In February 2016, the Russian Supreme Court in the course of examining a tax dispute confirmed a position very important for every taxpayer – if economic operations with a  direct contractor are duly confirmed by documents, a taxpayer is entitled to apply VAT deductions regardless of this contractor’s relations with service suppliers of the second, third and subsequent tiers. 

In this case, the tax authority denied VAT deductions to a company, as it came to a decision based on the results of inspection that the supply chain was comprised of fly-by-night companies which have not proven their performance of economic operations. 

The inspectorate decided that all payment operations of the contracting taxpayer with other suppliers is of transit nature, and companies participating in the whole chain do not have enough assets and staff to perform economic and financial activities. As a result, the company was denied VAT deductions. 

Meanwhile, courts of all three instances supported the taxpayer and afterwards the Russian Supreme Court confirmed the legality of positions of the lower instance courts. 

In particular, the following arguments deserve attention and should be taken into account in similar disputes with the tax authorities: 

• The first-tier contractor provided all necessary documents upon the inspectorate’s request, confirming that economic operations were real;
• Absence of evidence proving that the taxpayer was engaged in a scheme of receiving unjustified tax benefits;
• Bad faith of the second and third tier contractors does not in itself entail unjustified tax benefit, as each of these contractors bears individual tax liability. 

Taking into account the negative trend in the field of tax disputes, in particular, regarding VAT refunds from the state budget, the final decision of the Russian Supreme Court on this case is very significant and gives taxpayers hope that disputes with the tax authority will be resolved to their benefit. 

Decision No.308-KG 15-18629 of the Supreme Court of the Russian Federation dated 01.02.2016

Anastasiya Kuzmina    Associate   St. Petersburg   akuzmina@cls.ru    Tel.: +7 (812) 346 79 90

Additional notes

Should any questions arise in connection with the above or if you need any additional materials, please contact Anastasia Kuzmina, St. Petersburg Office of Capital Legal Services.

This Information letter keeps the clients of Capital Legal Services and other interested parties abreast of information that may, to any extent, affect their activity or cater to their particular interests. The opinions and commentaries expressed in this information letter shall not be deemed as legal opinions and do not cancel the need to obtain legal advice or legal opinion on separate issues.