ITEMID: 001-106308
LANGUAGEISOCODE: ENG
RESPONDENT: RUS
BRANCH: CHAMBER
DATE: 2011
DOCNAME: CASE OF OAO NEFTYANAYA KOMPANIYA YUKOS v. RUSSIA
IMPORTANCE: 2
CONCLUSION: Preliminary objection dismissed (non-exhaustion of domestic remedies);Violation of Art. 6-1+6-3-b;Violation of P1-1;No violation of P1-1;No violation of Art. 14+P1-1;No violation of Art. 18+P1-1;Just satisfaction reserved
JUDGES: Christos Rozakis;Dean Spielmann;Giorgio Malinverni;Khanlar Hajiyev;Sverre Erik Jebens
TEXT: 6. The applicant, OAO Neftyanaya Kompaniya YUKOS, was a publicly-traded private open joint-stock company incorporated under the laws of Russia. It was registered in Nefteyugansk, the Khanty-Mansi Autonomous Region, and at the relevant time was managed by its subsidiary, OOO “YUKOS” Moskva, registered in Moscow.
7. The applicant was a holding company established by the Russian Government in 1993 to own and control a number of stand-alone entities specialised in oil production. The company remained fully State-owned until 1995-1996 when, through a series of tenders and auctions, it was privatised.
8. Between 13 November 2002 and 4 March 2003 the Tax Inspectorate of the town of Nefteyugansk (“the Tax Office”) conducted a tax inspection of the applicant company.
9. As a result of the inspection, on 28 April 2003 the Tax Office drew up a report indicating a number of relatively minor errors in the company’s tax returns and served it on the company.
10. Following the company’s objections, on 9 June 2003 the Tax Office adopted a decision in which it found the company liable for having filed incomplete returns in respect of certain taxes.
11. The decision of the Tax Office was accepted and complied with by the company on 7 July 2003.
12. On 8 December 2003 the Tax Ministry (“the Ministry”), acting as a reviewing body within the meaning of section 87 (3) of the Tax Code, carried out an additional tax inspection of the applicant company.
13. On 29 December 2003 the Ministry issued a report indicating that the applicant company had a large tax liability for the year 2000. The detailed report came to over 70 pages and had 284 supporting documents in annex. The report was served on the applicant company on the same date.
14. The Ministry established that in 2000 the applicant company had carried out its activities through a network of 22 trading companies registered in low-tax areas of Russia (“the Republic of Mordoviya, the town of Sarov in the Nizhniy Novgorod Region, the Republic of Kalmykiya, the town of Trekhgornyy in the Chelyabinsk Region, the town of Lesnoy in the Sverdlovsk Region and the Evenk Autonomous District”). For all legal purposes, most of these entities were set up as entirely independent from the applicant, i.e. as belonging and being controlled by third persons, although their sole activity consisted of commissioning the applicant company to buy crude oil on their behalf from the company’s own oil-producing subsidiaries and either putting it up for sale on the domestic market or abroad, or first handing it over to the company’s own oil-processing plants and then selling it. There were no real cash transactions between the applicant company, its oil-processing and oil-producing subsidiaries and the trading entities, and the company’s own promissory notes and mutual offsetting were used instead. All the money thus accumulated from sales was then transferred unilaterally to the “Fund for Financial Support of the Production Development of OAO Neftyanaya Kompaniya YUKOS”, a commercial entity founded, owned and run by the applicant company. Since at all relevant times the applicant company took part in all of the transactions of the trading companies, but acted as the companies’ agent and never as an owner of the goods produced and processed by its own subsidiaries and since the compensation paid by the trading entities for its services was negligible, the applicant company’s real turnover was never reflected in any tax documents and, consequently, in its tax returns. In addition, most of the trading companies were in fact sham entities, as they were neither present nor operated in the place of their registration. In addition, they had no assets and no employees of their own.
15. The Ministry found it established, among other things, that:
(a) the actual movement of the traded oil was from the applicant company’s production sites to its own processing or storage facilities;
(b) the applicant company acted as an exporter of goods for the purpose of customs clearance, even though the goods had formally been owned and sold by sham companies;
(c) through the use of various techniques, the applicant company indirectly established and, at all relevant times de facto, controlled and owned the sham entities;
(d) all accounting operations of the companies were carried out by the same two entities, OOO “YUKOS” FBC and OOO “YUKOS” Invest, both dependant on or belonging to the applicant company;
(e) the network of sham companies was officially managed by OOO “YUKOS” RM, all official correspondence, including tax documents, being sent from the postal address of OOO “YUKOS” Moskva, the applicant company’s managing subsidiary;
(f) the sham companies and the applicant company’s subsidiaries entered into transactions with lowered prices for the purpose of reducing the taxable base of their operations;
(g) all revenues perceived by the sham companies were thereafter unilaterally transferred to the applicant company;
(h) statements by the owners and directors of the trading entities, who confessed that they had signed documents that they had been required to sign by the officials of the applicant company, and had never conducted any independent activity on behalf of their companies, were true;
(i) and, lastly, that the sham companies received tax benefits unlawfully.
16. Having regard to all this, the Ministry decided that the activities of the sham companies served the purpose of screening the real business activity of the applicant company, that the transactions of these companies were sham and that it had been the applicant company, and not the sham entities, which conducted the transactions and became the owner of the traded goods. In view of the above, and also since neither the sham entities nor the applicant company qualified for the tax exemptions in question, the report concluded that the company, having acted in bad faith, had failed properly to reflect these transactions in its tax declarations, thus avoiding the payment of VAT, motorway tax, corporate property tax, tax for improvement of the housing stock and socio-cultural facilities, tax in respect of sales of fuels and lubricants and profit tax.
17. The report also noted specifically that the tax authorities had requested the applicant company to facilitate reciprocal tax inspections of several of its important subsidiaries. Five of the eleven subsidiary companies refused to comply, four failed to answer, whilst two entities filed incomplete documents. It also specified that during the on-site inspection the applicant company failed to provide the documents requested by the Ministry concerning the transportation of oil.
18. The report referred, inter alia, to Articles 7 (3), 38, 39 (1) and 41 of the Tax Code, section 3 of Law no. 1992-1 of the Russian Federation (RF) of 6 December 1991 “On Value-Added Tax”, sections 4 and 5 (2) of RF Law no. 1759-1 of 18 October 1991 “On motorway funds in the Russian Federation”, section 21 (“Ch”) of RF Law no. 2118-1 of 27 December 1991 “On the basics of the tax system”, Article 209 (1-2) of the Civil Code, section 2 of RF Law no. 2030-1 of 13 December 1991 “On corporate property tax”, section 2 (1-2) of RF Law no. 2116-1 of 27 December 1991 “On corporate profit tax”, Decision no. 138-O of the Constitutional Court of Russia of 25 July 2001 and Article 56 of the Tax Code.
19. On 12 January 2004 the applicant company filed its detailed thirty-page objections to the report. The company admitted that for a very short period of time it had partly owned three out of the twenty-two organisations mentioned in the report, but denied its involvement in the ownership and management of the remaining nineteen companies. They maintained this position about their lack of involvement in the companies in question throughout the proceedings.
20. During a meeting between the representatives of the Ministry and the company on 27 January 2004, the applicant company’s counsel were given an opportunity to state orally their arguments against the report.
21. Having considered the company’s objections, on 14 April 2004 the Ministry adopted a decision establishing that the applicant company had a large outstanding tax liability for the year 2000. As the applicant company had failed properly to declare the above-mentioned operations in its tax declarations and to pay the corresponding taxes, in accordance with Article 122 (3) of the Tax Code the Ministry found that the company had underreported its tax liability for 2000 and ordered it to pay 47,989,241,953 Russian roubles (“RUB”) (approximately 1,394,748,234 euros, (“EUR”)) in tax arrears, RUB 32,190,599,501.40 (approximately EUR 935,580,142) in default interest and RUB 19,195,696,780 as a 40% penalty (approximately EUR 557,899,293), totalling RUB 99,375,538,234.40 (approximately EUR 2,888,227,669). The arguments contained in the decision were identical to those of the report of 29 December 2003. In addition, the decision responded in detail to each of the counter-arguments advanced by the company in its objections of 12 January 2004.
22. The decision was served on the applicant company on 15 April 2004.
23. The company was given until 16 April 2004 to pay voluntarily the amounts due.
24. The applicant company alleged that it had requested the Ministry to clarify the report of 29 December 2003 and that the Ministry had failed to respond to this request.
25. Under a rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute between the tax authority and the taxpayer was insoluble, the Ministry did not wait until 16 April 2004.
26. On 14 April 2004 it applied to the Moscow City Commercial Court (“the City Court”) and requested the court to attach the applicant company’s assets as a security for the claim.
27. By decision of 15 April 2004 the City Court initiated proceedings and prohibited the applicant company from disposing of some of its assets pending the outcome of litigation. The injunction did not concern goods produced by the company and related cash transactions.
28. By the same decision the court fixed the date of the preliminary hearing for 7 May 2004 and invited the applicant company to respond to the Ministry’s claims.
29. On 23 April 2004 the applicant company filed a motion in which it argued that the City Court had no territorial jurisdiction over the company’s legal headquarters and requested that the case be referred to a court in Nefteyugansk, where it was registered.
30. On 6 May 2004 the Ministry filed a motion inviting the court to call the applicant company’s managing subsidiary OOO “YUKOS” Moskva as a co-defendant in the case.
31. At the hearing the City Court examined and dismissed the applicant company’s motion of 23 April 2004. Having regard to the fact that the applicant company was operated by its own subsidiary OOO “YUKOS” Moskva, registered and located in Moscow, the court established that the applicant company’s real headquarters were in Moscow and not in Nefteyugansk. In view of the above, the court concluded that it had jurisdiction to deal with the case.
32. On 17 May 2004 the applicant company appealed against this decision. The appeal was examined and dismissed by the Appeals Division of the Moscow City Commercial Court (“the Appeal Court”) on 3 June 2004.
33. The City Court also examined and granted the Ministry’s motion of 6 May 2004. The court ordered OOO “YUKOS” Moskva to join the proceedings as a co-defendant and adjourned the hearing until 14 May 2004.
34. At the hearing of 7 May 2004 the applicant company lodged with the City Court a separate action against the tax assessment of 14 April 2004, seeking to have the assessment decision declared unlawful. The applicant company’s brief came to 42 pages and had 22 supporting documents in annex. This action was examined separately and dismissed as unsubstantiated by the City Court on 27 August 2004. The judgment of 27 August 2004 was upheld on appeal on 23 November 2004. On 30 December 2005 the Circuit Court upheld the decisions of the lower courts.
35. In the meantime the tax assessment case continued. On 14 May 2004 the City Court rejected the applicant company’s request to adjourn the proceedings, having found that the applicant company’s counterclaim did not require such adjournment of the proceedings concerning the Ministry’s action.
36. OOO “YUKOS” Moskva also requested that the hearing be adjourned as, it claimed, it was not ready to participate in the proceedings.
37. This request was rejected by the court as unfounded on the same date.
38. At the hearing the respondent companies also requested the City Court to vary their procedural status to that of interested parties.
39. The court rejected this request and, on the applicant company’s motion of 15 April 2004, ordered the Ministry to disclose its evidence. The company’s motion contained a lengthy list of specific documents which, it alleged, should have been in the possession of the Ministry in support of its tax claims.
40. The court then decided that the merits of the case would be heard on 21 May 2004.
41. On 17 May 2004 the Ministry invited the applicant company to examine the evidence in the case file at its premises. Two company lawyers went to the Ministry on 18 May and four lawyers went on 19 May 2004.
42. According to the applicant company, the supporting material underlying the case was first provided to the company on 17 May 2004, when the Ministry filed approximately 24,000 pages of documents. On 18 May 2004 the Ministry allegedly disclosed approximately a further 45,000 pages, and a further 2,000 pages on the eve of the hearing before the City Court, that is, on 20 May 2004.
43. Relying on a record dated 18 May 2004, drawn up and signed by S. Pepelyaev and E. Aleynikova (Ministry representative A. Bondarev allegedly refused to sign it), the applicant company submitted that the documents in question had been presented in an indiscriminate fashion, in unpaginated and unsorted piles placed in nineteen plastic crates (ten of which contained six thousand pages each, with nine others containing some four thousand pages each). All of the documents were allegedly crammed in a room measuring three to four square metres, with two chairs and a desk. No toilet facilities or means of refreshment were provided.
44. According to the Government, the documents in question (42,269 pages - and not 45,000 pages as claimed by the applicant- filed on 18 May 2004, and a further 1,292 - and not 2,000 pages as claimed by the applicant company, filed on 20 May 2004) were well-known to the applicant company; moreover, it had already possessed these accounting and legal documents prior to the beginning of the proceedings. The documents allegedly reflected the relations between the applicant company and its network of sham entities, and the entirety of the management and accounting activities of these entities had been conducted by the applicant company from the premises of its executive body OOO Yukos-Moskva, located in Moscow. All of the documents were itemised in the Ministry’s document dated 17 May 2004 and filed in execution of the court’s order to disclose the evidence.
45. The Government also submitted that the applicant company’s lawyers could have studied the evidence both in court and at the Ministry’s premises throughout May, June and July 2004.
46. The hearings on the merits of the case commenced on 21 May and lasted until 26 May 2004. It appears that the applicant company requested the court repeatedly to adjourn the proceedings, relying, among other things, on the lack of sufficient time to study the case file.
47. The Government submitted that the first day of the hearings, 21 May 2004, was devoted to hearing and resolving various motions brought by the applicant company and OOO Yukos-Moskva. On 24 May 2004, after hearing further motions by OOO Yukos-Moskva, the court proceeded to the evidence phase of the trial. The Tax Ministry then explained the evidence that it had submitted to the court. During this phase of the trial, which continued on 25 May 2004, the applicant company’s representatives were able to ask questions, and the defendants made various motions. According to the Government, where the court found that the applicant company had not had an opportunity to review a particular document that the Ministry wished to refer to, the court refused to allow the document to be entered in the record. On 26 May 2004 the applicant company was afforded an opportunity to explain its evidence and to submit additional evidence. The applicant company chose instead to address questions to the Ministry. The applicant company concluded the first-instance hearing of the case with over three hours of pleadings, whilst the Ministry limited its pleadings to brief references to its own tax inspection report, the decision dated 14 April 2004 and the statement of claim.
48. On 26 May 2004, at the end of the hearings, the City Court gave its judgment in which, for the most part, it reached the same findings and came to the same conclusions as in the Ministry’s decision of 14 April 2004. Having confirmed the factual findings of the decision of 14 April 2004 in respect of the relations and transactions between the sham companies and the applicant company with reference to sundry pieces of evidence, including the statements by the nominal owners of the trading companies, acknowledging to the true nature of their relations with the applicant company, the court then reasoned as follows:
“... Under section 3 of RF Law no. 1992-1 of 6 December 1991 ‘On value-added tax’, part 2 of section 5 and section 4 of RF Law no. 1759-1 of 18 October 1991 ‘On motorway funds in the Russian Federation’, subpart ‘ch’ of section 21 of RF Law no. 2118-1 of 27 December 1991 ‘On the basics of the tax system’, the sale of goods (works and services) gives rise to an obligation to pay VAT, motorway users’ tax, tax on the sale of oil and oil products and tax for the maintenance of the housing stock and socio-cultural facilities.
Under part 1 of Article 38 of the Tax Code, objects of taxation may consist of the sale of goods (works and services), assets, profit, value of sold goods (works and services) or other objects having value, quantity or physical characteristics on the presence of which the tax legislation bases the obligation to pay tax.
Under part 1 of Article 39 of the Tax Code, sales are defined as the transfer of property rights in respect of goods. Under subpart 1 and 2 of Article 209 of the Civil Code (taking into account Article 11 of the Tax Code) the owner of goods is the person who has the rights of ownership, use and disposal of his property, that is, the person who is entitled to carry out at his own discretion in respect of this property any actions which are not against the law and other legal acts and do not breach the rights and protected interests of other persons ...
The court established that the owner of the oil sold under contracts concluded with organisations registered in low-tax territories had been OAO Yukos. The respondents’ arguments about the unlawfulness of the use of the notion of de facto owner (фактический собственник) on the basis that, according to Article 10 (3) and Article 8 (1) part 3 of the Civil Code ... there existed a presumption of good faith on the part of parties involved in civil-law transactions and that therefore the persons indicated as owners in the respective contracts should be regarded as the owners, are baseless, because the above-mentioned organisations never acquired any rights of ownership, use and disposal in respect of oil and oil products (поскольку прав владения, пользования и распоряжения нефтью и нефтепродуктами у данных организаций не возникало).
OAO NK Yukos was therefore under an obligation to pay [the taxes], and this obligation has not been complied with in good time.
Article 41 of the Tax Code establishes that profit is an economic gain in monetary form or in kind, which is taken into account if it is possible to evaluate it and in so far as it can be assessed. Under subparts 1 and 2 of section 2 of RF Law no. 2116-1 of 27 December 1991 ‘On profit tax of enterprises and organisations’ which was then in force, the object of taxation is the gross profit of the enterprise, decreased (or increased) in accordance with the provisions of the present section. The gross profit is the total of revenues (receipts) from the sale of products (works and services), main assets (including plots of land), other property belonging to the enterprise and the profit derived from operations other than sales, less the sum of expenses in respect of these operations. Since it follows from the case file that the economic profit from the sale of oil and oil products was perceived by OAO NK Yukos, it was incumbent on [the applicant company] to comply with the obligation to pay profit tax.
