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Outcome of the CMS Cameron McKenna Case
The Federal Arbitration Court of the Moscow area decided in the case of CMS Cameron McKenna last year, which was discussed widely by Russian international tax specialists. The taxpayer - an international legal consulting firm CMS Legal, failed a legal process, it could not convince the courts and tax authorities of the need to use the OECD principle of acknowledging the permanent establishment of a foreign company as a solitary entity in tax purposes. Taxand Russia discusses this case in the context of permanent establishment in Russia.
The issue, in essence, is as follows; a permanent establishment of an English legal company provided legal services in Russia, using both English and Russian lawyers. The English lawyers' services were billed to clients. Legally this means the Moscow firm is paying full price for the services as a solitary independent entity.
Tax authorities may be able to prove to the courts that the payments for the English lawyers' services were not expenses for tax purposes, but were an income of the company, because both the Moscow and London branches are part of one legal entity - CMS Legal. With regard to the impossibility of making settlements, concluding treaties and providing services between parts of one entity, the courts suggested such payments are not expenses, but a redistribution of income. Additional evidence that the Russian branch was not treated as a solitary entity, the courts highlighted that the allocation management and commercial expenses from English head branch to the Moscow branch.
This case shows that the rules around cross-border taxation in Russia are complex. The courts are not able to fully investigate the concepts and principles of the OECD and sometimes they apply the rules by partly integrating with general Russian tax principles. International companies should consider structuring their businesses more carefully with regard to Russian court practice.