The Legal 500

Legal Update No. 342

Goltsblat BLP advises that the Presidium of the Supreme Arbitration Court of the Russian Federation officially published the Resolution No 11637/11 dated 07 February 2012 on a case against OOO Leroy Merlin Vostok.

Pepeliaev Group remind you about the start of the filing period for 2012 returns. Individuals who generated taxable income in 2011 and have not paid personal income tax on it may start filing their tax returns now. The last day of the filing period is 30 April 2012. Under the general rule, individuals must pay the personal income tax, as stated in their returns, before 15 July 2012.

Legal Update No. 333

Goltsblat BLP advises that Federal Law No. 9-FZ “On Ratifying the Protocol Amending the Agreement between the Government of the Republic of Cyprus and the Government of the Russian Federation for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital dated 5 December 1998” was adopted on 28 February 2012.

Legal Update No. 322

Goltsblat BLP advises that the Federal Tax Service has circulated Letter of No. OA-4-12/85@ dated 12 January 2012 on how to conclude advance pricing agreements for tax purposes.

Julia Alexandrova, Senior Associate, Pepeliaev Group

Alongside actively developing cross-border economic, trade and customs law and adjusting to European standards and the WTO principles, Russia is seeing the adoption of rulings actually hampering foreign capital flow into the country.  

Taxes

1. Order of the Federal Tax Service (FTS) N ЯК-7-6/488@ of 11 August 2011 "On approval of forms and formats of documents used for tax registration and deregistration of Russian organizations and individuals, including individual entrepreneurs, and procedures for filling in forms and sending by tax authorities to organizations, individuals, including individual entrepreneurs, of a certificate of tax registration with tax authorities and (or) a notice of tax registration with tax authorities (a notice of tax deregistration with tax authorities) in electronic format via telecommunications channels" has been recorded by the RF Ministry of Justice and published.

Legal Update No. 295

Goltsblat BLP advises of the signing, on 21 November 2011, of a Protocol on Amendments to the Treaty between the Russian Federation and the Grand Duchy of Luxembourg on Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital of 28 June 1993.

Legal Update No. 294

Goltsblat BLP advises that Federal Law No. 330-FZ "On Amending Part Two of the Tax Code of the Russian Federation and Article 15 of the Russian Law "On the Status of Judge in the Russian Federation" and Invalidating Certain Legislative Provisions of the Russian Federation" was adopted on 21 November 2011.

Legal Update No. 292

Goltsblat BLP advises that ruling of Supreme Arbitration Court No. VAS-12760/11 dated 13 October 2011 refuses to refer to the Presidium of the Russian Supreme Arbitration Court an application requesting supervisory review of judicial acts of three instances on case No. A58-2974/2010.

Legal Update No. 286.

Goltsblat BLP advises that the Presidium of the Supreme Arbitration Court of the Russian Federation adopted, on 15 November 2011, a resolution on case No. ВАС-8654/11 on an application from a tax authority for supervisory review of judicial acts of lower courts in relation to OAO Coal Company Severniy Kuzbas.

Legal Update No. 288

Goltsblat BLP advises of publication of Federal Law No. 321-FZ dated 16 November 2011 “On Amendments to Part 1 and 2 of the Tax Code of the Russian Federation in Connection with Creation of a Consolidated Taxpayer Group” (except for certain provisions).

The new Transfer Pricing Law significantly changes the existing TP regulations in Russia. Under the new Law, there is no longer requirement that, to be subject to TP control, the price applied by the taxpayer must deviate by more than 20 % from the fair market price. Now, the tax may be recalculated based on the fair market price even if the actual price deviates from the fair market value by less than 20 %.

Pepeliaev Group advises that the Russian Government has approved draft Protocols amending the Agreement between the Russian Federation and the Grand Duchy of Luxembourg for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, and the Agreement between the Russian Federation and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital.

Andrey Shpak , Partner, Tax

Despite being a feature of a different legal system, trusts are a common part of a personal ownership structure used by many Russian high-net-worth individuals (HNWI). Trusts are often sold by many providers as "a magic solution" without mentioning some of the potential practical difficulties that the beneficiaries may face. In this article, we look at some of the typical issues that Russian HNWI face when using trusts (in particular, English law trusts) and some of the approaches to solve these issues.

Pepeliaev Group law firm advises that the Presidium of the Supreme Arbitration Court (the “SAC”) will for the first time consider how the non-discrimination provisions of international double tax treaties correlate with Russian thin capitalisation rules, which in certain cases provide for interest accrued on a taxpayer’s debt to be reclassified as dividends.