Section 2 of RF Law no. 2030-1 of 13 December 1991 ‘On corporate property tax’ taxes the main assets, non-material assets, reserves and receipts which are indicated on the taxpayer’s balance sheet. It follows that the obligation to pay property tax was incumbent on the person who was legally responsible for reflecting the main assets, non-material assets, reserves and receipts on its balance sheet. Since it follows from the materials of the case that OAO NK Yukos was under such an obligation, this taxpayer was also under an obligation to pay property tax.
The court does not accept the respondent’s arguments that the tax authorities lacked the power to levy taxes from OAO NK Yukos in respect of the sums ... perceived by other organisations. The power of the tax authorities to bring proceedings in courts to ensure the payment of taxes to the budget in cases of bad-faith taxpayers is confirmed by decision no. 138-O of the Constitutional Court of the Russian Federation, dated 25 July 2001. At the same time the bad faith of taxpayer OAO NK Yukos and the fact that the proceeds from transactions in oil and oil products were remitted to it is confirmed by the materials of the case file.
The court has also established that the use of tax benefits by organisations which were dependent on OAO NK Yukos and participated in the tax-evasion scheme set up by that company was unlawful.
Pursuant to Article 56 of the Tax Code, tax benefits are recognised as preferences provided for in the tax legislation for certain groups of taxpayers in comparison with other taxpayers, including the possibility of not paying a tax or of paying it at a lower rate.
The court believes that tax payers must use their right to such benefits in good faith.
Meanwhile, it follows from the materials of the case that the taxpayers [concerned] used their right in bad faith.
The entities registered on the territory of the Republic of Mordoviya (OOO Yu-Mordoviya ..., ZAO Yukos-M ..., OAO Alta-Treyd ..., OOO Ratmir ..., OOO Mars XXII ...) applied benefits governed by Law of the Republic of Mordoviya no. 9-Z of 9 March 1999 ‘On conditions for the efficient use of the socio-economic potential of the Republic of Mordoviya’, which sets out a special taxation procedure for entities, for the purpose of creating beneficial conditions for attracting capital to the territory of the Republic of Mordoviya, developing the securities market and creating additional jobs. Under section 2 of that law, this special taxation procedure applies in respect of entities (including foreign entities operating through permanent representative offices established in the territory of the Republic of Mordoviya), established after the entry into force of the law (with the exception of entities conducting leasing activities, banks and other credit institutions) and whose business meets one of the following conditions: export operations, with the resulting quarterly earnings totalling at least 15% of the whole of the entity’s earnings; wholesale trading of combustibles and lubricants and other kinds of hydrocarbons with the resulting quarterly earning totalling at least 70% of the whole of the entity’s earnings; and other conditions enumerated in that law. Pursuant to sections 3 and 4 of the Law, the Government of the Republic of Mordoviya passed resolutions on the application of the special taxation procedure in respect of the mentioned entities and, consequently, on the application of the following tax rates: at the rate of 0% in respect of profit tax in so far as it is credited to the republican and local budgets of the Republic of Mordoviya; at the rate of 0% on motorway users’ tax in so far as it is credited to the Territorial Road Fund of the Republic of Mordoviya; and at the rate of 0% on corporate property tax. Moreover, the above-mentioned entities were exempted by local government resolutions from payment of tax for the maintenance of the housing stock and socio-cultural facilities.
However, the special taxation procedure is provided for [by this law] for the purposes of creating favourable conditions in order to attract capital to the territory of the Republic of Mordoviya, develop the securities market and create additional jobs. The entities which used those benefits did not actually carry out their activities on the territory of this subject of the Russian Federation, did not attract capital and did not facilitate the strengthening of the Republic’s socio-economic potential, but, on the contrary, inflicted material damage through non-payment of taxes to the budget of the Republic, the local budget and the federal budget. Thus, the use of the tax benefits in respect of these entities was not aimed at improving the economy of the Republic of Mordoviya but pursued the aim of evading taxes on the production, refining and sales operations in respect of oil and oil products by OAO NK Yukos and is, as a consequence, unlawful.
The entity registered on the territory of the Republic of Kalmykiya (OOO Sibirskaya Transportnaya Kompaniya ...) did not pay profit tax, property tax, motorway users’ tax, tax on the acquisition of vehicles and other taxes, under Law no. 12P-3 of the Republic of Kalmykiya of 12 March 1999 ‘On tax benefits to enterprises investing in the economy of the Republic of Kalmykiya’, which establishes advantages in respect of taxes and duties for the ... taxpayers that invest in the economy of the Republic of Kalmykiya and are registered as such enterprises with the Ministry of Investment Policy of the Republic of Kalmykiya. Moreover, the entity in question was exempt from the payment of local taxes and ... of profit tax to the consolidated budget.
At the same time, it follows from the presumption of good faith on the part of taxpayers (Decisions no. 138-O of the Constitutional Court of 25 July 2001, no. 4-O of 10 January 2002 and no. 108-O of 14 May 2002, Rulings of the Presidium of the Supreme Commercial Court no. 9408/00 dated 18 September 2001, no. 7374/01 of 18 June 2002, no. 6294/01 of 5 November 2002 and no. 11259/02 of 17 December 2002 and letter no. С5-5/уп-342 of the Deputy President of the Supreme Commercial Court of 17 April 2002) that, for the use of tax advantages to become lawful, the amount of advantages provided and the sum of investments made by the entity should be commensurate. Since the amounts of benefits declared for tax purposes by the above-mentioned entities and the sums of investment made are obviously not commensurate, application of the advantages is unlawful. The application of tax advantages by the given entity is not aimed at improving the economy of the Republic of Kalmykiya but pursues the aim of tax evasion by OAO NK Yukos in respect of the operations of production, refining and sales of oil and oil products and, consequently, is unlawful.
The entity registered in the closed administrative territorial formation (‘ZATO’) town of Sarov in the Nizhniy Novgorod Region (OOO Yuksar ...) concluded a tax agreement on the provision of tax concessions with the Sarov municipal administration. The granting of additional tax advantages on the territory of the Sarov ZATO (Federal Nuclear Centre) in 2000 was regulated by the norms of Articles 21 and 56 of the Tax Code, section 58 of Law no. 227-FZ of 31 December 1999 ‘On the federal budget for the year 2000’, section 5 of Law no. 3297-1 ‘On closed administrative territorial formations’ of 14 July 1992, Item 2 of Paragraph 30 of Decree no. 222 of the Russian Government of 13 March 2000 ‘On measures for implementation of the Federal Law ‘On the Federal Budget for 2000’ and Regulations ‘On the investment zone of the town of Sarov’, approved by a Resolution of the Sarov Duma on 30 December 1999. According to the tax agreement, the Sarov administration confers advantages in respect of taxes payable into the Sarov budget to the entity in question in the form of a reduction in the share of taxes and other compulsory payments to the budget, up to 25% of the sums due in VAT, property tax, tax on the sale of fuel and lubricants, motorway users’ tax, tax on vehicle owners, tax on the acquisition of vehicles, profit tax, tax on operations with securities and excise duties; in exchange, the entity undertakes to participate in investment projects (programmes) implemented in the Sarov investment zone or with its participation, aimed at raising additional budget receipts and solving the problems of Sarov’s socio-economic development by transferring quarterly at least 1% of the sum of the tax advantages.
At the same time, according to Paragraph 1 of section 5 of the Federal Law no. 3297-1 ‘On closed administrative territorial formations’ of 17 July 1992, additional benefits on taxes and duties are granted by the appropriate local government authorities to entities registered as taxpayers with the authorities of the closed administrative territorial formations in compliance with the above-mentioned law. Entities possessing at least 90% of their capital assets and conducting at least 70% of their activities on the territories of the closed administrative territorial formations (including the requirement that at least 70% of the average number of employees on the payroll must be made up of persons who permanently reside on the territory of the formation in question and that at least 70% of the labour remuneration fund must be paid to employees who permanently reside on the territory of the formation in question) enjoy the right to obtain the benefits in question. Given that OOO Yuksar did not actually carry out any activity on the territory of Sarov, was not actually present on the territory of Sarov and that there were no assets and production facilities necessary for the procurement and storage of oil on the territory of Sarov, Nizhniy Novgorod Region, the given entity applied the tax advantages unlawfully.
Thus, the use of tax advantages by the given entity is not aimed at improving the economy of the Sarov ZATO but pursued the aimed of tax evasion by OAO NK Yukos in respect of its obligation to pay taxes on production and refining operations and the sale of oil and oil products and is, consequently, unlawful.
Entities registered in the Trekhgornyy ZATO in the Chelyabinsk Region (OOO Kverkus ..., OOO Muskron ..., OOO Nortex ..., OOO Greis ... and OOO Virtus ...) concluded tax agreements with the administration of the town of Trekhgornyy, according to which entities were granted advantages in respect of profit tax, tax for the maintenance of the housing stock and socio-cultural facilities, property tax, land tax, tax on the sale of fuel and lubricants, motorway users’ tax, tax on vehicle users, and tax on the acquisition of vehicles, provided that the entities remitted the sum of 5% of the total amount of tax advantages conferred, for implementation of the town’s socio-economic programmes, to the Trekhgornyy administration... Reasoning from the contents and meaning of the tax agreements, it follows that their purpose was implementation of the particularly important socio-economic task of developing the educational, medical and housing spheres in the Trekhgornyy ZATO. At the same time, the sums which were transferred to the budget by the taxpayers in question were many times lower than the sums of the declared tax advantages (the sum of investments is around 0.006% of the sum of the advantages for each taxpayer). Thus, the investments made by the taxpayers did not influence the development of Trekhgornyy’s economy. On the contrary, since the above-mentioned organisations did not in fact carry out any activities, were never located on the territory of Trekhgornyy, had no assets and none of the production facilities necessary to buy and store oil on the territory of Trekhgornyy, the application of tax advantages by the above-mentioned organisations is contrary to part 1 of section 5 of RF Law no. 3297-1 of 17 July 1992 ‘On closed administrative territorial formations’.
The organisations registered in the Lesnoy ZATO in the Sverdlovsk Region (OOO Mitra ..., OOO Vald-oyl ..., OOO Bizness-oyl ...) concluded tax agreements on the granting of a targeted tax concession under which organisations were granted the concession in respect of profit tax, land tax, tax on the sales of fuel and lubricants, motorway users’ tax, vehicle users’ tax, tax on the acquisition of vehicles, tax for the maintenance of the housing stock and socio-cultural facilities and property tax, whilst the organisations [in question] were under an obligation to transfer to ... the Lesnoy municipal administration sums amounting to 5% of the sums of the granted tax concessions, but no less than 6,000 roubles quarterly, for implementation of the town’s socio-economic programmes. [However], the amounts received from the taxpayers are many times lower than the totals of the declared tax advantages. Accordingly, the investments made by the taxpayers did not influence the development of the economy of the town of Lesnoy because the above-mentioned organisations never carried out any activities on the territory of Lesnoy, were never in fact located on the territory of Lesnoy and had no assets and none of the production facilities required to sell and store oil on the territory of Lesnoy, [and thus] the application of the tax advantages in respect of the above-mentioned organisations is contrary to part 1 of section 5 of RF Law no. 3297-1 of 17 July 1992 ‘On closed administrative territorial formations’.
The organisation registered in the Evenk Autonomous District (OOO Petroleum-Treiding) without in fact carrying out any activity on the territory of the district in question and without in fact being located on the territory of the Evenk Autonomous District, abused its right granted by Law no. 108 of the Evenk Autonomous District of 24 September 1998 ‘On specific features of the tax system in the Evenk Autonomous District’. The mentioned organisation was registered in the given district solely for the purpose of acquiring the right to the tax concession that could be granted in the Evenk Autonomous District. The use of the tax benefits by the organisation in question is not aimed at strengthening of economy of the Evenk Autonomous District, but is instead aimed at tax evasion by OAO NK Yukos in respect of extraction and processing transactions and the sale of oil and oil products and is thus unlawful.
Thus, the use of tax concessions by the above-mentioned organisations is not aimed at strengthening the economy of the regions in which they were registered but is aimed at evading the taxes due in respect of the operations of extraction and processing transactions and the sale of oil and oil products by OAO NK Yukos and is thus unlawful. ...”
49. The first-instance judgment also responded to the applicant company’s submissions. As regards the argument that the Ministry’s calculations were erroneous in that they led to double taxation and the failure to take account of the right to a refund of VAT for export operations, the court noted that, contrary to the applicant company’s allegations, both the revenues and expenses of the sham entities had been taken into account by the Ministry so as to avoid double taxation. In addition, under Law no. 1992-1 of 6 December 1991 “On value-added tax”, in order to claim a refund of the VAT paid during export operations a taxpayer had to justify the claim in accordance with a special procedure and the applicant company had failed to apply for a refund either in 2000 or at any later date. As to the argument that the Ministry’s claim was time-barred, the court refuted it with reference to Article 113 of the Tax Code and Decision no. 138-O of the Constitutional Court of 21 July 2001. The court held that the rules on limitation periods were inapplicable in the case at issue as the applicant company had acted in bad faith. In response to the company’s argument that the interdependency within the meaning of Article 20 of the Tax Code was only relevant for the purposes of price correction under Article 40 of the Code, the court observed that the interdependency of the sham companies and the applicant company was one of the circumstances on the basis of which the tax authorities had proved that the tax offence had been committed by the applicant company in bad faith.
50. Accordingly, by the judgment of 26 May 2004 the court upheld the decision of 14 April 2004, albeit slightly reducing the payable amounts by reference to the Ministry’s failure to prove the relations of the applicant company with one of the entities mentioned in the decision of 14 April 2004. The court ordered the applicant company to pay RUB 47,989,073,311 (approximately EUR 1,375,080,541) in taxes, RUB 32,190,430,314 (approximately EUR 922,385,687) in default interest and RUB 19,195,606,923 (approximately EUR 550,031,575) in penalties, totalling RUB 99,375,110,548 (approximately EUR 2,847,497,802) and ordered its managing subsidiary OOO “YUKOS” Moskva to comply with this decision. The judgment could be appealed against by the parties within a thirty-day time-limit.
51. At the hearings of 21 to 26 May 2004 the applicant company and its managing subsidiary were represented by eight counsel. The reasoned copy of the judgment of 26 May 2004 was produced and became available to the parties on 28 May 2004.
52. On 1 June 2004 OOO “YUKOS” Moskva filed an appeal against the judgment of 26 May 2004.
53. The Ministry appealed against the judgment on 2 June 2004.
54. On 4 June 2004 the Appeal Court listed the appeals of OOO “YUKOS” Moskva and the Ministry to be heard on 18 June 2004.
55. On 17 June 2004 the applicant company filed its appeal against the judgment of 26 May 2004. The brief came to 115 pages and contained 41 documents in annex. The company complained, in particular, that the time for filing an appeal had been unlawfully abridged, in breach of its rights to fair and adversarial proceedings, that the first-instance judgment was ungrounded and unlawful, that the evidence in the case was unlawful, that the first-instance court had erred in interpretation and application of the domestic law, in that it had lacked legal authority to “assign” the tax liabilities of one company to another, and that the court’s interpretation of the legislation on tax concessions had been erroneous. The company also argued that the lower court had wrongly assessed the evidence in the case and had come to erroneous factual conclusions in respect of the relationships between the applicant company and the sham companies, that in any event some of the operations of the sham companies had been unrelated to the alleged tax evasion and that the respective sums should not be “assigned” to the applicant company, and also that the case should have been tried in the town of Nefteyugansk, where the company was registered.
56. The Government submitted that the applicant company attempted to delay the examination of the case by dispatching the appeal brief to an erroneous address. According to the applicant, the above allegation was unsubstantiated.
57. The appeal hearing in the case lasted from 18 to 29 June 2004.
58. At the beginning of the hearing on 18 June 2004 the applicant company requested the Appeal Court to adjourn the proceedings. The company considered that the hearing had been fixed for too early a date, before the expiry of the statutory time-limit for lodging appeals.
59. The court refused this request as unfounded.
60. At the hearings of 21 and 28 June 2004 the applicant company filed four supplements to its appeal. The company and its managing subsidiary were represented by ten counsel.
61. Under Article 268 of the Code of Commercial Court Procedure the court fully re-examined the case presented by the Ministry rather than simply reviewing the first-instance judgment.
62. At the end of the hearing of 29 June 2004 the court delivered its judgment, in which it reached largely similar findings and came to the same conclusions as the first-instance judgment. The court dismissed the company’s appeals as unfounded, but decided to alter the first-instance judgment in part. In particular, it declared the Ministry’s claims in respect of VAT partly unfounded, reduced the amount of the VAT arrears by RUB 22,939,931 (approximately EUR 649,336) and quashed the corresponding penalty of RUB 10,334,226 (approximately EUR 292,520).
63. The court judgment, in its relevant parts, read as follows:
“... The parties declared under part 5 of Article 268 of the Code of Commercial Courts Procedure that there was a need to verify the lawfulness and grounds of the first-instance judgment and to hold a fresh hearing of the case in full.
