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Taxation of Non-Profit Organisation and Translating Issues


On 28 July 2011 a panel of judges of the Russian Supreme Arbitration Court ("SAC") tried a case regarding the taxation of donations to Russian non-profit organisations received from international non-governmental organisations. The SAC also noted that it was an incorrect translation of foreign documents by the Russian tax authority that had resulted in the taxpayer suffering incorrect tax treatment. Taxand Russia looks at the case.

The non-profit organisation in question was AGORA. It had received donations from international non-governmental organisations (TIDES Foundation and National Endowment for Democracy). These non-profit organisations had received the funds they donated from a US government department in the form of "grants".

Under the Russian Tax Code taxpayers, such targeted financing, including grants, should not increase the CIT tax base. But any such targeted financing should be:

  • free of charge and non-returnable
  • spent on programs in culture, non-professional sport, science, art, education, health protection, human rights, etc
  • obtained by:
    • Russian natural entities
    • non-profit organisations
    • international non-profit organisations, which should be included in a special official list issued by the Russian Government.
  • spent under strict control with an obligatory report.

TIDES Foundation and National Endowment for Democracy were not included in the Russian government's list of organisations. The Russian tax authority therefore decided that the taxpayer's activity was a rendering of services, meaning that the taxpayer should increase its VAT base and CIT base by the amount of such profit and thus pay tax on these funds. However, it had not done so.

At the same time the taxpayer was sure that the funds it had obtained from TIDES Foundation and National Endowment for Democracy were a reimbursement of costs, so no tax obligations had arisen.

Considering facts of the case, the SAC's panel of judges concluded that the taxpayer had no reasons to apply the article of Russian Tax Code regarding the taxation of grants paid for a specific purpose.

But the SAC judges paid particular attention to the reasons that had prompted the tax authority to identify the payments as grants. The reason was that TIDES Foundation and National Endowment for Democracy have received financial assets from a US government department, which provided the funds as a "grant" (as it was referred to in English). Taking into consideration the arguments of translators, the Court said that in these circumstances the term "grant" should be translated as a government subsidy, not simply as a grant.

The court said that in view of this, the general rules on taxation should be applied, not rules relating to the taxation of grants. Under the Russian Tax Code, donations on targets assigned in Charter should not be taxed, so the taxpayer was right not to include donations from the TIDES Foundation and National Endowment for Democracy in its tax bases for CIT and VAT.

Taxand's Take

This is maybe the first resolution of the SAC's panel of judges in which the judges have paid such serious attention to the translation issues on which the tax authority based its arguments.

The ruling may be especially interesting in terms of the enforcement the Law which amends the Russian Tax Code with regard to the taxation of non-profit organisations. There may be an urgent need to revise provisions relating to charity and donations for publicly significant purposes.

Your Taxand contacts for further queries are:
Andrey Tereschenko
T. +7 495 967 00 07

Ivan Zelenin
T. +7 495 967 00 07

Taxand's Take Author