Federal Law No. 381-FZ “On the Fundamentals of State Regulation of Trade in the Russian Federation” dated 28 December 2009 may have not only civil law consequences, but also tax implications

In an information alert dated 11 January 2010, Pepeliaev Group reported that Federal Law No. 381-FZ dated 28 December 2009 “On the Fundamentals of State Regulation of Trade in the Russian Federation” had been adopted at the end of 2009 and would come into force fr om 1 February 2010.

The Law introduces a number of legal restrictions that have a material impact on the businesses of retail chains and also product suppliers. Many of these restrictions, in particular, the restriction on the size of bonuses payable by a supplier to a retail chain or the deadline for paying money for supplied products, will result in both civil law consequences and tax implications for these participants.

One of the key innovations concerns the procedure governing incentive payments effected by suppliers to retail chains and in some cases to distributors. The law introduces the following restrictions and antimonopoly rules:

• When supplying foodstuffs, a supplier may only pay the following type of remuneration to a retail chain within the scope of a contract – a premium (bonus) for the purchase of a specific amount of foodstuffs, in other words, for the volume purchased. The size of this remuneration may not exceed 10% of the product price. It is possible that the authorities will apply the following interpretation to this legislative provision: the remuneration payable for the purchase of a specific amount of a product may not be granted in any other ways, including through the sale of the product at a reduced price, in other words, through discounts on the product price;

• The Law restricts the ability to establish in a contract a fee for the right to sell goods through a retail chain (the common practice of payment for “entry” into a retain chain or outlet), for the inclusion of new products in the range of products sold by the retail chain and the expansion of the range of products, irrespective of the contract serving as the basis for this fee;

• The Law introduces a number of restrictions (article 13), which may in practice be perceived as lim itations on the freedom of the parties under a contract on the supply of foodstuffs to agree and include in supply contracts discounts that exceed the size stipulated by the Law;

• A fee for advertising foodstuffs, marketing and other similar services aimed at promoting foodstuffs with retail chains may only be charged by retail chains by way of fee-based contracts on the provision of corresponding services.

The adoption of this Law will force many market participants to change their standard cooperation model with respect to various advertising and marketing events and sales promotion. It should be acknowledged that the Law will imply abandonment of the practice of paying bonuses or accruing discounts within the scope of supply contracts and the replacement of these contracts with contracts on the provision of advertising and marketing services. Despite existing favourable court practice with respect to the deductibility of expenses incurred on such services, the restrictions that are being introduced on the payment of bonuses within the scope of supply contracts make it impossible to apply sub-clause 19.1, clause 1, article 265 of the Russian Tax Code in such tax disputes. When making the transition to new standards of work, market participants should take note of the taxation specifics of fee-based service contracts concluded in the retail trade sector.

Please note that businesses have been accorded 180 days since the entry into force of the law to bring concluded contracts into line with the new requirements.

For further information, please contact:

in Moscow – Andrey Tereschenko, Partner, at: (495) 967-0007 or by e-mail: info@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail: spb@pgplaw.ru