The overview of judicial practice for September-October 2016 concerning the application of tax incentives
Tax incentives in Russia
13 October 2016
Tax authorities successfully challenged the application of the research and development tax exemption, citing unjustified tax benefit due to lack of commercial substance in a deal
The Ninth Commercial Court of Appeal rejected PAO Rostelecom’s claim to recognise research and development (R&D) costs as expenses for profit tax purposes and offset the input VAT for these expenses.
The tax authority proved that the actions of R&D service providers were coordinated and aimed at providing unjustified tax benefit for the Company, as well as that the challenged transactions were unrealistic.
In addition, according to the expert opinion resulting from the expert examination undertaken at the request of the tax authority, the R&D report contained multiple logical and factual errors compromising the mandatory compliance check with respect to the R&D report.
In its ruling, the court of appeal pointed to the lack of commercial substance in the deal but did not comment on the possibility or the lack of possibility of classifying these works as R&D.
The next court hearing on this case is scheduled for 7 November 2016.
4 October 2016
Application of corporate income tax benefits by a company resident of the special economic zone in the Kaliningrad region
Soyuz-TTM limited liability company (hereinafter ̶ the Company) is a resident of a special economic zone in the Kaliningrad region. In order to be entitled to apply the reduced corporate profit tax rate, the Company recognises income/expenses generated/incurred as a result of implementing a regional investment project separately from income/expenses generated/incurred as a result of other business operations.
According to the tax authority, the Company should have reallocated its payroll by the two types of activities (investment activities and other), as the employees were engaged both in the investment project and other operations.
According to the ruling of the Commercial Court of the North-Western District made in favour of the taxpayer, the Company proved that it had separately recognised actual payroll expenses, as well as that the costs were legitimately classified as other operating expenses. The court also reviewed the documents submitted by the applicant at the stage of receiving the status of free economic zone resident.
3 October 2016
Application of the corporate property tax benefit in accordance with paragraph 11, article 381 of the Tax Code of the Russian Federation (as amended on 25 December 2012)
The corporate property tax benefit in respect of public railways, federal motorways, main pipelines, utility lines, and facilities that are integral parts of such objects is among the most problematic legal issues from the standpoint of justifying the legitimacy of its application, which is confirmed by the numerous legal cases in the past two years. Many major production companies record electrical infrastructure facilities on their balance sheets, and very often these items are the subject of legal disputes.
It is not the tax legislation standpoint on which the success of litigation in respect of using this benefit is directly depends, but on the detailed justification from the industry regulation standpoint, construction requirements and rules, as well as technical parameters of the property to which the benefit is being applied.
28 September 2016
Additional corporate profit tax assessment in connection with breaching the material terms of tax benefit application
The Commercial Court of Samara Region rejected the claim of ООО Ozon Pharm (hereinafter ̶ the Company) in respect of applying the zero tax rate to the portion of the profit payable to the regional budget as established for companies resident in the special economic industrial production zone of the “Tolyatti” type.
In order to implement the Agreement on Industrial and Production Operations, the Company entered into several international contracts involving the purchase of production equipment that were denominated in foreign currencies. With the aim of carrying out contract payments, the Company purchased currency in advance and placed it in short-term deposits prior to making contract payments. The Company applied the reduced profit tax rate to the earned income.
As a result of its review, the tax authority established that the production facility was at the construction stage and could not be used for receiving profit from production operations, which indicated that the zero profit tax rate was incorrectly applied to the earned income. The court also noted that neither the business plan, nor the free economic zone agreement stipulated the possibility of earning such income.
23 September 2016
Application of the corporate property tax benefit in respect of movable property
In 1H 2015, Energoremontnaya Kompaniya Limited Liability Company (hereinafter ̶ the Company) applied the corporate property tax benefit to vehicles, treating them as movable property.
According to the tax authority, the transaction between the Company and the business partner involving the purchase of the above-mentioned fixed assets was formal, given that both of them were related and affiliated entities, which precludes the application of the benefit in respect of the purchased vehicles in accordance with paragraph 25, article 381 of the Tax Code of the Russian Federation.
The Seventh Commercial Court of Appeal ruled that the benefit was applied properly, as the tax authority failed to prove such a relationship existed between the Company and the business partner at the time of the acquisition of the property in accordance with paragraph 2, clause 105 of the Tax Code of the Russian Federation.
5 September 2016
Application of the corporate property tax benefit in respect of in-house car parking
The Commercial Court of the Republic of Tatarstan confirmed the right of OOO Smart Service (hereinafter ̶ the Company) to use the regional tax benefit by applying the reduced corporate property tax benefit of 0.01 percent in respect of multi-story car parking structures.
The tax authority claimed that the multi-story car parking in question is not a standalone building but an integral part of the non-residential retail business centre.
The first instance court upheld the Company’s position, stating that under strict construction of the law, the criteria for exempting the property from taxation include only the property's quantitative and qualitative parameters. At the same time, the law does not stipulate that this tax benefit is applicable only to standalone multi-story car parking structures.
It is worth noting that the applicability of a similar corporate property tax benefit in respect of in-house car parking that is stipulated in the legislation of the city of Moscow was reviewed within several cases in which The Supreme Court of the Russian Federation supported the taxpayer’s position.