Pepeliaev Group advises that, on 28 July 2011, a Resolution of the Plenum of the Russian Supreme Arbitration Court [1]  (the “SAC”) with direct implications for construction and investment activity was published on the SAC’s website. The Resolution creates substantial tax risks for all those involved in that sector: builders, investors and developers.

Until recently Russian companies have generally been successful in defending any challenges put forward by the tax authorities against the admissibility of highly-leveraged financing schemes involving finance provided by a fellow-subsidiary company or by reliance on the non-discrimination clauses included in most of Russia's double tax treaties. The courts have generally accepted these arguments, giving companies scope to used highly leveraged debt financing for group tax planning purposes.

Pepeliaev Group advises that, on 22 July 2011, Federal Law №227-FZ was officially published. This Law makes extensive amendments to the Russian Tax Code with regard to transfer pricing rules. Such amendments are due to come into force on 1 January 2012, so the Russian Federal Tax Authority has already created a new department of transfer pricing and international cooperation. Staff of this department will be drawn not only from public officials, but also from private businesses.

The longest-awaited Russian tax law in recent years – the law on transfer pricing – has been adopted by the lower house of the Russian parliament, the Russian State Duma, in its third (and final) reading on 8 July 2011 and approved by the Federation Council on 13 July 2011. The law has now been submitted to the Russian President for signing and official publication.

On 8 July 2011 the Russian State Duma adopted in the third reading the law On amending certain legislative items of the Russian Federation in connection with improving the pricing rules for tax purposes.

Pepeliaev Group advises that on 07.06.2011 were forced some regulations of Federal law №132-FZ "On Amendments to article 95 of the first part and to the second part of Russian Tax Code regarding creating favorable tax conditions for innovation activity and article 5 Federal law "On Amendments to the second part of Russian Tax Code and some laws of Russian Federation".

Pepeliaev Group advises that on 24 April 2011, the Russian Supreme Arbitration Court published on its official website Resolution No. 14233/10 of the Court’s Presidium dated 17 March 2011. The Resolution considered the issue of the payment of interest on a late refund of VAT (clause 10, article 176 of the Russian Tax Code) in cases in which a taxpayer who has submitted a tax return declaring an amount of VAT to be refunded has not applied to the tax authority for the tax in question to be refunded.

Pepeliaev Group advises that on 11.04.2011 panel of judges Supreme Arbitration Court passed rulling in addition regarding to two questions, which can be very important for Companies, making business in Russian with foreign employees. The panel of judges SAC RF has told about social payments (in the Pension found RF for obligatory pension insurance) which should (not) be paid for foreign employee without plans of permanent living in Russia. In addition the panel of judges SAC RF has said about necessity of professional translator in tax authority and foreign taxpayers relations.

he majority of important changes to tax legislation traditionally come into effect at the beginning of the year, which is connected to the start of the new tax period. This Tax Outlook is aimed at highlighting the major amendments to Russian tax legislation1 adopted in 2010 and entered into force in 2011.

Looking back on the year gone by, let me go through the most significant events that have affected taxpayers, the business climate and the tax system in Russia.

Federal Law No. 243-FZ has amended the Russian Tax Code with the aim of promoting and supporting investors’ activity in the Skolkovo innovation centre. The changes provide for benefits on an unprecedented scale for participants in the Skolkovo project.

What is the position of the Russian Ministry of Finance in the absence of concrete provisions of the Russian Tax Code?

New, reduced rates of personal income tax for several categories of Russian non-residents1 are applicable from 1 July 2010. Notably, the Russian Tax Code (Part II No. 117-FZ of 5 August 2000 – the “Tax Code”) now stipulates that the 13% personal income tax rate applies to income received from professional activities of non-residents regarded as “highly qualified specialists”, instead of the former 30% tax rate that was applicable to all Russian-sourced income of non-residents.

Federal Law No. 229-FZ dated 27 July 2010 introduced significant amendments to tax legislation relating to the calculation and collection of taxes, which will affect most taxpayers. The majority of these amendments will enter into force as of 2 September 2010

Even though the worldwide sharp economic downturn seems to be drawing to a close, Russian legislators continue to adopt “anti-crisis” measures, especially in the area of tax legislation. In this context, on 27 July 2010, Russia’s President signed the Federal Law “On the modifications to part I and part II of the Russian Tax Code and other legislative acts of the Russian Federation, as well as on recognition of certain legislative acts of the Russian Federation as ceased in force in relation to settlement of arrears in taxes, duties, fines and penalties and certain other questions of tax management” No. 229-FZ (the “Law”).

