For the first time in 5 years, the court supported business in a tax dispute

Oct, 09 2019

The contractor of Sakhalin Energy consortium, the largest international oil and gas drilling company KSA Deutag Holding Ltd., managed to challenge the additional taxes and penalties imposed in the Arbitration Court of the Sakhalin Region for the payment of dividends to the Cypriot parent offshore company KCA Deutag Holding Ltd. These funds were then transferred to an account in the British bank HSBC of KCA European Holding, based in London, which owned a Cypriot offshore company.

According to the current double taxation treaties, dividends paid by Russian companies to residents of these countries are taxed at a reduced rate compared to the Russian – 5% for Cyprus and 10% – for the UK, with the usual rate for Russian residents of 15%. Taxes collected at these rates are transferred to the Russian budget, from the payment in Cyprus and in the UK the rest of the dividends are exempted.

The Federal Tax Service during the inspection considered that the Cypriot company is a technical agent, created only for the application of preferential tax rate in the payment of dividends, and the final recipient of the money was the parent company in the UK.  Therefore, the tax was recalculated at the rate of 10%. However, in the KSA court, Deutag Drilling proved that the Cypriot company had issued a loan to a German company, and subsequently paid tax in Cyprus for the interest received – the rate would have been even lower than 5% if the tax authorities had transferred the tax directly from Russia to Germany. Secondly, the company proved that the company is not a technical company, but a real entrepreneur and owns not only Russian assets. Money was transferred to the UK in 2013-2014 due to the crisis of the banking system in Cyprus.

The peculiarity of the case is that the court sided with the business for the first time in many years. This case may affect the court practice in the following cases.

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