Continental Tires RUS LLC had been issued a substantial loan from Continental AG (Germany). Following an audit the tax authority established that the main purpose of the loans was the systematic withdrawal of funds abroad. According to the tax authorities the loan transactions were concluded for the purpose of artificially raising cash in the form of loans and, accordingly, artificially increasing accounts payable, while the shortage of working capital arose and arises from the special, continuous and coordinated provision of deferred payments to buyers of tyre products. Judgement of the Russian Court of Appeal The Court ruled in favor of the tax administration. Excerpt: “The provisions of Article 252 of the Tax Code stipulate that the taxpayer reduces the income received by the amount of expenses incurred. Expenses are considered to be justified and documented expenses of the taxpayer. Reasonable expenses are defined as economically justified expenses, the evaluation of which is expressed in monetary form. Documented expenses shall mean expenses supported by documents executed in accordance with the legislation of the Russian Federation. Expenses are deemed to be any expenses on condition that they are incurred for the purpose of carrying out activities aimed at generating income. In accordance with Clause 3 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 12.10.2006 № 53 “On arbitration courts assessing the validity of taxpayers receiving tax benefits”. (hereinafter – Ruling No. 53) tax benefit may be recognised as unjustified, in particular, if for taxation purposes transactions are taken into account not in accordance with their real economic sense or transactions are taken into account not due to reasonable economic or other reasons (business purposes). It is established that the Moscow Arbitration Court in Case No. A40-123542/14 states that, based on an analysis of taxation and financial results of the parent company Continental AG in Germany, the court considered that the so-called interest income received from the taxpayer in Russia actually has nothing to do with the economic activity of the subsidiary in Russia, is not related to the efficiency and business purpose of the taxpayer in the Russian Federation, and has the goal of servicing the losses of the parent company, in the absence of the holding company. In the aforementioned judicial act, the court concluded that the purpose of the relevant operations involving the provision of loans by the parent company to the company (the subsidiary) was to withdraw assets and profit from taxation in Russia, with the creation of fictitious “income” in Germany, without actually paying taxes on it, given the declaration of multimillion losses in view of the permanent reduction of taxable income by means of interest expenses, in connection with which the court regarded these actions as receiving unjustified tax benefits, entailing a loss of taxable profit. Thus, the court concludes that, as a result of the tax control measures taken, the Inspectorate came to a justified and lawful conclusion.” Click here for English translateion Click here for other translation ...