Russian court accepted requalification of royalties for the use of know-how as dividends

On 07.05.2021, the Arbitration Court (State Commercial Court) of Krasnoyarskiy Kray issued a decision in case N A33-5437 / 2020, in which it agreed with the conclusions of the Russian tax authorities that the Payments from a taxpayer to a foreign affiliate company for the use of intellectual property rights (know-how) are in fact dividends.


Taxpayer (OOO ‘Johnson Matthey Catalysators’) paid a foreign affiliate (Johnson Matthey PLC) royalties for the use of intellectual property.

The payments were made in accordance with the license agreement for the transfer of technical information for the production and marketing of products (“know-how”) and the taxpayer considered these royalties as deductible expenses.

However, the Russian tax authorities have reclassified the royalties as dividends. As a result, license payments were excluded from the list of deductible expenses and an additional amount of corporate income tax was charged to the taxpayer.

In addition, while the Taxpayer has treated the payments as royalties exempt from Russian withholding tax on the basis of a double taxation agreement between Russia and the United Kingdom[1], the tax authorities concluded that the Taxpayer had to fulfill obligations as a tax agent, that is, he was obliged to pay withholding tax on the income of a foreign company from sources in Russia in the form of dividends. As a result, withholding tax was levied. The Taxpayer challenged the decision of the tax administration before the Krasnoyarskiy Kray Arbitration Tribunal (the Court).

The Court’s conclusions

The Court agreed with the tax administration’s position that the Taxpayer abused his rights by paying dividends in the guise of royalties. The findings were made on the basis of the following circumstances.

  1. The taxpayer did not provide all of the technical information for examination, he only submitted to the Court several first pages of documents with dates, signatures and general information as well as general tables with the dates of technology transfer and their updates. up to date. However, the court ruled that these pages do not demonstrate what exactly is confirmed by the signatures and cannot be considered proof of technology transfer;
  2. Some documents, which were submitted to the Court by the taxpayer, do not contain any reference to the license agreement under which the disputed license payments were made. Consequently, the Court considered that it was impossible to link them to the execution of the license contract;
  3. The documents presented by the taxpayer are dated from tax periods other than the tax period during which the tax administration made tax adjustments;
  4. The technical information has been partially provided to the Taxpayer before the conclusion of the license agreement, which deprives the information of the characteristic of being unknown to the licensee and, therefore, of the commercial value of receiving this information;
  5. The obligation to pay royalties depends on the operating result of the Taxpayer. In the absence of profits, the royalties will not be paid. This demonstrates the influence of the interdependence (affiliation) of the parties on the terms of the license agreement and confirms that the real purpose of the license agreement is to allow the withdrawal of profits;
  6. The amount of royalties over a period of time significantly exceeded (10 times!) The income from the sale of products presumably made with the use of technology;
  7. The Taxpayer (the licensee) and the foreign company (the grantor) are affiliated companies of the same group: the foreign company participates indirectly in the capital of the Taxpayer through other companies of the group.


To sum up, it should be noted that taxpayers must pay close attention to “paperwork”, in particular, they must ensure that the documents are properly drafted and dated.

In the case of a preliminary transfer (i.e. before the conclusion of the license agreement) of information (“know-how”) to the license holder for its examination and evaluation, it is appropriate to ” ensure that the know-how cannot be used by the holder without the conclusion of the license agreement. Failing this, the authorities may consider that the conclusion of the license agreement has no commercial value for the latter because of its knowledge of its content.

And of course, the commercial terms of the license agreement must correspond to the terms that would be agreed between independent (unaffiliated) persons.

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