The Supreme arbitration court of the Russian Federation made an important decision in the case of the Tax Code non-discriminatory provisions application

21.11.2011 On the 15th of November current year the SAC considered the case concerning the possibility of application of thin capitalization rules and, in particular, non-discriminatory provisions to the taxpayer - the Russian company. The defendant was "Coal Company" North Kuzbass ", which had outstanding debts to foreign affiliated companies, among which was a Swiss company that owned more than 20% of the Russian company shares. This is essentially the first decision of the highest court in the mentioned sphere, the decision that is not in favor of the taxpayer.
Let’s recall that p.2 art.269 of the Tax Code provides that the rules on thin capitalization for Russian companies - taxpayers apply if:
(1) Russian company has outstanding debt to the foreign entity that directly or indirectly owns more than 20% of the Russian company share capital, or
(2) The Russian company has a debt to the Russian organization, recognized under the laws of the Russian Federation, an affiliate of the mentioned foreign company, as well as
(3) There is debt obligation in respect of which an affiliated person and / or exactly this foreign entity are a sponsor, guarantor or otherwise undertake to enforce the debt obligation of the Russian company.
The SAC applied in the case exactly the norms of the Russian law, not rules of international agreements between Russia and Switzerland, supporting the position of the tax authority. The argument contained the fact that the condition of the taxpayer loans deviated significantly from the market and could not be considered as inconsistent with international agreements.

Expert’s opinion

“Since the decisions of the SAC of the Russian Federation carry precedent character, the resolution of this case is of particular value. Firstly, the important point is to use exactly the rules of the Russian law in this sphere, rather than the provisions of international agreements. Secondly, despite the numerous decisions of the cassation courts, the SAC resolved this case not in favor of taxpayers, in support of the arguments of the tax authority. Thus, when calculating the financial risks of the Russian companies with foreign capital the practice of the courts must be taken into consideration, especially one of the highest courts”.

On the basis: www.arbitr.ru

Andrianova Irina ( the lawyer of international consulting department of Honest&Bright)