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Royalty scheme and information exchange between Russia and Cyprus

June 2012 - Litigation & Dispute Resolution. Legal Developments by Pepeliaev Group.

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Pepeliaev Group advises that the Federal Arbitration Court of Ural area decided the case “Trading house “Monetka” on 17.05.2012, that was a finish word in a long way of claming.

The issue was that Element-Traid, LLC used the trade mark “Monetka” and paid royalty to a Cyprus company. At that time the Cyprus company was a sublicensee and paid royalty to a BVI Company.

It is intresting that the owner of this trade mark had been a director of mother-company Element-Trade, LLC, and Element-Traid, LLC had used it for free. Later he sold his rigths on the trademark, and Element-Traid, LLC started to used the trade mark with paying royalty abroad.

Tax authorities supposed that Element-Traid, LLC just tried to lied out of Russian taxation a part of income.

The tax authorities supposed that the royalty scheme had been applied only for paying royalty from Russia to Cyprus without taxation because of DTT between Russia and Cyprus, and later paying royalty to BVI, which was in Russian Minfin’s Black list of low taxation territories.

The new point in this case is that the tax authorities used police information channels to make their claims stronger. Now it is difficult and long to get information for tax purposes by using DTT. So the tax authorities got information from International Criminal Police Organization (Interpol) about real shareholder of Cyprus company. She (the real shareholder) was a relative of the director of mother-company Element-Trade, LLC, who sold his rights on the trade mark “Monetka” to BVI Company.

So the tax authorities decided that there wasn’t a business purpose to pay royalty to the BVI in a situation, when it could be bought from affiliated entity.

PG’s comment

The Court said that the tax authority can’t appreciate the business effect and that all the costs were proved by actual documents. What is more, the Court viewed the Interpol answer as appropriate evidence.

But it can be a good signal for taxpayers that tax authorities tried to prove their claims more careful. And it can be very important with the new protocol to the DTT between Russia and Cyprus, which is going to make information exchange faster and easier.

Andrey Tereschenko, Partner, Pepeliaev Group

T. +7 495 967 00 07

E. a.tereschenko@pgplaw.ru  

Ivan Zelenin, Junior Associate, Pepeliaev Group

T. +7 495 967 00 07

E. i.zelenin@pgplaw.ru

For more information please visit www.pgplaw.ru

 

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