A taxpayer may not be disallowed VAT deductions if it did not and could not have known about the tax offence committed by its contracting party

Pepeliaev Group advises that the Presidium of the Russian Supreme Arbitration Court has changed its own legal position on a taxpayer’s eligibility to a VAT deduction based on documents made in the name of so-called “deserted companies”, in other words, companies whose nominal directors refused accountability for their operations.

It is a well-known fact that state arbitration courts, citing Resolution No. 9299/08 of the Presidium of the Russian Supreme Arbitration Court dated 11 November 2008 on the case of ZAO Kestroy-1, frequently disallow VAT deductions exclusively on technical grounds, such as the signing of a VAT invoice by unauthorised person, in other words, without taking into consideration the actual nature of the business transactions and legal status of contracting parties, based on data fr om available sources (Unified State Register of Legal Entities (Companies Register), tax registration or licence availability).

The existing situation evoked an extremely negative reaction fr om the business community and tax experts, which was inevitably noticed by the supreme tax authority.

On 20 April, the Presidium of the Russian Supreme Arbitration Court adopted Resolution No. 18162/09 wh ere it reviewed its position on Resolution No. 9299/08 dated 11 November 2008. To date, we do not have a full text of the Resolution with the grounds for the conclusions, but certain conclusions can be drawn based on the ruling of the Russian Supreme Arbitration Court to refer the case for supervisory review and the discussion of the case by the Presidium of the Russian Supreme Arbitration Court.

To check whether you are eligible for a VAT deduction, you should follow articles 171 and 172 of the Russian Tax Code, which states that taxes are deductible based on the VAT invoices issued by the sellers after booking the sold goods (work, services).

By virtue of Resolution No. 53 of the Plenum of the Russian Supreme Arbitration Court dated 12 October 2006, the taxpayer’s submission to the tax authority of all duly formalised documents to be eligible for tax benefits constitutes the grounds for obtaining such tax benefits, unless the tax authority proves the inaccuracy, inconsistency or incompleteness of the data contained.

As the obligation to issue VAT invoices is imposed on the seller, if there are no errors in said document, there are no grounds for concluding on the inaccuracy or incompleteness of data, unless circumstances have been established that the buying taxpayer knew or should have known about the seller’s indicating inaccurate or inconsistent data.

After verifying the suppliers’ legal capacity and their due state registration as legal entities and the receipt of respective excerpts from the Companies Register, the taxpayer displayed due care when concluding the transaction.

When issuing the resolution, the Presidium of the Russian Supreme Arbitration Court took into account the legal position of the European Court of Human Rights on the case of Bulves AD v. Bulgaria[1], wh ereby a person that did not or could not have known about the tax offence committed by the contracting party may not be disallowed VAT deductions.

Once the official text of Resolution No. 18162/09 of the Presidium of the Russian Supreme Arbitration Court dated 20 April 2010 (approximately in a month) is published, we will prepare and send you recommendations on how to arrange pre-contractual work and on similar disputes with the tax authorities that the company lost.