20 May 2010 saw the final session of the Federal Arbitrazh Court for the Moscow Circuit (FAC MC) hearing the case of British Airways (BA), the national flag carrier of the United Kingdom, closing the proceedings against the tax authorities, which were supported by the Tax Litigation Group of the Vegas Lex Law Firm representing BA.

20 May 2010saw the final session of the Federal Arbitrazh Court for the Moscow Circuit (FAC MC) hearing the case of British Airways (BA), the national flag carrier of the United Kingdom, closing the proceedings against the tax authorities, which were supported by the Tax Litigation Group of the Vegas Lex Law Firm representing BA.

Will the new widely debated position of the Supreme Arbitration Court be applicable, notwithstanding contradictions with the official opinion of the Ministry of Finance?

Russian tax law has applied transfer pricing rules since 1999. Law enforcement practice has, however, demonstrated that these rules are ineffective and that the tax authorities are incapable of applying them and exercising effective control over transfer pricing. The developers of the draft law have to a large extent taken into account the shortcomings and limitations of existing legislation in this area. We analysed the draft law on tax control for transfer pricing purposes to identify the underlying aspects of the proposed innovations.

Russian thin capitalisation rules do not permit a tax deduction for excessive interest payments between related parties. The rules set a maximum debt to equity ratio of 3:1 meaning that if the amount of the controlled debt is three times greater than the borrowing entity’s own capital as of the last day of the relevant reporting/ tax period, then Russia’s thin capitalisation rules are applicable.

Recent history demonstrates that in times of economic recession tax control procedures are significantly tightened. The reasons for this are quite apparent: while companies’ incomes and, consequently, tax payments are considerably decreased1, the tax authorities try to achieve their tax collection plan at any cost. As a result, tax authorities pay more attention to documentation justifying the deductibility of input VAT, incurred expenses or the right to apply a tax exemption and seek new possibilities of conducting more information inspections and verifications as well as of carrying out of iterative, cross and additional tax audits. However, two recent widely debated Decrees of the Russian Supreme Arbitration Court that express an official viewpoint and consider the grounds and legal consequences of iterative tax audits seem to improve the position of taxpayers in relation to the tax authorities.

The Russian government has been working on new transfer pricing rules for several years, but now businesses can realistically expect that rules, with heavy documentation requirements for taxpayers, will be adopted this year.

In December 2009 the Russian Parliament adopted important changes further promoting the Russian holding companies regime. Starting from January 1, 2011 Russian holding companies will no longer be required to meet the present 500 million ruble threshold for investments made into companies qualifying as “strategic investments” to receive tax benefits.

On December 29, 2009 the RF President signed a law introducing important changes to criminal liability for tax evasion. It is established that a person violating the tax legislation may be relieved of criminal liability if the respective outstanding taxes and penalties connected to a crime are paid to the budget.

The law replacing the Unified Social Tax with social contributions will come into effect on January 1, 2010. The Unified Social Tax will completely disappear from the Russian Tax Code and will be replaced by social contributions payable to the State Pension Fund, Social Security Fund, Federal Medical Insurance Fund and Territorial Medical Insurance Fund.

The thin capitalization rule was integrated into the Russian Tax Code in 2002. This special rule for tax treatment of interest paid on loans was introduced as a means of fighting tax minimization.

When a company operates in a foreign country, it has to comply with local tax obligations. At the same time it can sometimes appear more important to know about the specifics of tax law practice and the modus operandi of the tax authorities than legal norms. In this article we draw the attention of readers to the most typical claims of the Russian tax authorities.

The CIS Tax Newsletter is intended to update you on the most recent legislative and case law developments in Azerbaijan, Kazakhstan, Russia and Ukraine and raise hot tax issues which you and your partners may face when doing business in these CIS jurisdictions.

The Russian Federation has been very popular for foreign investors for quite a long time, and setting-up a joint venture with another company is an alternative often used by such investors. However, there are still several issues in Russian commercial law, in particular, that investors entering the Russian market should be aware of. One is that there are three different types of incorporation, another is the unenforceability of shareholders agreements in Russia and there are also strict rules that an obligatory offer be made in open joint stock companies in the event of an acquisition of shares. Due to these aspects of Russian law, alternative foreign structures are often used for Russian joint venture transactions

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