The Appeal Court has checked the lawfulness and grounds of the first-instance judgment pursuant to ... Article 268 ... of the Code of Commercial Court Procedure. ...
The Appeal Court does not accept the arguments of the respondents concerning erroneous interpretation and application of the norms of the substantive law by the first-instance court and concerning the factual incorrectness of that court’s conclusions.
[The court went on to review and confirm all factual findings made by the Ministry and the first-instance court in respect of the tax-evasion scheme set up by the applicant company.]
... Bearing in mind the above-mentioned circumstances, the Appeal Court has established that the de facto owner of the oil was [the applicant company]. The acquisition of the oil and its transfer and subsequent sale was in reality carried out by [the applicant company] as the owner, which is proved by the control of [the applicant company] over all operations, and the actual movement of the oil from the extracting entities to processing entities or oil facilities controlled by [the applicant company], which is proved by the materials of the case.
...
The [applicant company’s] ownership of the oil is confirmed by the interdependence of the contracting parties, by the control that [the applicant company] had over them, by the registration of the contracting parties on territories with a low-tax regime, by the lack of activities by these entities at their place of registration, by the fact that the accounting operations for these entities was carried out by OOO Yukos-Invest or OOO Yukos-FBC, companies officially dependant on [the applicant company], by the fact that the accounting for these entities was filed from the addresses of [the applicant company] and OOO Yukos-Moskva, by the fact that their bank accounts were opened in the same banks owned by [the applicant company], by the presence and character of commercial relations between [the applicant company] and the dependent entities, and by the use of promissory notes and mutual offsetting between them.
...
Under the legislation then in force, such as section 3 of RF Law no. 1992-1 of 6 December 1991 ‘On value-added tax’, part 2 of Section 5 and section 4 of RF Law no. 1759-1 of 18 October 1991 ‘On motorway funds in the Russian Federation’, subpart ‘ch’ of section 21 of RF Law no. 2118-1 of 27 December 1991 ‘On the basics of the tax system’, the sale of goods (works and services) gives rise to an obligation to pay VAT, motorway users’ tax, tax on the sale of oil and oil products and the tax for the maintenance of the housing stock and socio-cultural facilities.
Under part 1 of Article 39 of the Tax Code, sales are defined as the transfer of property rights in respect of goods. Under subpart 1 and 2 of Article 209 of the Civil Code (taking into account Article 11 of the Tax Code) the owner of goods is the person who has the rights of ownership, use and disposal of his property, that is, the person who is entitled to carry out at his own discretion in respect of this property any actions which are not against the law and other legal acts and do not breach the rights and protected interests of other persons...
It follows that the person who in fact has the rights of ownership, use and disposal of the property and who, in view of these rights, exercises in reality and at his discretion in respect of his property any actions, including transfers of property to other persons ... is the owner of this property.
Therefore, OAO NK Yukos, being the de facto owner of the oil, was under an obligation to pay [the taxes], which has not been complied with in good time.
As was previously established, Article 41 of the Tax Code sets out that profit is an economic gain in monetary form or in kind, which is taken into account if it is possible to evaluate it and in so far as it can be assessed, and determined in accordance with the chapters ‘Taxes in respect of the profits of natural persons’, ‘Taxes in respect of the profits of organisations’, and ‘Taxes in respect of the capital profits’ of the Tax Code of the Russian Federation. Under subparts 1 and 2 of section 2 of RF Law no. 2116-1 of 27 December 1991 ‘On profit tax of enterprises and organisations’ which was then in force, the object of taxation is the gross profit of the enterprise, decreased (or increased) in accordance with the provisions of the present section. The gross profit is the total of revenues (receipts) from the sale of products (works and services), main assets (including land parcels), other property of the enterprise and the profit derived from operations other than sales, less the sum of expenses in respect of these operations. The court established that the economic profit from the sale of oil and oil products was perceived by OAO NK Yukos, [and] it was incumbent on [the applicant company] to comply with the obligation to pay profit tax.
Section 2 of RF Law no. 2030-1 of 13 December 1991 ‘On corporate property tax’ taxes the main assets, non-material assets, reserves and receipts which are indicated on the taxpayer’s balance sheet. It follows that the obligation to pay property tax was incumbent on the person who was legally responsible for reflecting the main assets, non-material assets, reserves and receipts on its balance sheet. Since it follows from the materials of the on-site tax inspection that OAO NK Yukos was under such an obligation, this taxpayer was also under an obligation to pay property tax.
The Constitutional Court of the RF in its decision of 25 July 2001 no. 138-0 stated that it followed from the meaning of the norm contained in part 7 of Article 3 of the Tax Code of the RF that there is a presumption of good faith on the part of taxpayers. In order to refute this and establish the taxpayer’s bad faith, the tax authorities have the right – in order to strike a balance between public and private interests – to carry out necessary checks and bring subsequent claims in commercial courts in order to guarantee the payment of taxes to the budget.
In view of the above, the tax authorities ... have the right to carry out checks with a view to establishing the de facto owner of sold property and the de facto recipient of the economic profit, and also with a view to establishing [the owner’s] bad faith as expressed in use of the tax-evasion scheme. At the same time, the tax authorities establish the de facto owner with regard to the actual relations between the parties to the transaction, irrespective of whether the persons were declared as owners of the property in the documents submitted during the tax inspections.
The circumstances indicating that OAO NK Yukos had in fact the rights of ownership, use and disposal of its oil and oil products and, at its discretion, carried out in this connection any actions, including the sale, transfer for processing, etc., through specially registered organisations dependant on OAO NK Yukos is confirmed by the materials of the case.
...
In view of the above, the court does not accept the respondent’s arguments about the unlawfulness and the lack of factual basis of the decision to levy additional taxes from OAO NK Yukos as the de facto owner of the oil and oil products.
The respondent’s argument that OAO NK Yukos had not perceived any economic profit from the application of benefits by the entities mentioned in the decision of the Ministry contradicts the materials of the case. The court had established that OAO NK Yukos received economic profit in the form of unilateral transfers of cash. OAO NK Yukos set up the Fund for Financial Support of the Production Development of OAO NK Yukos [to this end].
...
The argument of OAO NK Yukos that the Ministry is levying taxes in respect of transactions “within the same owner” is unsupported, since the calculations of additional taxes (except for the property tax in respect of which [this is inapplicable]) also take into account the expenses connected with the acquisition of the oil and oil products.
The court does not accept the respondent’s arguments that the tax authorities lacked the power to levy taxes from OAO NK Yukos in respect of the sums ... perceived by other organisations. The power of the tax authorities to bring proceedings in courts to ensure the payment of taxes to the budget in cases of bad-faith taxpayers is confirmed by decision no. 138-O of the Constitutional Court of the Russian Federation, dated 25 July 2001. At the same time the bad faith of taxpayer OAO NK Yukos and the fact that the proceeds from transactions involving oil and oil products belonged to it is confirmed by the materials of the case file.
The circumstances of the ... acquisition and sale of the oil and oil products, taken in their entirety, as established by the Appeal Court, indicate the presence of bad faith in the actions of OAO NK Yukos, which was expressed in intentional actions aimed at tax evasion by the use of unlawful schemes. In accordance with part 2 of Article 110 of the Tax Code of the RF the tax offence is considered intentional if the person who has committed it knew about the unlawful character of the actions (inactions), wished them or knowingly accepted the possibility of the harmful consequences of such actions (inactions).
Since OAO NK Yukos intentionally committed actions aimed at tax evasion, and its officers were aware of the unlawful character of such actions, wished or knowingly accepted the possibility of harmful consequences due to such actions, OAO NK Yukos must be held liable under part 3 of Article 122 of the RF Tax Code for the non-payment or incomplete payment of taxes due to the lowering of the taxable base or incorrect calculation of the tax or other unlawful actions (inactions) committed intentionally, in the form of a fine equivalent to 40% of the unpaid taxes.
...
Having re-examined the case and verified the lawfulness and grounds of the first-instance judgment in full, having examined the evidence and having heard the arguments of the parties, the Appeal Court has come to the conclusion that the decision of the Ministry dated 14 April 2004 ... is in compliance with the Tax Code as well as with Federal laws and other laws on taxes...
The claims for payment of taxes, interest surcharges and fines made in the decision of the Ministry of 14 April 2004 ... are grounded, lawful and confirmed by the primary documents of the materials of the inspection submitted in justification to the court. ...”
64. The appeal judgment also responded to the applicant company’s other arguments. As regards the alleged breaches of procedure and the lack of time for the preparation of the defence at first instance, the court noted that it had examined this allegation and that there had been no violation of procedure at first instance and that, in any event, the applicant company had had ample opportunities to study the evidence relied on by the Ministry both at the Ministry’s premises and in court. As regards the argument that the evidence used by the Ministry was inadmissible, the court noted that the materials of the case had been collected in full compliance with the requirements of the domestic legislation. The court also agreed with the first-instance court that the three-year statutory time-limit had been inapplicable in the applicant company’s case since the company had been acting in bad faith.
65. The first-instance judgment, as upheld on appeal, came into force on 29 June 2004.
66. The applicant company had two months from the date of the delivery of the appeal judgment to challenge it in third-instance cassation proceedings (кассация).
67. On 7 July 2004 the applicant company filed a cassation appeal against the judgments of 26 May and of 29 June 2004 with the Federal Commercial Court of the Moscow Circuit (“the Circuit Court”). The applicant company’s brief came to 77 pages and had 6 documents in annex. The arguments in the brief were largely similar to those raised by the applicant company on appeal, namely that the judgment was unlawful and unfounded, that the entities mentioned in the report ought to have taken part in the proceedings, that the trial court had had insufficient evidence to conclude that the applicant company and other entities were interrelated, that the evidence used by the trial court was unlawful, that the trial proceedings had not been adversarial and that the principle of equality of arms had been breached. In addition, the company alleged that it had had insufficient time to study the evidence and had been unable to contest the evidence in the case, that the Ministry had unlawfully applied to a court before the applicant company had had an opportunity to comply voluntarily with the decision of 14 April 2004, that the entities mentioned in the report had in fact been eligible for the tax exemptions, that the rules governing tax exemption had been wrongly interpreted, that the Ministry’s claims had been time-barred, that the company had had insufficient time for the preparation of the appeal, and that the case ought to have been examined by a court in Nefteyugansk.
68. A copy of the reasoned version of the appeal judgment of 29 June 2004 was attached to the brief.
69. It appears that on an unspecified date the Ministry also challenged the judgments of 26 May and 29 June 2004.
70. On 17 September 2004 the Circuit Court examined the cassation appeals and upheld in substance the judgments of 26 May and 29 June 2004.
71. In respect of the applicant company’s allegations of unfairness in the appeal proceedings, the court noted that both defendant companies had had ample opportunities to avail themselves of their right to bring appeals within the statutory time-limit, as the appeal decision was not taken until 29 June 2004, which was more than thirty days after the date of delivery of the judgment of 26 May 2004. Furthermore, the court observed that the evidence presented by the Ministry and examined by the lower courts was lawful and admissible, and that it had been fully available to the defendant companies before the commencement of the trial hearings. The court also noted that on 14 May 2004 the City Court specifically ordered the Ministry to disclose all the evidence in the case, that this order had been complied with by the Ministry and that, despite the fact that the evidence was voluminous, the applicant company had had sufficient time to examine and challenge it repeatedly throughout the proceedings between May and July 2004.
72. As regards the applicant company’s complaint that the Ministry had brought proceedings before the expiry of the time-limit for voluntary compliance with the decision of 14 April 2004, the court noted that the Ministry and lower courts had acted in compliance with Article 213 of the Code of Commercial Court Procedure, as there were irreconcilable differences between the parties and, throughout the proceedings, the applicant company had had insufficient funds to satisfy the Ministry’s claims.
73. In respect of the applicant company’s argument that the case should have been tried by a court in Nefteyugansk, the court noted that the City Court had had jurisdiction over the case under Article 54 of the Civil Code and decision no. 6/8 of the Plenary Session of the Supreme Court and Supreme Commercial Court of 1 July 1996.
74. On the merits of the case, the court noted that the lower courts had reached reasoned conclusions that the applicant company was the effective owner of all goods traded by the sham companies registered in low-tax areas, that the transactions of these entities were in fact those of the applicant company, that neither the applicant company nor the sham entities were eligible for the tax exemptions and that the applicant company had perceived the entirety of the resulting profits. The court upheld the lower courts’ conclusion that, acting in bad faith, the applicant company had failed properly to declare its transactions for the year 2000 and to pay corresponding taxes, including VAT, profit tax, motorway users’ tax, property tax, the tax for the maintenance of the housing stock and socio-cultural facilities and tax on the sale of fuel and lubricants.
75. The court noted some arithmetical mistakes in the appeal judgment of 29 June 2004, increasing the penalty by RUB 1,158,254.40 (approximately EUR 32,613) and reducing the default interest by RUB 22,939,931 (approximately EUR 645,917) accordingly.
76. On an unspecified date the applicant company lodged a complaint against the domestic courts’ decisions in its case with the Constitutional Court. It specifically raised the question of the lower courts’ refusal to apply the statutory time-limit set out in Article 113 of the Tax Code.
77. By decision of 18 January 2005 the Constitutional Court declared the complaint inadmissible for lack of jurisdiction. The court noted that the applicant company did not in fact challenge the constitutionality of Article 113 of the Code but rather insisted that this provision was constitutional and should be applied in its case. Therefore, the applicant company was not complaining about the breach of its rights by the above-mentioned provision and, accordingly, the court had no competence to examine the applicant company’s claims.
78. Simultaneously to bringing the cassation appeal, on 7 July 2004 the applicant company also challenged the judgments of 26 May and 29 June 2004 by way of supervisory review before the Supreme Commercial Court of Russia.
79. On 31 December 2004 the applicant company’s case was accepted for examination by the Supreme Commercial Court.
80. By a decision of 13 January 2005 the Supreme Commercial Court, sitting as a bench of three judges, decided to relinquish jurisdiction in favour of the Presidium of the Supreme Commercial Court. Addressing one of the applicant company’s arguments, the court noted that the lower courts had decided that the three-year statutory time-bar was inapplicable in the case at issue since the applicant company had been acting in bad faith. It further noted that such an interpretation of the rules governing the time-limits was not in line with the existing legislation and case-law and that therefore the issue should be resolved by the Presidium of the Supreme Commercial Court.
81. On 19 April 2005 the Presidium of the Supreme Commercial Court referred the above-mentioned issue to the Constitutional Court and adjourned the examination of the applicant company’s supervisory review appeal pending a ruling by the Constitutional Court.
82. By a decision of 14 July 2005 the Constitutional Court decided that it was competent to examine the question of the compatibility of Article 113 of the Tax Code with the Constitution, having cited the application of an individual, one G. A. Polyakova, and the referral by the Supreme Commercial Court. At the same time, it noted specifically that it had no competence to decide individual cases and its ruling would only deal with the points of law in abstracto.
83. It appears that the legal issues raised by G. A. Polyakova and the applicant company were different. G. A. Polyakova was dissatisfied with the established court practice which required the tax authorities, rather than the courts, to hold a taxpayer liable for a tax offence within the three-year time-limit set out in Article 113 of the Code. On the facts of her individual case, the decision of the tax authorities was taken on time, whilst later the final decision by the courts was taken outside the specified time-limit. As regards the applicant company, it raised the same point which had been previously declared inadmissible by the Constitutional Court in its decision dated 18 January 2005, namely the refusal of the courts in its case to follow the established practice and to declare the claims of the authorities time-barred, as they related to the year 2000 and were set out in the decision to hold the applicant liable for a tax offence on 14 April 2004, that is, outside the three-year time-limit laid down by Article 113 of the Code.
84. As a result of its examination, the Constitutional Court upheld Article 113 of the Tax Code as compatible with the Constitution, having ruled that the legal provisions on the statutory time-limits ought to be applied in all cases without exception. The court made an abstract review of the provision in question and mentioned the “principles of justice”, “legal equality” and “proportionality” in giving its own “constitutional interpretation” of Article 113. The court noted that the rule set out in Article 113 of the Code was too strict and failed to take into account various relevant circumstances and the actions of taxpayers, including those aimed at hindering tax control and delaying the proceedings. It further ruled that:
“... the provisions of Article 113 of the Tax Code of the Russian Federation in their constitutional and legal sense and in the present legal context do not exclude [the possibility] that, where the taxpayer impedes tax supervision and the conduct of tax inspections, the court may excuse the tax authorities’ failure to bring the proceedings in time ...”
“... In their constitutional and legal sense in the context of the present legal regulation... [these provisions] mean that the running of the statutory time-bar in respect of a person prosecuted for tax offences stops on the date of the production of the tax audit report in which the supported facts of the tax offences revealed during the inspection are mentioned and in which there are reference to the relevant articles of the Tax Code or - in cases where there was no need to produce such a report - from the moment on which the respective decision of the tax authority, holding a taxpayer liable for a tax offence, was taken. ...”
85. Three out of the nineteen judges filed separate opinions in this case.
86. Judge V. G. Yaroslavtsev disagreed with the majority, having noted that the Constitutional Court acted ultra vires and openly breached the principle of lawfulness by creating an exception from the rule set out in Article 113 where there had previously been none.
