Post by Sapphire Capital on Oct 29, 2008 20:31:34 GMT 4
Russia: Latest court practice on application of transfer pricing rules to the sale of shares
Structuring investments into Russia involves transactions with shares in Russian joint-stock companies (JSCs) and limited liability companies (LLCs). If double tax treaty protection is not available, transfer of such shares may be a taxable event in Russia and related transfer pricing (TP) issues should be addressed. In 2008 a number of arbitration court cases appeared where the Russian tax authorities tried to apply Russian TP rules to transactions with shares in JSCs/ LLCs. These court cases are considered below:
Sale of non-quoted shares in JSCs
Under the Russian legislation, shares in JSCs fall under the definition of securities. According to the Russian tax code, in the absence of identical (similar) quoted securities the sale price of non-quoted securities may be accepted for tax purposes if it does not deviate by more than 20% from the estimated price of these securities. The estimated price should be determined on the basis of the fair market value "taking into account terms of the transaction, liquidity and price of securities and other relevant factors."
In 2008, the Russian tax authorities proposed profits tax adjustments based upon the determination of the estimated price by dividing the value of the company's net assets under the Russian statutory financial statements by the number of the company's shares (i.e. the net asset method of determining the price of shares).
Since the net assets method is a relatively straight-forward method, the Russian tax authorities quite often use this method to determine the estimated price of non-quoted shares. Furthermore, sometimes, the Russian tax authorities equate the estimated price calculated on the basis of the net assets method with the market price of non-quoted shares. 2008 court practice shows that the arbitration courts do not support such approach. This can be demonstrated by the following court rulings:
Resolution of the Federal Arbitration Court of the Povolzskiy region of May 6 2008 # A55-8633/2007. The court ruled as follows: the price of non-quoted shares calculated using the net assets method is one of key factors when determining the estimated price of non-quoted shares. The court also indicated that other factors such as an ability to exercise control over the company, off-balance obligations and liquidity of shares should be taken into account;
Resolution of the Supreme Arbitration Court of May 16 2008 # 15498/07. The court ruled as follows: the estimated price of non-quoted shares is determined to check if the 20% deviation between the sale price of the shares and estimated price of the same shares exists. Such comparison allows to determine if the sale price should be adjusted for tax purposes. The Russian tax code does not contain provisions stipulating that the estimated price of non-quoted shares, in particular the price which is calculated using the net assets method, should be considered as the market price of the respective non-quoted shares.
Resolution of the Federal Arbitration Court of the Severo-Kavkazskiy region of April 7 2008 # F08-1561/08-552A. The court ruled as follows: if the 20% deviation of the price of transaction from the estimated price exists, the tax code provides that tax obligations should be calculated on the basis of the market price established using the general TP rules regulating the market price of goods, work, and services for tax purposes.
Sale of shares in LLCs
Under the Russian legislation, an ownership interest in a LLC is considered to be a property right rather than a security. As a result, technically special TP rules established for the sale of securities do not apply to the sale of an interest in LLC shares.
Until recently, application of general TP rules regulating the market price of goods, work, and services to the sale of LLC shares was arguable. However, the Arbitration Court of the Moscow region in its decision of February 1 2008 # A40-77926/06-111-446 confirmed that the general TP rules do apply to the sale of LLC shares (parts).
The above court cases confirm that the Russian tax authorities pay close attention to the fact whether or not the sale of shares is performed at arm's length. Moreover, the approach of arbitration courts becomes less formal as compared to the past. Russian arbitration courts start paying more attention not only to the net assets value of a company calculated on the basis of Russian financial statements (which not always reflect the fair market value of the company's assets), but also to other factors. It is recommended that multinationals investing into Russia carefully consider the TP aspects of structuring their investments.
