A ruling on the high-profile case Oriflame vs. tax authorities^[1] was rendered by the Moscow District Arbitration Court (cassation instance) on June 11, 2015. The conclusions drawn by the court in this case affect all foreign companies operating in Russia through subsidiaries.

In this case, tax authorities and courts questioned the right of the Russian company OOO Oriflame Cosmetics to deduct from its profit tax base the royalties paid to the foreign affiliate Oriflame Kosmetiek B.V. (Netherlands) for the right to use trademark, brand and know-how. Tax authorities and courts consider that such royalties are unlawful tax optimization, which allowed the Russian company to significantly decrease its tax burden by deducting paid royalties from its profit tax base and deducting withheld VAT, while Oriflame Cosmetics SA and Oriflame Kosmetiek B.V. avoided paying taxes in their respective jurisdictions. Tax authorities and courts argue that such tax optimization is unlawful because OOO Oriflame Cosmetics is registered as legal entity only formally, while it actually operates as Oriflame Cosmetics SA’s representative office. You will find a case overview and court arguments here.

RECOMMENDATION

Although the case formally concerned royalties, the conclusions drawn by courts could apply to other types of agreements between foreign companies and their subsidiaries in Russia. Despite the contestable position held by courts in the Oriflame case, Awara experts recommend foreign companies operating in Russia through subsidiaries to take the following actions to minimize the risk of claims from tax authorities:

1. Conduct a thorough audit of the relationships with subsidiaries to determine whether the level of independence enjoyed by the subsidiaries is sufficient. If necessary, review the contractual relationships with Russian subsidiaries, granting more independence and autonomy;
2. Verify that the transfer prices and amounts paid to foreign affiliated companies for goods, services, royalties, etc. are in line with market level in accordance with transfer pricing rules;
3. Ensure proper documentation of operations and benefits by Russian companies from the operations with foreign affiliated companies.
4. Ensure that the know-how received under license and franchise agreements remains confidential and that the received trademarks are registered in Russia.

Should you have any questions or require any assistance, please do not hesitate to contact Awara team.

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The content of this Legal Alert is provided for general information only and should not be treated as a substitute for legal advice for which it is always necessary to consider the actual and specific circumstances of the situation at hand.