87. Judge G. A. Gadzhiev concurred with the conclusions of the majority but would have preferred to quash, rather than uphold, Article 113 of the Tax Code as unconstitutional and breaching the principle of equality.
88. Judge A. L. Kononov dissented from the majority ruling, having considered that the Constitutional Court clearly had no competence to decide the matter and that indeed there had been no constitutional issue to resolve as, among other things, there had been no prior difficulties in application of Article 113 of the Tax Code and the contents of this provision had been quite clear. He also criticised the “inexplicable” way in which the Constitutional Court had first rejected the application by the applicant company and had then decided to examine the matter again. Judge Kononov further noted that the decision of the Constitutional Court was vague, unclear and generally questionable.
89. The case was then returned to the Presidium of the Supreme Commercial Court.
90. On 4 October 2005 the Presidium of the Supreme Commercial Court examined and dismissed the applicant company’s appeal. In respect of the company’s argument that the Ministry’s claims were time-barred, the court noted that during the tax proceedings the company had been actively impeding the tax inspections. In view of this and given the Constitutional Court’s ruling, the court concluded that since the Ministry’s tax audit report in the applicant’s case had been completed on 29 December 2003, that is, within the statutory three-year time-limit as interpreted in the Constitutional Court’s decision of 14 July 2005, the case was not time-barred.
91. Simultaneously with the determination of the case before the courts in respect of the applicant company’s tax liability for the year 2000, the parties also took part in various enforcement proceedings.
92. On 15 April 2004 the City Court accepted for consideration the Ministry’s action in respect of the year 2000 and attached certain of the applicant company’s assets, excluding goods produced by the company and related cash transactions, as a security for the claims. The court also issued writs of execution in this respect (see paragraph 27). This decision was upheld by the Appeal Court on 2 July 2004.
93. By a decision of 16 April 2004 the bailiffs instituted enforcement proceedings in connection with the attachment.
94. On the same day they executed the attachment order by informing the applicant company and the holder of its corporate register, ZAO ‘M-Reestr’, of the decision of 15 April 2004.
95. According to the Government, the applicant company impeded the execution of the writs issued by the court by hiding its corporate register from the bailiffs. In particular, they alleged that a few hours prior to the bailiffs’ visit, the applicant company had cancelled its contracts with ZAO ‘MReestr’. The register was then dispatched by ordinary post to a location in Russia so that, over the next weeks, it could not be physically found and the execution writs could not be enforced.
96. On 22 April 2004 the applicant company filed its first court request to have the attachment of the entirety of its assets replaced by the attachment of shares belonging to it in OAO Sibirskaya neftyanaya kompaniya (“the Sibneft company”, a major Russian oil company which had attempted unsuccessfully to merge with the applicant company in 2003), which were allegedly worth three times as much as the then liability. The applicant company also alleged that the attachment order adversely affected its proper functioning and invited the authorities to opt for less intrusive measures, insisting on the lack of any risk of asset-stripping.
97. By a decision of 23 April 2004 the City Court examined and dismissed this request as unfounded. The court found no evidence that the interim measures affected any of the company’s production activities.
98. On 17 May 2004 the applicant company appealed against the decision of 23 April 2004.
99. The outcome of court proceedings in respect of the applicant company’s appeal of 17 May 2004 is unclear.
100. The Government provided the following background information in connection with the company’s offer of shares in Sibneft. The applicant company had attempted to merge with Sibneft in May-September 2003. As a result of the initial stages of the merger, the applicant company acquired 92% of Sibneft: 20% of these shares were bought for cash, whilst 57.5% were exchanged for 17.2% of the applicant company’s newly issued shares and 14.5% were swapped for 8.8% of the applicant company’s existing shares. In November 2003 it was announced publicly that, at the request of the former Sibneft owners, the parties had decided not to go ahead with the merger. In February 2004 the owners of Sibneft sued the applicant company in this connection, demanding cancellation of the operation whereby the applicant had issued 17.2% of shares. Among other things, on 14 February 2004 they obtained an attachment order in respect of the Sibneft shares remaining in the possession of the applicant company pending the proceedings. On 1 March 2004 the City Court decided to cancel the issue of 17.2% shares by the applicant company. The Government submitted that it was clear from the above-mentioned account that on 22 April 2004, the date on which the applicant company first made the offer of Sibneft shares, the owners of Sibneft already anticipated suing the applicant company again, this time demanding back the 57.5% of Sibneft shares swapped for the cancelled 17.2% of the applicant company’s shares. At the same time, the fate of the remaining issues of Sibneft shares still in the possession of the applicant company was also uncertain.
101. On 23 April 2004 the City Court also examined the applicant company’s request for an injunction order against the attachment and rejected it. The court noted that the attachment did not interfere with the company’s day-to-day operations and it was a reasonable measure aimed at securing the Ministry’s claims.
102. On 2 July 2004 the Appeal Court rejected the company’s appeal and upheld the judgment.
103. It does not appear that the applicant company brought cassation proceedings in this respect.
104. In the meantime, on 7 May 2004 the applicant company applied to the City Court with a separate action against the tax assessment of 14 April 2004, seeking its invalidation (see paragraph 34 and 35 above). The company also requested interim measures in this connection.
105. Following the applicant company’s request for interim measures, on 19 May 2004 the City Court stayed the enforcement of the Tax Ministry’s decision of 14 April 2004, having noted that the Ministry could have enforced the decision in the part relating to taxes and default interests even without waiting for the outcome of the Ministry’s claim (Article 46 of the Tax Code). The court decided, however, that this might be detrimental to the applicant company and stayed the decision of 14 April 2004 accordingly.
106. On 27 May 2004 the applicant company made a public announcement that:
“... it [was] under an injunction prohibiting it from selling any of its property, including the shares owned by the company. Until the injunction is lifted, the Company is unable to sell its assets in order to obtain liquid funds. Consequently, if the Tax Ministry’s efforts continue, we are very likely to enter a state of bankruptcy before the end of 2004”.
107. It appears that the City Court’s decision of 19 May 2004 to stay the enforcement was appealed against by the Ministry. Having examined the Ministry’s arguments at the hearing of 23 June 2004, the Appeal Court quashed the first-instance decision of 19 May 2004 as unlawful and rejected the applicant company’s request for interim measures as unfounded.
108. It does not appear that the applicant company appealed against this decision before the Circuit Court.
109. As mentioned above (paragraphs 46-66), by a judgment of 26 May 2004 the City Court found in favour of the Tax Ministry, upholding the Tax Assessment of 14 April 2004. The Tax Assessment was upheld by the Appeal Court with minor reductions and became enforceable on 29 June 2004.
110. On 30 June 2004 the Appeal Court issued the writ of enforcement in this respect. The applicant company was to pay RUB 47,958,133,380 (approximately EUR 1,358,914,565) in reassessed taxes, RUB 32,190,430,314 (approximately EUR 912,129,842) in interest surcharges and RUB 19,185,272,697 (approximately EUR 543,623,045) in penalties.
111. On 30 June 2004 the bailiffs instituted enforcement proceedings based on the above judgment and gave the applicant company five days to pay. The applicant company was informed that it would be liable to pay enforcement fees of 7%, totalling RUB 6,953,375,547 (approximately EUR 197,026,920), in the event of failure to honour the debt voluntarily. Upon the Ministry’s application, the bailiffs issued sixteen orders freezing the cash held by the applicant company in its Russian bank accounts. The orders did not concern cash added to the accounts after 30 June 2004.
112. On 7 July 2004 the applicant company challenged the bailiffs’ decision of 30 June 2004.
113. It argued that the decision to open enforcement proceedings had been unlawful as it was in breach of the rules of bailiffs’ territorial competence as the enforcement ought to have taken place in Nefteyugansk and not in Moscow, that the five-day term for voluntary compliance with the court decisions had been too short and that the cash-freezing orders had made such compliance impossible.
114. On 30 July 2004 the City Court examined and dismissed these claims as groundless. The court ruled that the bailiffs had acted lawfully and that the cash-freezing orders did not interfere with its ability or inability to honour its debts, as the applicant company had been free to dispose of any cash not in the frozen accounts and any cash added to those accounts after 30 June 2004.
115. It does not appear that the company brought appeal proceedings against this judgment.
116. In the meantime, on 1 July 2004 the bailiffs decided to seize 24 subsidiary companies belonging to the applicant company.
117. The applicant appealed against the decision in court.
118. By a first-instance judgment of 17 September 2004 the appeal was dismissed as unfounded. The judgment was produced on 20 September 2004.
119. The applicant did not appeal against the judgment before the Appeal Court, though it did bring further appeal proceedings before the Circuit Court.
120. On 2 February 2005 the judgment was upheld by the Circuit Court.
121. In addition to the above attempts to stay the enforcement of the judgments concerning the 2000 Tax Assessment, the applicant company, by a letter dated 2 July and filed on 5 July 2004, suggested to the bailiffs for the second time that it repay its debts by using 34.5% of Sibneft stock allegedly worth over 4 billion United States dollars (“USD”, or some EUR 3.3 billion), citing its vertically integrated structure as a possible reason for seeking to find the least intrusive solution as well as the need to honour its contractual debts.
122. The Government provided the following background information in connection with the applicant’s second offer of Sibneft shares (see paragraph 121 above). At this point, the owners of Sibneft had already obtained a court judgment in their favour by the City Court on 1 March 2004, ordering the applicant company to return the 57.5% of Sibneft shares swapped for the cancelled 17.2% of the applicant company’s shares and on 6 July 2004, that is, on the day after the applicant’s second offer, they had filed court claims demanding the return of 14.5% of the shares previously exchanged for 8.8% of the applicant company’s existing shares. In addition, by a decision of 6 July 2004 the owners of Sibneft had obtained an attachment order in respect of the Sibneft shares in question.
123. On 14 July 2004 the applicant company filed an action against the bailiffs on account of their alleged failure to respond to the company’s offer of 5 July 2004.
124. On 17 August 2004 the City Court dismissed this action, having noted that the failure to respond was lawful and within the scope of the bailiffs’ discretion. The court established that some of the steps undertaken by the applicant company during the unsuccessful merger with the Sibneft company had been contested in a different set of proceedings as unlawful. In addition, the applicant company’s ownership of the Sibneft shares had been contested by third parties in two different sets of proceedings. On the basis of these findings, the court concluded that the bailiff had not breached the law by ignoring the company’s offer.
125. It does not appear that the applicant company appealed against the judgment.
126. On 5 July 2004 the applicant company received a default notice from syndicated lenders, a group of international banks, who had previously loaned the company USD 1 billion (EUR 821,894,430). The lenders considered that a default had occurred as a result of the recent and well-publicised events in respect of the applicant company and their actual or potential impact on the applicant company’s business and assets. The notice stated that as a result of the default notice the loans were due and payable on demand.
127. As set out above (paragraph 67), on 7 July 2004 the applicant company filed a cassation appeal against the court judgments on the 2000 Tax Assessment and at the same time it moved to stay the enforcement proceedings. It argued that its assets were highly valuable, but that it had insufficient cash to honour the debts immediately and that the attachment of assets made any voluntary settlement impossible. The applicant company also argued that enforcement of the court judgments in the case would irreparably damage its business, since a reversal of the enforcement would be impossible.
128. By a decision of 16 July 2004 the Appeal Court agreed to consider the cassation appeal and, having examined the motion to stay the enforcement, dismissed it as unsubstantiated and unfounded, as the circumstances referred to by the applicant company were irrelevant under the domestic law. The court noted that it would be possible to reverse the enforcement, since the plaintiff was the Treasury.
129. This decision was upheld by the Circuit Court on 4 August 2004.
130. By a decision of 9 July 2004 the bailiffs levied an enforcement fee of 7% in respect of the applicant company’s failure to comply with the execution writs of 30 June 2004 (see paragraph 110 above). The applicant company was to pay RUB 6,848,291,175.45 (approximately EUR 190,481,640)
131. On 19 July 2004 the applicant company challenged this decision in court.
132. By a decision of 3 August 2004 the City Court examined the applicant company’s action and quashed the decision of 9 July 2004 as disproportionate and unjustified. The court decided that the enforcement fee could only be levied if the respondent had acted in bad faith and found that the bailiffs had failed to examine this question. The court also noted that 7% was the highest possible rate and that the bailiffs’ decision failed to explain why the fee could not be lower. Among other things, the court referred to section 3 of Constitutional Court Ruling no. 13-P of 30 July 2001.
133. Following an appeal by the Ministry, on 27 August 2004 the Appeal Court quashed the decision of 3 August 2004 as erroneous and held that the bailiffs’ actions had been lawful and justified. The court noted that the applicant company had failed to demonstrate that it had taken any steps to meet the liabilities. It further noted that the cash in the applicant company’s accounts was only frozen in certain specified amounts and that, above those amounts, the company was free to function as usual. As to the company’s proposal to offer the Sibneft shares as payment, the court noted that this could not be accepted, because the applicant company’s property rights in respect of these shares had been questioned by a third party in a parallel set of proceedings. In addition, the court noted that the applicant company had failed to use a remedy provided in Article 324 of the Commercial Procedure Code.
134. The Circuit Court upheld the appeal decision on 6 December 2004.
135. Overall, in respect of 2000, the applicant company was ordered to pay RUB 99,333,836,391 (approximately EUR 2,814,667,452)
136. On 13 July 2004 the applicant company again repeated its offer of 34.5% of Sibneft shares to the bailiffs. On the next day the offer was amended to include only 20% of Sibneft shares. The domestic courts at three instances analysed this offer in detail in their decisions of 6, 18 August and 25 October 2004 (see paragraphs 139-146 below).
137. On 14 July 2004 the bailiffs seized the shares of OAO Yuganskneftegas, one of the applicant company’s principal production subsidiaries. The decision referred to the applicant company’s inability to meet its liabilities. The attachment did not affect the applicant company’s ability to manage OAO Yuganskneftegaz, but rather prevented the company from selling or encumbering those shares.
138. The applicant company appealed against this decision in court. With reference to section 59 of the Enforcement Proceedings Act, it argued that the bailiffs ought firstly to claim assets which were not involved in the production process, secondly those goods and other values which were not related to the production process and, thirdly, immovable objects, raw material and other main assets relating to the production cycle. In addition, the applicant company referred to Ruling no. 4 of the Plenary Supreme Commercial Court “On certain questions arising out of seizure and enforcement actions in respect of corporate shares”, dated 3 March 1999, which suggested, in respect of those companies which had been privatised by the State as parts of bigger holding groups through the transfer of controlling blocks of shares, that the production cycle of the respective production unit should be preserved as much as possible. The company further claimed that the above ruling was applicable to the case at issue, that OAO Yuganskneftegas was a major production unit and that the bailiffs had produced no evidence that the assets and goods and other values not involved in the production process were insufficient. In addition, it reiterated its offer of the shares in Sibneft.
139. On 6 August 2004 the City Court examined and allowed the applicant company’s challenge of this seizure.
140. At the hearing the Ministry and bailiffs referred to sections 9 (5) and 51 (1-4) of the Enforcement Proceedings Act and Government Decree no. 934 “On seizure of securities” of 12 August 1998. They argued that, under the applicable domestic law, the seizure should be made first in respect of the cash-flow and then, under section 46 (5) of the Enforcement Proceedings, it would be open to the bailiffs to assess and seize the assets depending on their liquidity. They countered the applicant company’s arguments by saying that the latter’s references were invalid in that they related to the other stage of enforcement proceedings (the collection of debt and not the seizure as such). Furthermore, they argued that Ruling no. 4 of the Plenum of the Supreme Commercial Court was inapplicable since, in the case of Yuganskneftegas, the State had transferred only 38% of the shares and not a controlling block. With regard to the offer of Sibneft stock, the Ministry and bailiffs argued that the applicant company’s rights in respect of these shares had been contested in separate sets of court proceedings and it was therefore risky to accept them as a payment. Lastly, they informed the court that the applicant company had recently hidden the shareholder registers of its three major subsidiaries, OAO Yuganskneftegas, OAO Samaraneftegas and OAO Tomskneft, which, in their view, demonstrated the risk of possible asset-stripping by the applicant company.
141. Having examined the parties’ submissions, the court upheld the applicant company’s arguments. It noted that the applicant company’s references to the applicable domestic law were correct. With regard to the non-controlling block argument, the court noted that at the time of transfer of the shares, 25% of shares were privileged and non-voting. For the remaining 75% of the voting stock, the 38% transferred by the State constituted the controlling block. As regards the offer of shares in Sibneft, the court noted that the exact quantity of the contested shares was unclear and that the bailiffs should find out the exact figures and that they should consider the uncontested shares as a possible means of partial settlement. The court concluded that the decision of 14 July 2004 was unlawful and quashed it.
142. On 9 August 2004 the Ministry challenged the decision of 6 August 2004 on appeal.
143. On 18 August 2004 the Appeal Court quashed the decision, finding that the first-instance court had erred both in law and fact. In particular, the court confirmed that it was up to the bailiffs to choose the most liquid assets and dispose of them with a view to honouring the applicant company’s huge debt. It also noted that Ruling no. 4 of the Plenary Supreme Commercial Court was inapplicable to the case in issue, as the applicant company, in the years following its privatisation, had restructured its initial shareholding in OAO Yuganskneftegaz in 1999 in such a manner as to take those shares outside the scope of the exception provided by Ruling no. 4.
