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.
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