Source: ITR - Price Waterhouse, Moscow
Svetlana Stroykova (svetlana.stroykova@ru.pwc.com), Ilarion Lemetyuynen (ilarion.lemetyuynen@ru.pwc.com)
+7 495 967 6000
Structuring investments into Russia involves transactions with shares in Russian joint-stock companies (JSCs) and limited liability companies (LLCs). If double tax treaty protection is not available, transfer of such shares may be a taxable event in Russia and related transfer pricing (TP) issues should be addressed. In 2008 a number of arbitration court cases appeared where the Russian tax authorities tried to apply Russian TP rules to transactions with shares in JSCs/ LLCs. These court cases are considered below:
Sale of non-quoted shares in JSCs
Under the Russian legislation, shares in JSCs fall under the definition of securities. According to the Russian tax code, in the absence of identical (similar) quoted securities the sale price of non-quoted securities may be accepted for tax purposes if it does not deviate by more than 20% from the estimated price of these securities. The estimated price should be determined on the basis of the fair market value "taking into account terms of the transaction, liquidity and price of securities and other relevant factors."
In 2008, the Russian tax authorities proposed profits tax adjustments based upon the determination of the estimated price by dividing the value of the company's net assets under the Russian statutory financial statements by the number of the company's shares (i.e. the net asset method of determining the price of shares).
Since the net assets method is a relatively straight-forward method, the Russian tax authorities quite often use this method to determine the estimated price of non-quoted shares. Furthermore, sometimes, the Russian tax authorities equate the estimated price calculated on the basis of the net assets method with the market price of non-quoted shares. 2008 court practice shows that the arbitration courts do not support such approach. This can be demonstrated by the following court rulings:
Resolution of the Federal Arbitration Court of the Povolzskiy region of May 6 2008 # A55-8633/2007. The court ruled as follows: the price of non-quoted shares calculated using the net assets method is one of key factors when determining the estimated price of non-quoted shares. The court also indicated that other factors such as an ability to exercise control over the company, off-balance obligations and liquidity of shares should be taken into account;
Resolution of the Supreme Arbitration Court of May 16 2008 # 15498/07. The court ruled as follows: the estimated price of non-quoted shares is determined to check if the 20% deviation between the sale price of the shares and estimated price of the same shares exists. Such comparison allows to determine if the sale price should be adjusted for tax purposes. The Russian tax code does not contain provisions stipulating that the estimated price of non-quoted shares, in particular the price which is calculated using the net assets method, should be considered as the market price of the respective non-quoted shares.
Resolution of the Federal Arbitration Court of the Severo-Kavkazskiy region of April 7 2008 # F08-1561/08-552A. The court ruled as follows: if the 20% deviation of the price of transaction from the estimated price exists, the tax code provides that tax obligations should be calculated on the basis of the market price established using the general TP rules regulating the market price of goods, work, and services for tax purposes.
Sale of shares in LLCs
Under the Russian legislation, an ownership interest in a LLC is considered to be a property right rather than a security. As a result, technically special TP rules established for the sale of securities do not apply to the sale of an interest in LLC shares.
Until recently, application of general TP rules regulating the market price of goods, work, and services to the sale of LLC shares was arguable. However, the Arbitration Court of the Moscow region in its decision of February 1 2008 # A40-77926/06-111-446 confirmed that the general TP rules do apply to the sale of LLC shares (parts).
The above court cases confirm that the Russian tax authorities pay close attention to the fact whether or not the sale of shares is performed at arm's length. Moreover, the approach of arbitration courts becomes less formal as compared to the past. Russian arbitration courts start paying more attention not only to the net assets value of a company calculated on the basis of Russian financial statements (which not always reflect the fair market value of the company's assets), but also to other factors. It is recommended that multinationals investing into Russia carefully consider the TP aspects of structuring their investments.
Source: ITR - Price Waterhouse, Moscow
Svetlana Stroykova (svetlana.stroykova@ru.pwc.com), Ilarion Lemetyuynen (ilarion.lemetyuynen@ru.pwc.com)
+7 495 967 6000