144. Following an appeal by the applicant company, on 25 October 2004 the Circuit Court upheld the decision of 18 August 2004.
145. The applicant company’s attempts to bring supervisory review proceedings against this decision proved unsuccessful.
146. The respective complaint was dismissed by a decision of the Supreme Commercial Court dated 17 December 2004.
147. In addition to seizing the shares of OAO Yuganskneftegaz, on 14 July 2004 the bailiffs also seized the shares of OAO Tomskneft-VNK and OAO Samaraneftegas, the applicant company’s two other principal production units.
148. The applicant company’s complaint against the seizure of OAO Tomskneft-VNK proved unsuccessful.
149. The City Court dismissed its complaint as unfounded on 13 August 2004.
150. The applicant company did not contest that judgment before the Appeal Court.
151. On 5 November 2004 the Circuit Court dismissed the applicant company’s cassation appeal in respect of the judgment of 13 August 2004. The court noted that the seizure was intended to protect the creditor’s claims and that there was no indication that the seizure impeded the production cycle or otherwise disturbed the normal functioning of the company.
152. The company also complained unsuccessfully about the seizure of its shares in OAO Samaraneftegaz.
153. The City Court, acting as a first-instance court, dismissed the appeal on 2 September 2004.
154. The applicant company failed to appeal the judgment before the Appeal Court, although though it did pursue cassation proceedings.
155. On 18 January 2005 the Circuit Court upheld the judgment.
156. On 16 July 2004 the applicant company wrote a letter to the Ministry of Finance, applying for respite or payment in instalments in respect of the sums due. It appears that this letter remained unanswered. The Government submitted that the Ministry of Finance had not had any authority to respond to the request, as the issue of respite and payment in instalment lay within the competence of the courts.
157. On 12 August 2004 the City Court examined the applicant company’s request to re-pay the 2000 Tax Assessment award in instalments and rejected it as unfounded. The court noted, among other things, that the tax debt had resulted from intentional tax evasion by the applicant company and that the conduct of the debtor in court and during the enforcement proceedings demonstrated that it did not intend to pay the debts voluntarily.
158. It does not appear that the applicant company brought any appeal proceedings in respect of this judgment.
159. On 9 August 2004 the applicant company offered the bailiffs the 20% stake in Sibneft and shares in fifteen other subsidiary companies as a settlement for its debts, requesting that the bailiffs respond within one day.
160. It appears that the bailiffs responded to the company’s offer on 9 September 2004. It does not appear that the company brought any court proceedings in respect of that response.
161. It appears that on 22 September 2004 the Ministry responded to four of the applicant company’s letters about the settlement of the debt, rejecting the offers.
162. It does not appear that the company brought any separate court proceedings in this respect.
163. On 8 October 2004 the applicant company announced that it would comply with the City Court’s judgment of 1 March 2004, which had cancelled the issue of additional shares in the applicant company, used for the purpose of acquiring Sibneft. The applicant company, acting in compliance with the court order, instructed the registrar to return its 57.5% stake in Sibneft to its former owners.
164. On 23 March 2004 the Tax Ministry commenced tax inspection in respect of the applicant company’s activities in 2001. The inspection ended on 30 June 2004 and on 5 July 2004 the Ministry served the resultant report on the applicant company.
165. On the basis of the above-mentioned report, by a decision of 2 September 2004 the Ministry issued a tax assessment for the year 2001 (“the 2001 Tax Assessment”), finding the company liable for having used essentially the same tax arrangement as in the previous year. The Tax Assessment 2001 relied on a similarly wide range of evidence as the Tax Assessment 2000, including the documentary evidence and detailed statements of those involved in the nominal ownership and running of the trading companies. This time the applicant company had to pay RUB 50,759,436,900 (approximately EUR 1,424,746,313) in tax arrears, RUB 28,520,204,254 (approximately EUR 800,522,195) in default interest and RUB 40,607,549,520 in penalties (approximately EUR 1,139,797,051). Since the applicant company had recently been found guilty of a similar offence, the penalty was doubled.
166. On 14 September 2004 the applicant company lodged an appeal against the decision of 2 September 2004 and requested an injunction against the immediate enforcement of this decision.
167. On 5 October 2004 the City Court turned down the request for an injunction and on 13 October 2004 it issued execution writs in respect of the Ministry’s decision of 2 September 2004. The court referred to Information Letter no. 83 of the Supreme Commercial Court of 13 August 2004, which recommended that requests for interim measures in such situations be granted only if an applicant could demonstrate some security for a creditor’s future claims. The court noted that, in the present case, the applicant company clearly had insufficient cash to satisfy the creditor’s claims, and had failed to produce any security, and dismissed the claims accordingly.
168. The judgment of 5 October 2004 was upheld by the Appeal Court on 3 December 2004 and by the Circuit Court on 29 March 2005.
169. As the 2001 Tax Assessment was similar to the 2000 Tax Assessment, the Ministry decided to enforce it directly in the part relating to additional taxes and interest surcharges, without taking the matter to the courts. The applicant company was to pay the amounts due by 4 September 2004.
170. On 9 September 2004 the bailiffs instituted enforcement proceedings in connection with the decision of 2 September 2004. The company was to pay RUB 50,759,436,900 (approximately EUR 1,424,746,313) in tax arrears and RUB 28,520,204,254 (approximately EUR 800,522,195) in default interest.
171. It appears that the 2001 Tax Assessment, in the part relating to additional taxes and interest surcharges, was upheld by the City Court on 11 October 2004. The judgment of 11 October 2004 was upheld on appeal on 16 February 2005. The Circuit Court upheld the decisions of the lower courts on 9 December 2005.
172. The applicant company’s request for an injunction pending those proceedings was unsuccessful. The City Court dismissed it in its judgment of 5 October 2004. The refusal was upheld by the Appeal Court on 3 December 2004 and by the Circuit Court on 29 March 2005.
173. On 3 September 2004 the Ministry applied to the City Court to recover the penalties arising from the 2001 Tax Assessment. .
174. It appears that on 11 October 2004 the action was examined and granted by the City Court. The judgment in the case was produced on 15 October 2004.
175. According to the applicant company, its appeal against the judgment of 15 October 2004 was dismissed by the Appeal Court on 18 November 2004. It appears that the Circuit Court upheld these two decisions on 15 November 2005.
176. On 19 November 2004 the bailiffs instituted enforcement proceedings in respect of the Tax Assessment 2001 in the part relating to penalties. The company was to pay RUB 39,113,140,826 in penalties (approximately EUR 1,097,851,399).
177. On 20 September 2004 the bailiffs decided to impose a 7% enforcement fee in respect of the applicant company’s failure to abide by the 2001 Tax Assessment in the part relating to taxes and interest surcharges. The applicant company was to pay RUB 5,549,574,880.78 (approximately EUR 155,693,193).
178. The resolution was served on the applicant company on 1 October 2004.
179. On 29 October 2004 the City Court examined and dismissed the challenge to the decision of 20 September 2004 as groundless.
180. It does appear that the company pursued appeal proceedings.
181. On 1 December 2004 the company appealed in cassation against the judgment of 29 October 2004.
182. The appeal was dismissed by the Circuit Court on 3 March 2005.
183. On 9 December 2004 the bailiff decided to impose a 7% enforcement fee in respect the applicant company’s failure to abide by the 2001 Tax Assessment in the part relating to penalties. The company was to pay a 7% enforcement fee of RUB 7,102,488,295 or approximately EUR 190,077,377.
184. On 23 December 2004 the company challenged this decision in court.
185. On 3 February 2005 the City Court dismissed the action.
186. The applicant company failed to appeal the judgment of 3 February 2005.
187. The Circuit Court upheld the judgment of 3 February 2005 on 16 June 2005.
188. Overall, in respect of 2001 the applicant company was ordered to pay RUB 132,539,253,849.78 (approximately EUR 3,710,836,129).
189. On 29 October 2004 the Ministry produced an audit report in respect of the applicant company’s activities for the year 2002. The report was received by the company on 1 November 2004.
190. On 16 November 2004 the Ministry took a decision to levy further tax liabilities, this time in respect of the year 2002 (“the 2002 Tax Assessment”). The applicant company was to pay RUB 90,286,552,485 (approximately EUR 2,425,825,387) in taxes, RUB 31,485,110,355.58 (approximately EUR 845,944,140) in default interest and RUB 72,040,907,796 (approximately EUR 1,935,600,133) in penalties.
191. The decision established the use of the same tax-evasion scheme (in respect of profit tax, VAT, corporate property tax and motorway users’ tax) as in the decisions concerning the years 2000 and 2001. It mentioned that the company had carried out its activities through OOO Ratmir, OOO Alta-Treid, ZAO Yukos-M, OOO Yu-Mordoviya, OOO Ratibor, OOO Petroleum treyding, OOO Evoyl, OOO Fargoyl, most of which had also been used by the applicant company in previous years. The entities in question, acting in breach of Article 575 of the Civil Code, which prohibits grants and gifts between independently functioning commercial entities, had transferred the entirety of their profits unilaterally to a fund owned and controlled by the applicant company. The decision mentioned that the transfers had been wrongly reflected in the applicant company’s financial accounting and that the company had failed to explain the origin of these funds and had failed to take these sums into account for tax purposes. Accordingly, the applicant company had failed to pay taxes in respect of these amounts.
192. The decision referred to several other mistakes in the applicant company’s tax declarations. In particular, the tax in respect of the company’s securities transactions was wrongly calculated, there were many general mistakes in the company’s financial accounting, and there were some mistakes in the company’s request for reimbursement of the VAT on export operations (e.g. on one occasion the company failed to submit the required sales contract; it also mentioned one contract but received the money on the basis of a different contract; on some occasions the company failed to submit documents proving customs clearance, indicated wrongly calculated sums, and made multiple mistakes in VAT export documents). There were further multiple mistakes in tax deductions in respect of internal VAT.
193. The decision also established that the applicant company had used sham entities to lower its group taxes, that the entities and the company’s subsidiaries had entered into transactions with reduced prices, that on some occasions the company had declared the extracted oil as “hydrocarbon liquid” in order to lower the applicable price even further, that there were no cash transactions between the entities and subsidiaries and that the company’s own promissory notes and mutual offsetting had been used instead and that the whole set-up, which had no economic purpose other than tax evasion, had resulted in massive tax evasion by the applicant company. The decision also noted that use of tax concessions in the Republic of Mordoviya and the Evenk Autonomous District by the sham entities had been unlawful, because they had failed to qualify for the exemptions and also because they had been sham companies. The decision was detailed in respect of the composition and all the activities of the sham entities: the Ministry analysed the entirety of their activities month by month.
194. The applicant company had until 17 November 2004 to meet the debts voluntarily.
195. By a decision of 18 November 2004 bailiffs proceeded to enforcement of the decision of 16 November 2004 in so far as it related to additional taxes and interest surcharges.
196. The City Court joined the proceedings by which the applicant company tried to contest the decision of 16 November 2004 and on 23 December 2004 it examined and, in the most part, dismissed the applicant company’s appeals against the decision of 16 November 2004. The court declared the Ministry’s conclusions partly unfounded and reduced the company’s tax liability by RUB 325,628,742 (approximately EUR 8,752,543), its default interest payments by RUB 98,515,758 (approximately EUR 2,647,995) and the penalty by RUB 851,419,688 (approximately EUR 22,885,227). The court also ordered the applicant to pay the penalty in question.
197. This decision was upheld by the Appeal Court on 5 March 2005 and the Circuit Court on 30 June 2005.
198. On 28 December 2004 the applicant company also appealed against the Ministry’s decision in respect of the year 2002, in so far as it had ordered that the tax debts and default interest payments be collected directly.
199. It appears that on 7 February 2005 the City Court examined and dismissed the claim as unfounded. The judgment was upheld on appeal on 4 April 2005. The Circuit Court upheld the decisions of the lower courts on 15 June 2005.
200. On 9 December 2004 the bailiffs decided to impose a 7% enforcement fee in respect of the applicant company’s failure to comply voluntarily with the 2002 Tax Assessment in the part relating to additional taxes and surcharge interests.
201. On 23 December 2004 the company appealed against this decision in court, initially claiming that the decision had been unlawful and asking to reduce the fee to 1%. The company then withdrew its claim in the part relating to the reduction of the fee.
202. On 10 February 2005 the City Court judgment dismissed the appeal.
203. It does not appear that the company brought any proceedings before the Appeal Court in respect of the judgment.
204. The applicant company’s cassation appeal was examined and dismissed by the Circuit Court on 16 June 2005.
205. Overall in respect of the year 2002 (excluding the 7% enforcement fee), the applicant company was ordered to pay RUB 192,537,006,448.58 (approximately EUR 4,344,549,434).
206. In their observations of 15 April 2005 the Government submitted a copy of a report communicated to the applicant company’s management by its auditor ZAO PricewaterhouseCoopers Audit. The applicant company did not comment on the contents of the report.
207. In contrast to “ordinary” audit reports, which were made public, the internal information report was produced exclusively for the applicant company’s management.
208. The report noted specifically that the applicant company’s “Fund for Financial Support of the Production Development of OAO Neftyanaya Kompaniya YUKOS” was in breach of the domestic law in that the relevant legislation disallowed unilateral transfers and gifts between commercial entities. It also noted that the applicant company’s accounting policy in respect of the operations involving promissory notes had been incompatible with the legislation in force and provided a distorted view of the company’s activities.
209. In addition, on 15 June 2007 the applicant company’s auditor, ZAO PricewaterhouseCoopers Audit, disavowed its audit certifications in respect of the applicant company’s financial statements for the years 1995-2004 on account of the applicant company’s deliberate attempts to conceal its tax-evasion scheme, as well as its failure to disclose all relevant documents during the respective inspections conducted by the company’s auditors at the time.
210. On 28 October 2004 the Tax Ministry commenced a tax inspection in respect of the year 2003, which resulted in an audit report that was dated 19 November 2004 and served on the applicant company on the same date.
211. On the basis of the report, by a decision of 6 December 2004 the Ministry levied tax liabilities for the year 2003 (“the 2003 Tax Assessment”), consisting of RUB 86,228,187,852 (approximately EUR 2,327,114,103) in taxes, RUB 15,235,930,657.66 (approximately EUR 411,185,136) in default interest and RUB 68,939,326,976.40 (approximately EUR 1,860,524,778) in penalties.
212. The decision established that the company was guilty of having evaded taxes (in particular, VAT, profit tax and advertising tax) by using the same arrangement as in previous years. The decision mentioned the following entities registered either in the Republic of Mordoviya or the Evenk Autonomous District: OOO Yu-Mordoviya, ZAO Yukos-M, OOO Alta-Treyd, OOO Ratmir, OOO Energotreyd, OOO Makro-Treyd, OOO Fargoyl, and OOO Evoyl. It was alleged that the entities were sham and that they had made unilateral transfers to the applicant company, in breach of Article 575 of the Civil Code, that the applicant company had failed to reflect the transferred amounts as its profits, to account for them and to pay taxes in this connection and that the company had used lowered prices to avoid the payment of taxes. The decision contained a detailed contract-by-contract analysis of the sham entities’ transactions.
213. The decision also mentioned that some of the applicant company’s expenses were unjustifiably deducted from the company’s taxable income, that the company failed to account for some of its operations with promissory notes, that there were some mistakes in calculation of the VAT owed by the company and that the company had evaded payment of advertising tax in Moscow.
214. The applicant company had one day to comply with the decision, that is, until 7 December 2004.
215. On 9 December 2004 the bailiffs proceeded to enforcement of the decision of 6 December 2004 in so far as it related to taxes and interest surcharges.
216. It appears that the City Court joined the proceedings by which the applicant company tried to contest the decision of 9 December 2004 and on 28 April 2005 it examined the company’s challenge. In respect of the company’s request to recalculate automatically the export VAT on operations conducted by the sham entities in the course of these proceedings, the court noted the request was unsubstantiated and also lodged out of time. In particular, the company had failed to submit a proper claim with monthly calculations and evidence that the goods in question had indeed been exported. The court also addressed the applicant company’s argument that Article 75 (3) of the Tax Code prevented the authorities from levying the interest surcharges. It noted that the provision in question only applied to cases in which the sole reason for the taxpayer’s inability to pay tax debts was the seizure of its assets and cash funds. On the facts, the applicant company was unable to pay because it had insufficient funds and not because its assets were frozen. The court concluded that the applicant company’s argument was unfounded. The court also reduced the amount of additional taxes to be paid to RUB 86,221,835,476.37 (EUR 2,399,884,085) and the amount of fines to RUB 68,918,264,491 (EUR 1,918,259,397). The amount of interest surcharges was reduced accordingly. The exact figure of the interest surcharges to be paid by the applicant is unclear.
217. The judgment was upheld on appeal on 16 August 2005.
218. The applicant company appealed on cassation.
219. On 5 December 2005 the Circuit Court upheld the decisions of the lower courts.
220. The bailiffs instituted enforcement proceedings in respect of the payment of fines on 4 October 2005.
221. On 17 March 2006 the bailiffs decided to impose a 7% enforcement fee in respect of the applicant company’s failure to comply voluntarily with the 2003 Tax Assessment. The applicant company was to pay RUB 7,102,488,296 (EUR 211,872,906) in respect of the unpaid reassessed taxes and interest surcharges and RUB 4,824,278,304 (EUR 143,912,080) in respect of the unpaid fines.
