The Russian Supreme Court on withholding tax at source when services of a foreign company are paid for


According to the Russian Supreme Court payments under cross-border agreements for services (work) are treated as passive income if no operations have actually been performed. 


The Judicial Board for Economic Disputes of the Russian Supreme Court examined the case of HaloPolymer Kirovo-Chepetsk LLC  (the “Company”) and concluded that the taxpayer could not book the expenses in the form of payments under a cross-border transaction for the provision of services when calculating its own tax base, since the taxpayer was aware that there would be no consideration under such transaction.  Moreover, such payments are classified as other passive income not relating to active entrepreneurial operations, both for the purposes of double taxation treaties and for the purposes of article 309 of the Russian Tax Code (the “Tax Code”).  Therefore, when the Company acted as a tax agent, it was obliged to withhold tax at source.


From the facts of the case it follows that the Company and the foreign company entered into agreements for services and work to develop a project that involved creating, determining and selling carbonic assets.  Pursuant to the specified agreements the Company transferred over RUB 130 million to the foreign company.  Following a field tax audit, the tax authority did not acknowledge such expenses and additionally assessed profit tax.


Discover more: The Russian Supreme Court on withholding tax at source

Megaphone Icon

Taxand's Take

What to think about and what to do


The decision of the Russian Supreme Court demonstrates that the tax authorities devote close attention to cross-border transactions. In disputes over the taxation of such transactions, courts are taking the side of the tax authorities with increasing frequency.


It is another serious warning for the taxpayers that when cross-border transactions are structured and cross-border payments without withholding tax at source or with the application of a reduced rate under a double taxation treaty are planned, confirmation is required of both the business (economic) purpose as well as of the fact that saving on withholding tax is not the only purpose. In other words, the principal purpose test must actually be performed in accordance with the Multilateral Convention to implement the BEPS Plan measures and with the provisions of article 54.1 of the Tax Code.

Crosshairs Icon

Article tags

International Tax | Russia

Hands on Keyboard


Keep up to date with news, views and updates from Taxand.

Sign-up now »