profit assessable at a rate other than 20% (as specified in Article 284.1 (tax rates)), the tax base should be calculated separately. The court concluded that this requirement did not apply either, because it applied to the calculation of profits whereas dividends are not profit per se but income.

We eagerly await the final decision of the Court of First Instance.


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