222. Overall, in respect of 2003 (excluding the 7% enforcement fee and the interest surcharges, the exact amount of which is unclear) the applicant company was ordered to pay RUB 155,140,099,967.37 (approximately EUR 4,318,143,482).
223. On 20 July 2004 the Ministry of Justice announced the forthcoming evaluation and sale of OAO Yuganskneftegaz as a part of its ongoing enforcement procedures.
224. On 22 July 2004 the applicant company announced that:
“...the company management [is] currently making every effort to raise additional funds in order to repay, as soon as possible, the tax liability and to finance current operations. However, should those efforts prove unsuccessful and Yuganskneftegaz [be] sold, in the present circumstances, the management of the Company would be compelled to announce the bankruptcy of Russia’s largest oil company”.
225. On 17 September 2004 the valuation commissioned by the bailiffs and the Ministry of Justice from Dresdner Kleinwort Wasserstein, the investment branch of Dresdner Bank AG (working in Russia as ZAO Dresdner bank), for the purposes of the enforcement proceedings, estimated that 100% of shares in OAO Yuganskneftegas were worth between USD 15.7 and 18.3 billion (between EUR 15.2 and 17.7 billion), excluding the pending and probable tax liabilities of this entity.
226. The report evaluated 100% of the price of OAO Yuganskneftegaz as a separate entity and, having deduced its corresponding obligations, calculated the cost of its shares, on the basis of which it would be possible to calculate the price of one share in OAO Yuganskneftegaz.
227. It was specifically mentioned in the report that the valuation was not an opinion concerning the attainable price in the event of the sale of OAO Yuganskneftegaz or any kind of recommendation concerning the starting bid of the auction in the event of the sale of Yuganskneftegaz by the Ministry of Justice or any other State institution, or any recommendation concerning particular actions to be undertaken by the Ministry of Justice with a view to levying the judicially determined or estimated amount of the applicant company’s tax debt.
228. Among the basic risks affecting the price of OAO Yuganskneftegaz, the report mentioned the tax claims, the validity of oil extraction licences, future oil prices, export quotas etc. The report also mentioned that the price of OAO Yuganskneftegaz as a part of the applicant company could be substantially different from the price of OAO Yuganskneftegaz as a separate entity. The report also mentioned various valuations of OAO Yuganskneftegaz made by third parties, including investment institutions and banks, and ranging from USD 9 to 22 billion (between EUR 7.4 to 18.1 billion). It also mentioned that, because of the size of OAO Yuganskneftegaz, not many buyers would be financially capable of acquiring it.
229. The valuation (between USD 15.7 and 18.3 billion or EUR 15.2 and 17.7 billion) did not take account of already pending and probable tax claims against OAO Yuganskneftegaz. If and when lodged, these claims would “substantially influence the assessment” of the equity of OAO Yuganskneftegaz. The claims already announced (as on that date) were USD 951.3 million.
230. In carrying out the valuation, the report used the following three methods: the method of discounted cash flows, a method based on the analysis of comparable transactions, and a method based on the analysis of comparable publicly-held companies.
231. The report also specifically noted that:
“...the decision concerning the starting bid of the auction is a tactical one and should strike a balance between the desire to reach the highest price on the one hand, and the need to attract the maximum number of potential buyers on the other. Because of this, the starting bid is most likely to be different from the assessment of the price.”
232. A copy of the valuation report was served on the applicant company on 13 October 2004.
233. It does not appear that the applicant company contested the report’s valuations report before the courts.
234. On 21 October 2004 the bailiffs confirmed to the Ministry that they had collected 79,584,690,127 RUB (approximately EUR 2,183,447,331).
235. On 4 November 2004 the applicant company responded to the valuation report. It disagreed with the decision to evaluate and sell OAO Yuganskneftegaz, and would have preferred to sell its other assets first. The applicant company informed the bailiffs that it had already honoured a major part of the debt (apparently referring to its tax liability for the year 2000 only) and that the remaining sum was USD 2.5 billion (around EUR 2 billion). The company claimed that it would be more reasonable to lift the seizure and let it dispose of its minor assets in order to honour the remaining debt.
236. As regards OAO Yuganskneftegas, the company referred to independent valuations by JP Morgan PLC, valuing the subsidiary at “no less than USD 14 billion (some EUR 11 billion)” and “between USD 16.1 billion (EUR 12.6 billion) and USD 22.1 billion (EUR 17.378 billion), including tax liabilities” respectively.
237. The letter mentioned that the Ministry had brought tax claims against OAO Yuganskneftegaz totalling USD 2.903 billion.
238. On 18 November 2004 the bailiffs noted that the applicant company’s debt to the Ministry on that date was RUB 204,902,386,620 (approximately EUR 5,506,781,584 or USD 7,147,250,717). Having referred to sections 4, 46 (6), 54 (2) and 88 of the Enforcement Proceedings Act, the bailiffs decided to sell 76.79 % of the shares in OAO Yuganskneftegas at an auction which would take place on 19 December 2004. The published minimum bidding price for 76.79 % of the shares in OAO Yuganskneftegas was RUB 246,753,447,303.18 (approximately USD 8.65 billion or EUR 6.63 billion).
239. The sale was entrusted to the Russian Fund of Federal Property (“the Property Fund”), a specialised State Institution in charge of organising sales of federal property and the property of those who had debts towards the State.
240. On the same date, the Property Fund issued a regulation setting out the parameters and rules that would govern the auction, including the number of shares to be sold (43 ordinary shares representing 76.79% of the capital of OAO Yuganskneftegaz), the starting price (RUB 248.6 billion or some USD 8.85 billion), the date and place of the auction (19 December 2004), the eligibility requirements for bidders (the auction was open to all perspective bidders, including foreign individuals and legal entities), which included a cash deposit of RUB 49.4 billion (USD 1.7 billion, or 20% of the starting price), to be paid no later than the day before the auction.
241. The decision of 18 November 2004 was challenged in court on 26 November 2004.
242. It appears that on 3 December 2004 the City Court dismissed the appeal against the decision of 18 November 2004.
243. On 21 January and 3 May 2005 that judgment was upheld on appeal and in cassation respectively.
244. The applicant company argued that the valuation report had failed to give a market valuation of the asset and that the decision of 18 November 2004 failed to mention a specific price for OAO Yuganskneftegaz. In response, the courts noted that 43 ordinary and 13 privileged shares in OAO Yuganskneftegaz had been seized by the bailiffs in satisfaction of the applicant company’s liability, that the shares had been valued by ZAO Dresdner Bank and that the applicant company had been informed of all of the bailiffs’ actions in the course of the enforcement proceedings. They also noted that the seizure of shares in OAO Yuganskneftegaz had previously been declared lawful, that the applicant company had been properly notified of all of the steps taken by the bailiffs in the course of the enforcement proceedings and could bring court proceedings against them, that the valuation by ZAO Dresdner Bank had not been contested by the applicant in accordance with the special procedure provided for by the legislation in force, and that the bailiffs had properly indicated the amount of the applicant company’s debt and requested the Fund to sell the amount of shares necessary to satisfy the debt.
245. In the meantime, on 19 November 2004, the Russian Gazette, an official Government newspaper, published an announcement about the sale of 76.79% of shares in OAO Yuganskneftegaz at a public auction organised by the Property Fund. The only two conditions for participating in the auction were to file an application between 19 November and 18 December 2004 and to make a deposit payment.
246. On 10 December 2004 OOO Gazpromneft, ZAO Intercom and OAO First Venture Company filed applications with the Federal Antimonopoly Service and thus were expected to bid at the auction.
247. The media reported that OAO Gazprom, a parent company of OOO Gazpromneft, had begun negotiating a financing arrangement with a consortium of international banks to finance its bid at the auction. It was also reported that a number of non-Russian companies, such as ENI, Chevron Texaco, China National Petroleum Corporation and E.ON, had expressed interest in participating in the auction.
248. On 17 December 2004 the bailiffs noted that the applicant company’s consolidated debt on that date, regard being had also to the 2001 Tax Assessment, was RUB 344,222,156,424.22 (EUR 9,210,844,560.93, or USD 12,365,545,256.86).
249. On 14 December 2004 the applicant company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of Texas, Houston Division (“the U.S. Bankruptcy Court”).
250. Simultaneously, the applicant company filed a request for injunctive relief, pursuant to section 105 of the U.S. Bankruptcy Code in order, among other things, to enforce the automatic stay set out in section 362 (a) of the Bankruptcy Code by enjoining certain parties from participating in the Yuganskneftegaz Auction. The request was directed specifically against “... defendants the Russian Federation, OOO Gazpromneft, ZAO Intercom, OAO First Venture Company, ABN Amro, BNP Paribas, Calyon, Deutsche Bank, JP Morgan and Dresdner Kleinwort Wasserstein ...”.
251. Under U.S. law, an automatic stay went into immediate effect when the applicant company filed for bankruptcy. The automatic stay protected the company’s assets by preventing the creditors from collecting claims that arose prior to the bankruptcy filing or from taking “possession” or “control” of the applicant company’s property covered under the filing.
252. On 16 December 2004, having examined the applicant company’s request, the U.S. Bankruptcy Court issued a temporary restraining order barring certain specific entities from taking any actions with respect to the shares in OAO Yuganskneftegaz, including participation in the auction. Among other things, Judge Letitia Z. Clark stated the following:
“... The court is mindful of the need for deference to the judicial determination of another jurisdiction. This is ... of exceptional importance when it involves that of agencies of another sovereign state. However, in the instant case, the [applicant company] has made a showing that it needs a short additional time to hold its shareholder meeting scheduled for December 20, 2004 and may elect to file for bankruptcy under Russian law in order to proceed with a more orderly adjustment of its assets and debts in accordance with Russian law or to continue to seek international arbitration ...”.
253. The entities mentioned in the order were (a) the three companies registered to bid at the Auction, including OOO Gazpromneft, ZAO Intercom and OAO First Venture Company, (b) six western financial institutions that had announced their intention to fund OOO Gazpromneft’s bid at the auction (ABN Amro, BNP Paribas, Calyon, Deutsche Bank, JP Morgan and Dresdner Kleinwort Wasserstein) and (c) those persons in active concert or participation with them.
254. On 24 February 2005 the U.S. Bankruptcy Court dismissed the applicant company’s petition for bankruptcy with reference to section 1112 (b) of U.S. Bankruptcy Code which gave the court discretion to dismiss a case “in the best interest of the creditors and the estate”.
255. The court noted that most of the applicant company’s assets were oil and gas within Russia, so that the court’s ability to carry out a re-organisation without the cooperation of the Russian government was extremely limited, that the applicant company sought to substitute U.S. law in place of Russian, European Convention and/or international law, that the applicant company had commenced proceedings in other fora, including the European Court of Human Rights, and the court did not feel that it was uniquely qualified or more able that these other fora to consider the issues presented. Lastly, the court noted that the vast majority of the business and financial activities of the applicant company continued to occur in Russia and that the applicant company was one of the largest producers of petroleum products in Russia. The court held that “the sheer size of [the applicant company] and its impact on the entirety of the Russian economy weighs heavily in favour of allowing resolution in a forum in which participation of the Russian government is assured”.
256. On 19 December 2004 the Property Fund auctioned 76.79% of the shares in OAO Yuganskneftegaz. It appears that media reporters were able to attend the auction.
257. There were two participants in the auction, OOO Baykalfinansgrup and OOO Gazpromneft. OOO Baykalfinansgrup, the only bidder in the auction, made two bids, first of USD 8.65 billion and then of RUB 260,753,447,303.18 (USD 9.4 billion or EUR 7.05 billion). It appears that whilst taking part in the auction OOO Gazpromneft was prevented from bidding by the injunction of 16 December 2004 (see paragraph 253 above).
258. On 21 December 2004 the Ministry of Justice issued a report accepting that the Property Fund had properly carried out the services due under the contract of 18 November 2004.
259. On 21 December 2004 the Property Fund publicly reported the sale of the shares in OAO Yuganskneftegaz.
260. On 31 December 2004 the bailiffs issued a resolution confirming the results of the auction. The resolution stated that OOO Baykalfinansgrup had won the auction for 43 shares in OAO Yuganskneftegaz (76.79% of its stock) for RUB 260,753,447,303.18 (approximately EUR 6,896,341,940 or USD 9,396,960,842). By the time that resolution was issued, the money had already been transferred to the bailiffs.
261. According to press reports of 31 December 2004, OAO Rosneft, a State-owned oil company, acquired OOO Baykalfinansgrup and thus took control of OAO Yuganskneftegas.
262. In its consolidated financial statements 2003-2005, dated 15 May 2005,OAO Rosneft declared:
“... In late December 2004 [OAO Rosneft] acquired a 100% interest in [OOO Baykalfinansgrup], which a few days earlier had won an auction for the sale of a 76.79% interest in [OAO Yuganskneftegaz], which represents 100% of the common shares of [OAO Yuganskneftegaz]. ...”
263. It appears that on 26 May 2005 the applicant company filed an action in the City Court against the Property Fund, OOO Baykalfinansgrup, OAO Rosneft, OOO Gazpromneft, OAO Gazprom and the Ministry of Justice, seeking to annul the auctioning of 43 shares in OAO Yuganskneftegas and the deed of sale. It also claimed damages in excess of RUB 324 billion.
264. The action was examined and dismissed by the City Court on 28 February 2007. The court decided that both the Ministry of Justice and the Property Fund had acted within their statutory powers, that the auction procedure had been fully complied with and that the applicant company’s allegation about the auction participants acting in concert had been unsupported by any evidence.
265. The judgment was upheld by the Appeal Court on 30 May and by the Circuit Court on 12 October 2007.
266. On 27 January 2005 the applicant company also initiated parallel proceedings against OAO Rosneft, OOO Baykalfinansgrup, Deutsche Bank AG, Deutsche Bank AG London, Deutsche Bank Luxembourg S.A., Deutsche Bank Trust Company Americas and the Russian Federation before the U.S. Bankruptcy Court for violation of the automatic stay.
267. The applicant company voluntarily withdrew the entire proceedings on 28 March 2005, after its bankruptcy petition was dismissed by the U.S. Bankruptcy Court.
268. It does not appear that any enforcement measures took place in respect of the applicant company after the auctioning of OAO Yuganskneftegaz until September 2005.
269. On 8 September 2005 a consortium of foreign banks represented by the French bank Société Générale (“the banks”) filed an application with the City Court for recognition and enforcement of an English High Court judgment ordering the applicant company to re-pay the contractual debt of USD 482 million (around EUR 385 million), resulting from the applicant company’s default under a USD 1 billion loan agreement dated 24 September 2003.
270. On 22 September 2005, at the banks’ request, the bailiffs again attached the applicant company’s property.
271. In October 2005 the applicant company challenged this order.
272. On 30 November 2005 the City Court dismissed the appeal as groundless.
273. The first-instance judgment was upheld by the Appeal Court and by the Circuit Court on 27 February and 12 May 2006 respectively.
274. In the meantime, on 28 September 2005, the City Court allowed recognition and enforcement of the English High Court judgment.
275. On 5 December 2005 the Circuit Court granted the applicant company’s cassation appeal and quashed the judgment of 28 September 2005. It remitted the case for a fresh hearing.
276. On 21 December 2005, having re-examined the case, the City Court allowed the banks’ claims.
277. On 25 January 2006 the applicant company appealed against the judgment of 21 December 2005.
278. On 2 March 2006 the Circuit Court dismissed the appeal.
279. It appears that on 13 December 2005 the banks reached an agreement with the Rosneft company to sell to the latter the applicant company’s debt to the banks.
280. On 6 March 2006 the banks lodged a petition with the City Court to declare the applicant company bankrupt.
281. On 9 March 2006 bankruptcy proceedings were initiated against the applicant company upon the banks’ petition. It appears that the Ministry decided to join the proceedings as one of the bankruptcy creditors in respect of remaining tax debts of the 2000-2003 Tax Assessments still owed by the applicant company.
282. On 14 March 2006 the banks notified the City Court about the decision to sell the debts owed by the applicant company to Rosneft.
283. On 29 March 2006 the City Court substituted Rosneft in the place of the banks as a bankruptcy creditor. By the same decision the court imposed a supervision order on the applicant company and appointed Mr Eduard Rebgun as the applicant company’s interim receiver. It also prohibited the company’s management from disposing of any of its property exceeding RUB 30 million in value.
284. On 6 and 7 April 2006 the applicant company appealed against the decision of 29 March 2006 on all three points.
285. On 27 April 2006 the Appeal Court dismissed the appeals.
286. On 21 June 2006 the applicant company appealed against the lower courts’ decisions to the Circuit Court. The outcome of these proceedings is unclear.
287. On 21 April 2006 the Ministry submitted a claim to the City Court, seeking to be included in the list of the applicant company’s creditors for the amount of 353,766,625,235.66 RUB (approximately EUR 10,435,809,153), along with 2,118 pages of documentation. The claim was based on the company’s reassessed tax liability for the year 2004.
