Tax reclassification of advertising and marketing services provided in favour of foreign companies

Pepeliaev Group advises that the practice of conducting tax audits aimed at reclassifying advertising and marketing services provided to foreign companies has spread.

I. Whom does this concern?

Risks of tax audits in this field relate to companies that provide advertising and marketing services to foreign companies and apply the Russian VAT exemption under article 148(4)(1) of the Russian Tax Code.

The risks are especially high for companies whose services of this nature have as their subject matter, among other things, the activity of communicating information about the customer’s products at professional events addressed to the so-called “target audience’.

Such practices are most often used by pharmaceutical companies, since the promotion of medicines prescribed by doctors is possible in limited ways, including:

• through advertising in the venues of medical or pharmaceutical exhibitions, seminars, conferences and in specialised printed publications intended for medical and pharmaceutical employees;
• by providing targeted information to doctors during individual or group meetings (visits, round tables) with representatives of pharmaceutical companies.

II. Why risks of additional tax assessments are high

The tax authorities are guided by case law that has recently appeared, in which the courts supported additional tax assessments as a result of the reclassification of advertising and marketing services as services for bringing information about products to a limited number of third parties.

These are the court decisions in the dispute of Novamedica (case No. А40-218059/22-140-4122).

In a controversial case, the court found it justified to assess additional VAT to a pharmaceutical company providing marketing services to its foreign partner. The court concluded that “bringing information to third parties (medical and pharmaceutical employees) by holding lectures at specialised medical events, as well as meetings with doctors and representatives of pharmacies cannot be regarded as providing advertising and/or marketing services, but constitutes information services”. And the place of supply of such services is Russia, since information services are not specified in article 148(1)(4).

Tax authorities are conducting tax audits of other companies and are applying the conclusions of the controversial decision, irrespective of the fact that this case has not yet been considered by the court of third instance (the court hearing is scheduled for 12 October 2023).

What to think about and what to do

If the circumstance of Novamedica’s court case are similar to the services your company provides, you should acknowledge that the risks of a tax audit being scheduled and additional taxes being assessed are high.

We recommend conducting an ‘audit’ of the services provided and the documents that are issued in relation to them and forming additional evidence and arguments that will be able to resist the negative conclusions of the court.

Help from your adviser

The lawyers of Pepeliaev Group have extensive experience of advising clients on all tax matters.

We can help you with assessing tax risks and preparing a set of ‘defence’ files that can be used when defending yourself against tax claims.