Commercial court decision may create risks for cross-border licensing arrangements
The Moscow District Commercial Court issued a controversial decision on 11 June 2015, in which it ruled that expenses associated with the payment of royalties by a Russian company to a foreign affiliate under a sublicensing agreement were nondeductible for profit tax purposes. The commercial court affirmed the ruling of two lower courts and the position of the Russian tax authorities.
This article overviews the decision and makes some comments on the potential impact of the case for multinational companies charging royalties to Russian subsidiaries.
Oriflame Cosmetics SA (Luxembourg), which owns the “Oriflame” trademark and brand, as well as business-related know-how, granted a license to an affiliated company in the Netherlands (Oriflame Kosmetiek BV) to use intellectual property (IP). Oriflame Netherlands then concluded a sublicensing agreement with another affiliated company, Oriflame Russia (the taxpayer). Oriflame Russia paid royalties to Oriflame Netherlands for the rights to use the brand and know-how. Oriflame Netherlands transferred most of the royalties to the Luxembourg parent company. Oriflame Russia deducted the royalties paid under the sublicense agreement for Russian tax purposes.
The Russian tax authorities challenged the deduction of the royalties during a tax audit of Oriflame Russia, taking the position that the sublicense agreement was used as a tax-free profit repatriation tool that allowed the taxpayer to reduce its tax burden by deducting the royalties and allowed the Netherlands and Luxembourg affiliates to avoid paying tax in their countries.