288. In June 2006 the City Court made a number of rulings concerning the formation of the list of creditors. In particular, on 1 and 7 June 2006 the City Court held hearings on the claim. On 14 June 2006 the final hearing of the claim was held. The court allowed the claims in its entirety and dismissed the application for stay.
289. On 21 June 2006 the City Court delivered a full version of the judgment of 14 June 2006. It decided to include the Ministry in the list of the applicant company’s creditors for the amount claimed and refused to stay the proceedings.
290. On 3 and 6 July the applicant company appealed against the judgment of 14 June 2006 concerning the allowed claims.
291. On 4, 7 and 11 August 2006 the Appeal Court heard the applicant company’s arguments.
292. On the latter date the Appeal Court dismissed the applicant company’s appeal.
293. It appears that on 18 August 2006 the Appeal Court delivered a full version of the appeal decision.
294. On 25 July 2006 the Committee of Creditors rejected the rehabilitation plan offered by the management and recommended the applicant company’s liquidation.
295. On 31 July 2006 the applicant company appealed against this decision.
296. On 4 August 2006 the City Court examined the applicant company’s situation, declared that the company was bankrupt and dismissed its management. The court appointed Mr E. Rebgun as the applicant company’s trustee. It also refused the company’s request to stay the proceedings.
297. Both parties appealed on 15 August 2006
298. The judgment was upheld on appeal and entered into force on 26 September 2006.
299. It appears that on 22 August 2006 Mr E. Rebgun, acting as the trustee in the company’s bankruptcy proceedings, revoked the authority of all counsel appointed by the applicant company’s previous management, including Mr P. Gardner.
300. On 23 October 2006 Mr E. Rebgun appointed a consortium of independent appraisers led by ZAO Roseko (“the consortium”), selected through an open tender, to inventory and evaluate the applicant company’s assets with a view to auctioning them.
301. The consortium carried out its evaluation from October 2006 to July 2007.
302. From 27 March to 15 August 2007 Mr E. Rebgun held 17 public auctions at which all of the applicant company’s assets were sold in line with the evaluations which had been made earlier by the consortium. The aggregate proceeds amounted to over RUB 860 billion (around USD 33.3 billion). The assets sold included a 20% stake in OAO Sibneft (sold, along with 12 fully owned subsidiaries, blocks of shares in 5 more entities and some exchange notes, for RUB 151.536 billion, or some EUR 4.387 billion), 9.44% of shares of OAO Rosneft (sold, along with 12 exchange notes of OAO Yuganskneftegaz, for RUB 197.840 billion, or some EUR 5.728 billion) and scores of the company’s subsidiary companies.
303. By a decision of 12 November 2007, the full version of which was produced on 15 November, the City Court examined the applicant company’s situation, heard the report by Mr E. Rebgun and decided to terminate the liquidation proceedings. The applicant company ceased to exist, leaving over RUB 227.1 billion (around USD 9.2 billion) in unsatisfied liabilities.
304. On 21 November 2007 a certificate was issued to the effect that the applicant company had been liquidated on the basis of the court decision.
305. It appears that a company Glendale Group Limited and Yukos Capital S.A.R.L. contested the decision of 12 November 2007 before the Appeal Court. The appeal of Glendale Group was declared inadmissible for the failure to submit it on time, whilst the appeal of Yukos Capital S.A.R.L. has been accepted for examination. The hearing in this respect was scheduled by the Appeal Court on 19 November 2007.
306. The outcome of these proceedings remains unclear.
307. Under Article 57 of the Constitution of Russia, everyone is liable to pay taxes and duties established by law.
308. Article 44 of the Tax Code of 31 July 1998 no. 146-FZ (as in force at the relevant time) states that an obligation to pay a tax or a duty arises, alters or ceases in accordance with that Code and other legislative acts on taxes and fees.
309. Articles 45 and 80 of the Tax Code provide that, as a general rule, taxpayers must comply with their obligation to pay a tax on their own initiative, and define a tax declaration as the written statement by taxpayers on their revenues and expenses, sources of revenue, tax benefits and the calculated sum of the tax, as well as other data related to calculation and payment of the tax.
310. Under Article 45, in the event of non-payment or incomplete payment of the tax in due time, the tax authorities may levy the tax liability directly from the taxpayer’s bank account.
311. Article 11 (2) of the Tax Code defines a branch of an organisation as a geographically separate department, with stable employment posts.
312. Under Articles 82 and 87 of the Tax Code, the tax authorities may carry out documentary and on-site tax inspections of taxpayers. Such inspections may cover only the three calendar years of the taxpayer’s activity directly preceding the year of inspection. In exceptional cases the authorities are allowed to carry out repeated on-site tax inspections. Such cases include, among other things, on-site inspections conducted by way of supervision of the activities of the tax authority that conducted the initial audit (Article 87 (3) of the Code).
313. Article 101 (4) 2 of the Tax Code states that the tax authority may use as evidence during its inspections documents earlier demanded by the authority from a taxpayer, documents submitted or obtained during documentary and on-site tax inspections of that taxpayer as well as other documents in the possession of the authority.
314. Under Article 100 (5) of the Tax Code a taxpayer has two months to file a detailed reply to the report drawn up by the tax authorities on the outcome of the tax inspection.
315. Under Article 81 of the Tax Code, a taxpayer may not be fined in respect of any errors if, prior to commencement of the on-site tax inspection for the relevant year, it files amended tax returns and voluntarily satisfies the related tax liabilities, including default interest.
316. By order no. BG-3-29/159 dated 2 April 2003 the Tax Ministry decided that the period for performance of the demand to pay tax addressed to a taxpayer may not exceed ten calendar days from the date of its receipt by the taxpayer.
317. The Government relied on the following cases as examples of typical terms given to taxpayers for voluntary payment of reassessed taxes and surcharges:
318. On 13 November 2000 the Tax Ministry demanded that respondent OAO Slavneft-YANOS pay reassessed taxes and interest surcharges amounting to over RUB 53 million within one day. The court decisions in the case were taken on 11 June 2003, 7 October 2003 and 19 January 2004.
319. On 31 May 2001 the Tax Ministry ordered the Municipal Housing and Utilities Infrastructure of the Kansk District to pay reassessed taxes in the amount of RUB 814,581.54 within one day. The first judgment of 9 April 2002 was upheld by the cassation instance on 16 July 2002.
320. On 23 January 2003 the Tax Ministry ordered FGUP PO Progress to pay reassessed taxes in the amount of RUB 72,827,208 within one day. The court decisions were taken on 4 September, 16 December 2003 and 5 April 2004 respectively.
321. On seven occasions in 2003 the Tax Ministry ordered OOO Krasnaya Rybka to pay reassessed taxes and interest surcharges in the overall amount of RUB 760,043.19 within one day. The first-instance judgment in the case, dated 13 February 2004, was upheld by a cassation decision of 16 June 2004.
322. On 25 August 2004 the Tax Ministry ordered OOO YamalGIS-Servis to pay reassessed taxes in the amount of RUB 268,083 on the same day. The court decisions upholding the demand were taken on 9 December 2004, 24 February and 4 May 2005.
323. Article 38 of the Tax Code provides that objects of taxation may be operations involving the retailing of goods, works and services, property, profit, income, value of retailed goods, works and services or other objects having cost, quantitative or physical parameters on the existence of which the tax legislation bases the obligation to pay tax.
324. Article 39 of the Code defines retailing of goods, works and services as, inter alia, the transfer (including exchange of services, works and goods) in return for compensation of property rights in respect of goods and results of works from one person to another, as well as the rendering of services from one person to another in exchange for compensation.
325. Article 41 of the Code defines profits as economic gains in monetary form or in kind.
326. Section 3 of RF Law no. 1992-1 of 6 December 1991 “On Value-Added Tax” (as in force at the relevant time) subjects to VAT, among other things, the turnover generated by the retailing of goods, works and services on the territory of Russia, the rates of which range between 10% and 20%. Under section 5 of the Law, exported goods are exempt from payment of the tax. The exemption becomes effective only if the taxpayer properly justifies the claim. Until these documents are filed, the tax remains payable under the non-export rate.
327. Letter no. B3-8-05/848, 04-03-08 of the State Tax Service of Russia and the Ministry of Finance, dated 21 December 1995, stated that taxpayers were to file the following documents to justify this tax exemption: a contract concluded between the legal personality taxpayer registered in Russia with its foreign partner, proof of payment in respect of the goods, and a customs declaration bearing the appropriate stamp of the customs body, confirming the export of goods from the customs territory of Russia.
328. In respect of VAT, the applicable tax rate is 0% if the traded goods are placed in an “export” customs regime and physically removed from the customs territory of the Russian Federation (Article 164 (1) of the Tax Code). In addition, the taxpayer may claim a refund of the “incoming” VAT already paid in respect of the exported goods.
329. For the zero rate to become effective and in order to claim the VAT refund, it is necessary to justify the claim by filing the following documents with the tax authorities (Article 165 of the Tax Code): the export contract concluded between the taxpayer and the foreign buyer, a bank statement confirming receipt of funds from the foreign buyer by a Russian bank duly registered with the tax authorities, a relevant customs declaration bearing the stamp of the customs bodies confirming the export of the goods from the customs territory of Russia, and copies of relevant transport bills and shipping documents, bearing the stamps of the customs bodies, confirming the export of goods from the customs territory of Russia.
330. On 14 July 2003 the Constitutional Court issued ruling no. 12-P, in which it essentially upheld the constitutionality of Article 165 of the Code. The court distinguished between documents required by public-law norms, such as the taxpayer’s customs declaration bearing the relevant stamps from the customs bodies, and which are mandatory in all cases, and other documents such as contracts, transport bills etc. In view of the different practices of the economic actors, which made the latter type of documents mutually replaceable, the authorities were constitutionally permitted to require a taxpayer to file these documents, but without an excessive degree of formalism.
331. The relevant documents are to be filed with the competent tax authority within 180 days from the date of the customs clearance of the goods in question (Article 165 (9) of the Tax Code). Until these documents are filed, the tax remains payable under the non-export rate. A taxpayer is not precluded from filing the documents in question even after the expiry of the time-limit in question (Article 176 of the Tax Code).
332. By a decision of 28 April 2003 (case no. F09-1159/03-AK) in the case of ZAO Aktsionernaya neftyanaya kompaniya v. the Tax Ministry, the Federal Commercial Court of the Ural District, acting as a cassation review court, rejected the company’s claims for VAT refunds with reference to its failure to satisfy the requirements of Article 165 of the Code. The company could not prove the fact of actual payment for the allegedly exported goods.
333. By a decision of 17 February 2004 (case no. F09-187/04-AK) in the case of OOO Firma Galaktika v. the Tax Ministry, the Federal Commercial Court of the Ural District, acting as a cassation review court, rejected the company’s claims for VAT refunds with reference to its failure to satisfy the requirements of Article 165 of the Code. The company failed to submit a proper bank statement confirming receipt of funds from the foreign buyer.
334. By a decision of 3 May 2005 (case no. A56-31805/04) in the case of ZAO Stroitelnyy trest no. 28 v. the Tax Ministry, the Federal Commercial Court of the North Western District examined the decisions of lower courts whereby the company had been refused VAT refunds at first instance (by a judgment of 11 October 2004 – the company failed to submit the properly stamped customs declaration confirming the actual export of the goods) and had subsequently been granted them on appeal (by a decision of 21 January 2005 – the appeal court decided that the fact of the actual export had been established by a final court decision in a related court dispute). The cassation court quashed the appeal decision, having noted that the requirements set out in Article 165 of the Code were strict and unequivocal and that the law did not allow for any replacement of the customs declaration by other means of proof.
335. By a decision of 9 March 2005 (case no. F09-563/05-AK) in the case of OAO Kachkanarskiy gorno-obogatitelnyy kombinat Vanadiy v. the Tax Ministry, the Federal Commercial Court of the Ural District quashed the decisions of lower courts whereby the company had been granted VAT refunds. The cassation court noted that the requirements set out in Article 165 of the Code were strict and unambiguous and that the law required the taxpayer to prove the actual export solely by means of the properly stamped customs declaration, which had not been done by the company in the present case. Accordingly, the court rejected the company’s claims.
336. By a decision of 27 September 2005 (case no. F09-4252/05-C2) in the case of OAO Nauchno-proizvodstvennyy centr vysokotochnoy tekhniki Izhmash v. the Tax Ministry, the Federal Commercial Court of the Ural District, acting as a cassation review court, rejected the company’s claims for VAT refunds with reference to its failure to satisfy the requirements of Article 165 of the Code in a timely manner, that is, within six months.
337. Section 5 (2) of RF Law no. 1759-1 of 18 October 1991 “On motorway funds in the Russian Federation” provides for a 1% motorway users’ tax from the turnover of the retail of goods, works and services, payable by all motorway users. Section 4 also makes subject to a 25% tax the turnover (excluding VAT) of companies trading in fuels and lubricants.
338. This tax was abolished from 1 January 2003.
339. Section 21 (“Ch”) of RF Law no. 2118-1 of 27 December 1991 “On the foundations of the tax system” imposes a tax of up to 1.5% for the maintenance of the housing stock and socio-economic facilities.
340. This tax was abolished with the entry into force of the Second Part of the Tax Code on 1 January 2001.
341. Section 2 (1-2) of RF Law no. 2030-1 of 13 December 1991 “On corporate property tax” provided for a tax of up to 2% in respect of organisations’ property.
342. Chapter 30 of the Tax Code provides for a tax of up to 2.2% in respect of organisations’ property. The exact rate is defined by the regional authorities.
343. Law no. 2116-1 of 27 December 1991 “On profit tax on enterprises and organisations” (sections 2 and 5) provided for a profit tax, the rate of which could vary depending on the type of taxable activity and the rate fixed by the local authorities. The mandatory rate to be transferred to the Federal budget was 11%.
344. Chapter 25 of the Tax Code provides for a profit tax of up to 24% (6.5% to be transferred to the Federal budget and the rest to the regional budget).
345. Section 21 (1) “z” of RF Law no. 2118-1 of 27 December 1991 “On the foundations of the tax system” imposed a tax in respect of the cost of advertisement services.
346. This tax was abolished from 1 January 2005.
347. Article 56 of the Tax Code defines a tax benefit as a full or partial exemption from the payment of taxes, granted by the tax legislation.
348. In letter no. 04/06/08, dated 21 October 1998, the Ministry of Finance noted, inter alia:
“...[that] experience in creating and operating free economic zones in the Russian Federation, established pursuant to both federal laws (the special economic zone in the Kaliningrad region) and resolutions of the authorities of constituent entities of the Federation (Kalmykiya, Tuva), [has] demonstrate[d] that the creation of such zones across such vast areas in the absence of a proper analysis of investment projects leads to abuses of the tax and customs incentives granted and, accordingly, to serious losses suffered by the federal and local budgets, as reported by the Ministry of Finance of Russia to the Government of Russia on multiple occasions.”
349. Under Article 83 (1) of the Tax Code, taxpayers which are legal entities are required to register with the tax authorities at their headquarters (location of their executive bodies), at the location of their branches and at the location of any real estate and places where vehicles belonging to them are registered.
350. Special registration rules applied in respect of large taxpayers, including the applicant company.
351. By Decree no. АП-3-10/399 of the Tax Ministry, dated 15 December 1999, such taxpayers are required to register at their main location, at the location of their branches and at the location of real estate and places where vehicles belonging to them are registered, and in certain specific tax offices (inter-district level or as specifically indicated by the Ministry).
352. Annex 3 to the Decree contains the form “On subsidiary and dependant companies and subsidiary enterprises”, to be filled in by the taxpayer. During registration the taxpayer is required to indicate all of its subsidiary and dependant companies.
353. In respect of domestic off-shore territories, according to commentators, this requirement means that in practice the taxpayer’s executive body should always be physically located and functioning on the territory of the off-shore. If the taxpayer fails to comply with the requirement, the tax authorities could declare its registration void with the subsequent recovery of the entirety of the perceived tax benefits (see A.V. Bryzgalin, Practical Tax Encyclopaedia, Moscow, 2003-2006, Chapter 3 “Methodology of tax optimisation”).
354. Under section 5 of Law no. 3297-1 of the Russian Federation “On closed administrative-territorial formations”, tax concessions are provided to businesses if, inter alia, they have at least 90% of their fixed assets and conduct at least 70% of their activities on the territory of the respective formation (including a requirement that at least 70% of their employees be made up of persons permanently residing in the ZATO in question, and that at least 70% of their wage bill be paid to employees permanently residing in that territory).
355. Letter no. AП-6-01/505 of the Tax Ministry, dated 24 June 1999, contained Methodological Directions to the tax bodies on issues concerning the lawfulness of the use of additional tax benefits granted by local authorities in the closed administrative-territorial formations. It stated that the tax authorities ought to verify the actual presence of the taxpayer’s assets on the territory in question by checking its accounting records and financial statements, and by confirming the physical location of the organisation at the indicated address and the fact of genuine performance by the taxpayer’s employees at the taxpayer’s registered location.
356. The respondent legal entity was OOO Pribrezhnoe, registered in the closed administrative territorial formation town of Snezhnogorsk, which has a privileged tax regime. The Ministry tried unsuccessfully to contest the use of tax concessions by the respondent, by demonstrating that the entity had not been actually present at the place of its registration. The domestic court found for the respondent. They established that the entity had some assets on the territory of Snezhnogorsk, a number of permanent employees (including a lawyer and the cleaning lady), and a cash account in the local bank, which proved that the entity satisfied the criteria provided for in law.
357. The final decision in the case was taken by the Court of Cassation on 5 June 2002.
358. Under Law no. 9-FZ of the Republic of Mordoviya of 9 March 1999 “On the conditions of efficient use of the socio-economic potential of the Republic of Mordoviya”, tax concessions are granted to taxpayers whose entities were established after the entry into force of that law and whose activities meet certain conditions, including but not limited to the following:
(a) they conduct export operations, the quarterly proceeds from which account for at least 15%of the business’s total earnings;
(b) they engage in wholesale trade in fuel and lubricants and other types of hydrocarbon raw materials, the quarterly proceeds from which account for at least 70% of the business’ total earnings.
359. Section 1 of the Law states that “this Law establishes concessions with the objective of creating favourable conditions for attracting capital into the territory of the Republic of Mordoviya, strengthening the socio-economic potential of the Republic of Mordoviya, developing the securities market and creating new jobs through special arrangements for the taxation of organisations”.
360. Law no. 12-P-3 of the Republic of Kalmykiya of 12 March 1999 “On tax concessions for companies investing in the Republic of Kalmykiya” provides tax concessions to those who meet the following criteria:
(a) the taxpayer is not a user of mineral resources in the territory of the Republic;
(b) the taxpayer is registered with the Ministry of Investment Policy of the Republic of Kalmykiya as an enterprise investing in the economy of the Republic;
(c) the enterprise’s investment in the economy of the Republic meets the criteria established by the Ministry of Investment Policy of the Republic in accordance with this law.
361. By a decision of 16 April 2002 (case no. F08-1134/2002-402) in the case of OOO Simpleks v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
362. By a decision dated 29 April 2002 (case no. F08-1368/2002-506A) in the case of OOO Impuls v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and indeed made any investments in the local economy.
363. By a decision of 20 May 2002 (case no. F08-1678/2002-614A) in the case of OOO Sibirskaya transportnaya kompaniya (one of the sham entities belonging to the applicant company) v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District ruled as follows:
“[b]ased on the content and meaning of the [above-mentioned] law and Resolution no. 7 of the Elista Town Administration, [the purpose of the municipal legislation] is to attract funds from various investors for development of the regional and local economies, given the lack of funds in the regional and local budgets and the need for their replenishment to ensure the activities of the Kalmyk Republic and the town of Elista ...
The case documents show that RUB 27,196 came from the plaintiff for development of the regional and local economies, whereas RUB 6,918,617 did not enter the regional and local budgets directly. Thus, the investments made by [OOO Sibirskaya transkportnaya kompaniya] amount to 0.4% of the amount of taxes that would otherwise have been payable by it. They have no effect on the development of the economy [and] do not cover the budgetary losses related to the granting of incentives to taxpayers; on the contrary, they have consequences in the form of unfair enrichment at the expense of budgetary funds. Thus, given that the amount of the investments made by the plaintiff is incommensurate to the amount of incentives used, the plaintiff abused its right, that is, it acted in bad faith”.
Accordingly, the court quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had complied with the above-mentioned conditions and whether it had acted in good faith.
364. By a decision of 28 May 2002 (case no. F08-1793/2002) in the case of ZAO Telekom Zapad Komplekt v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District ruled that:
“[b]ased on the meaning and contents of the [above-mentioned] law and Resolution no. 7 of the Elista Town Administration, it follows that [the purpose of the municipal legislation] is to attract funds from various investors for development of the regional and local economies, given the lack of funds in the regional and local budgets and the need for their replenishment to ensure the activities of the Kalmyk Republic and the town of Elista...
... [the court has to examine] the proportion between the investments made by the [taxpayer] and the amount of tax that did not enter the budget [in order] to resolve the issue of the plaintiff’s good faith and its abuse of its rights”.
Accordingly, the court quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had complied with the above-mentioned conditions and had acted in good faith.
365. By a decision of 4 June 2002 (case no. F08-1864/2002-697A) in the case of ZAO Promyshlennaya korporaciya Shar v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
366. By a decision of 5 August 2002 (case no. F08-2762/2002-1009A) in the case of OOO Promet v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
367. By a decision of 13 August 2002 (case no. F08-2892/2002-1051A) in the case of OOO TD Dion v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
368. By a decision of 29 August 2002 (case no. F08-3158/2002-1140A) in the case of ZAO Stanford v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
369. By a decision of 20 February 2003 (cases nos. F08-270/2003-91A and F08-1679/2002-622A) in a dispute between the Tax Ministry and OOO “Vostochnaya perestrakhovochnaya kompaniya”, the Federal Commercial Court of the North-Caucasian Circuit found as follows:
“The investments made by the [taxpayer] amount to 0.14% of the amount of taxes that would otherwise have been payable by it. They have no effect on the development of the economy... but ... their effect is unfair enrichment .... Therefore, [as] the amount of investments by [the taxpayer] was incommensurate to the amount of the benefits received, [the taxpayer] abused its right, that is, it acted in bad faith”
370. By a decision of 20 February 2003 (case no. F08-268/2003-98A) in the case of OOO Bazis Sekyuritis v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
371. By a decision of 8 April 2003 (case no. F08-1013/2003-383A) in the case of OOO Gravite v. the Tax Ministry, the Federal Commercial Court of the North-Caucasian District quashed the decisions of the lower courts and instructed them to investigate further whether the taxpayer had indeed complied with the conditions mentioned in the law, had acted in good faith in this respect and had indeed made any investments in the local economy.
372. Under section 9 of Law no. 108 of the Evenk Autonomous District “On specific features of the tax system in the Evenk Autonomous District” of 24 September 1998, substantially lower tax rates apply to local businesses whose activities meet certain conditions with regard to the special taxation procedure set out in section 8 of that Law.
373. Under Article 11 of the Tax Code, the institutions, notions and terms of the civil legislation of Russia used in the Tax Code keep their respective meanings, unless specifically stated.
374. Under Article 2 of Civil Code of 30 November 1994 no. 51-FZ (as in force at the relevant time), the legal status of parties involved in civil-law transactions, the grounds for the creation of ownership and other property rights and the order of exercising those rights are defined by the civil legislation, which also regulates contractual and other obligations.
375. The civil legislation regulates the relations between persons engaged in business activities or in those activities performed with their participation, on the assumption that business activity is an independent activity performed at one’s own risk and aimed at systematically deriving a profit from the use of property, the sale of commodities, the performance of work or the rendering of services by those persons registered in this capacity in conformity with the legally-established procedure.
376. It is formally prohibited to make any unilateral property transfers (gifts, grants or gratuitous loans) between independent commercial legal entities (Articles 575 and 690 of the Civil Code). Unilateral property transfers are permitted by Article 251 (1) 11 of the Tax Code and not counted for the purposes of profit tax if they are made between associated entities, where one of them holds more than 50% of shares in the equity of the other entity.
377. Article 105 of the Civil Code provides that a subsidiary company is one controlled by another company, either through ownership of the subsidiary company’s shares, by virtue of a contract or by any other means.
378. The controlling company is jointly responsible for debts incurred by the subsidiary company as a result of compliance with the controlling company’s instructions. The controlling company may be held vicariously responsible for a debt of the subsidiary company in the event of the latter’s insolvency.
379. Article 106 of the Code provides that a company is dependant when the other company owns over 20% of the first company’s voting stock. A company which purchases over 20% of the voting shares in other companies is obliged to make this information public.
380. Similar rules are established in respect of limited liability companies (обществa с ограниченной ответственностью) by section 6 of Law no. 14-FZ on limited liability companies of 8 February 1998.
381. Article 209 of the Civil Code defines an owner as the person who has the rights of possession, use and disposal of his property. In respect of this property, the owner is entitled, at his will, to perform any actions not contradicting the law and the other legal acts, and not violating the rights and legally protected interests of other persons.
382. Articles 9 and 10 of the Civil Code provide that the parties involved in civil-law transactions are free to act contractually within the limits defined by law.
383. Article 10 (1 and 2) of the Code states specifically that parties involved in civil-law transactions are prohibited from abusing their rights. In such cases, the courts may deny legal protection in respect of the right which is being abused. Article 10 (3) establishes a refutable presumption of good faith and reasonableness of actions on the parties in civil-law transactions.
384. In its decision no. 24-P dated 12 October 1998, the Constitutional Court of Russia for the first time made use and interpreted the notion of “bad/good faith” to assess the legal consequence of the conduct of taxpayers in its jurisprudence. In this case this was done to define the moment at which a taxpayer can be said to have discharged his or her constitutional obligation to pay taxes.
385. In its decision no. 138-O dated 25 July 2001, the Constitutional Court of Russia again confirmed that there existed a refutable presumption that the taxpayer was acting in good faith and that a finding that a taxpayer had acted in bad faith could have unfavourable legal consequences for the taxpayer. The case again concerned the definition of a moment at which a taxpayer can be said to have discharged his or her constitutional obligation to pay taxes.
386. The domestic commercial courts applied this approach in a number of cases concerning the eligibility of taxpayers to tax concessions in the Republic of Kalmykiya, such as decision no. F08-1134/2002-402 of 16 April 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-1864/2002-697A of 4 June 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-2762/2002-1009A of 5 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-2892/02-1015A of 12 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-3158/2002-1140A of 29 August 2002 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-268/2003-98A of 20 February 2003 of the Federal Commercial Court of the North Caucasian Circuit, decision no. F08-1013/2003-383A of 8 April 2003 of the Federal Commercial Court of the North Caucasian Circuit.
387. In its decision no. 168-O of 8 April 2004 the Constitutional Court noted that it would be inadmissible for bad-faith taxpayers to manipulate the legal civil-law institutions to create and operate schemes for unlawful enrichment at the expense of the State budget. The case concerned the use of exchange notes in the sphere of VAT refunds.
388. Under Article 153 of the Civil Code, transactions are defined as activities of natural and legal persons creating, altering and terminating their civil rights and obligations.
389. Article 166 of the Civil Code states that a transaction may be declared invalid on the grounds established by that Code, either by force of its being recognized as such by the court (a voidable transaction, оспоримая сделка), or regardless of such recognition (a void transaction, ничтожная сделка).
390. Under Article 167 of the Civil Code, void transactions entail no legal consequences, apart from those relating to their invalidity, and are invalid from the moment they are conducted.
391. Article 170 (2) establishes specific rules in respect of two types of void transactions: ‘imaginary’ transactions (“мнимая сделка”, effected only for form’s sake, without the intention to create the corresponding legal consequences) and ‘sham’ transactions (“притворная сделка”, which are effected for the purpose of screening other transactions). This provision condemns both imaginary and sham transactions as void.
392. It also provides that in the event of sham transactions, the rules governing the transaction that was in fact intended by the parties may be applied by a court, regard being had to the substance of this transaction (the so-called “substance over form” rule).
393. Under Article 45 (2) 3 of the Tax Code the power to re-characterise transactions by a taxpayer with third parties, their legal status and the nature of the taxpayer’s activity in tax disputes lies with the courts (as opposed to executive bodies). Section 7 of Law no. 943-1 of 21 March 1991 “On Tax Authorities in the Russian Federation” vests the power to contest such transactions and recover everything received in such transactions with the State budget.
394. Comments on the Civil Code (O.N. Sadikov, Comments on the Civil Code, Yuridicheskaya firma Kontrakt Infra-M, Moscow, 1998) states, with reference to Bulletin no. 11 of the Supreme Court of RSFSR (page 2), that any evidence admitted by the rules on civil procedure may also serve as proof of the invalidity of sham transactions.
395. Article 40 (1) of the Tax Code requires that the parties trade at market prices. It also establishes a refutable presumption that the prices agreed to by the parties correspond to market levels and are used for taxation purposes.
396. Under Article 40 (2) of the Tax Code, the tax authorities are empowered to overrule the above presumption by verifying and correcting the prices for taxation purposes. A finding that the prices were lowered usually leads to the conclusion that the taxpayer understated the taxable base and thus failed properly to pay his taxes (see Article 122 of the Tax Code below).
397. This may happen only (1) when the parties are interdependent within the meaning of Article 20 of the Tax Code; (2) in the event of barter transactions, or; (3) international transactions; (4) when the prices set by a taxpayer during the same short period for certain identical types of goods, work or services fluctuate by more than 20%.
398. Article 20 (1) of the Tax Code defines interdependent parties as natural persons and (or) organisations whose mutual relations may influence the terms or economic results of their respective activities or the activities of the parties that they represent. In particular, (a) one organisation has a direct and (or) indirect interest in another organisation, and the aggregate share of such interest is more than 20%. The share accounted for by the indirect interest held by one organisation in another, through a chain of separate organisations, is defined as the product of the direct interest shares that the organisations in this chain hold in one another; (b) one natural person is subordinate to another natural person ex officio; (c) in the case of individuals, they are spouses, relatives, adopters or adoptees, guardians or wards under the family law of the Russian Federation.
399. Article 20 (2) of the Tax Code provides that the court may recognize persons as interdependent on other grounds, not provided for by Item 1 of that Article, if the relations between these persons may have influenced the results of transactions in the sale of goods (work, services).
400. Article 122 §§ 1 and 3 of the Tax Code imposes a penalty of 40% of the unpaid tax liability on intentional non-payment or incomplete payment of the tax due, as a result of understating the taxable base. Articles 112 § 2 and 114 § 4 of the Tax Code provide for a 100% increase in this penalty in the event of a repeated offence by the same taxpayer. Article 114 § 3 of the Code also provides for a possibility of reducing the fine by half if there were extenuating circumstances on the facts of the case.
401. Article 114 § 7 of the Code makes it mandatory to recover the penalties in court. This rule does not apply to reassessed fines and interest surcharges.
402. Article 75 of the Tax Code provides for payment of an interest surcharge by taxpayers in cases of late payment of the taxes due. The interest surcharge amounts to one three-hundredth of the statutory rate for each day of the delay. Persons and entities that were unable to meet their tax liabilities in due time because their bank account was suspended by the tax authority or a court are excused from payment of the interest surcharge for the duration of the respective suspension (Article 75 § 3 of the Tax Code).
403. In accordance with Article 113 § 1 of the Tax Code (Chapter 15 General provisions concerning liability for tax offences), a person could not be held liable for a tax offence under Article 122 of the Code if three years had expired since the first day after the end of the tax period during which the offence was committed. The above provision only applied to the payment of fines. Article 115 of the Code sets out an additional six-month time-limit within which the authorities must collect the fines. It starts running from the date of adoption of the relevant audit report.
404. As regards the reassessed taxes and interest surcharges, Article 87 of the Tax Code (as in force as the relevant time) limited the ability of the authorities to carry out tax inspections by stating that “the[y] ... [may] only be carried out in respect of the activities of the relevant taxpayer ... during the three calendar years immediately preceding the year of the tax inspection” (see also decision no. 3803/01 of the Supreme Commercial Court below).
405. In paragraph 36 of Resolution of the Plenum of the Supreme Commercial Court no. 5 dated 28 February 2001 “On certain issues arising from application of the first part of the Tax Code”, the court indicated to the lower courts that “a taxpayer is considered to have been held liable [within the meaning of Article 113 of the Tax Code] on the date on which the head of the [relevant] tax body or his deputy takes a decision to hold this person liable of a tax offence in accordance with [the rules set out in] the Code”.
406. This interpretation was subsequently used by the Presidium of the Supreme Commercial Court in its decision no. 3803/01 (Averyanov v. the Tax Ministry), taken in 2002, where an offence had been committed in 1996, whilst the time-limit began to run on 1 January 1997 and expired on 1 January 2000. The Ministry’s decision was issued on 25 January 2000 and was, accordingly, time-barred in so far as the fines were concerned.
407. On 30 September 2003 the Federal Commercial Court of the Ural Circuit reviewed and quashed the lower courts’ decisions in a tax dispute involving the Tax Ministry and a private shareholding. Among other things, the Circuit Court stated that the time-limit set out in Article 113 of the Code started running from the date on which the relevant facts came to the attention of the competent authorities (as a result of a tax inspection or other types of tax control).
408. In a number of cases pre-dating the decision of the Constitutional Court of 14 July 2005, the courts applied Article 113 in line with an interpretation given by Resolution no. 5 of the Plenum of the Supreme Commercial Court of 28 February 2001 (see decision no. F04/7-1527/A27-2002 of 4 January 2003 of the Federal Commercial Court of the Western Siberia Circuit, decision no. F04/7-1527/A27-2002 of 8 January 2003 of the Federal Commercial Court of the Northern Western Circuit, decision no. F03-A59/03-2/745 of 23 April 2003 of the Federal Commercial Court of the Far-Eastern Circuit, decision no. A48-1188/03-2 of 12 November 2003 of the Federal Commercial Court of the Central Circuit, decision no. A82-471/2004-8 of 8 October 2004 of the Federal Commercial Court of the Volgo-Vyatskyy Circuit, decision no. F03-A73/04-2/947 of 19 May 2004 of the Federal Commercial Court of the Far Eastern Circuit, decision no. A19-3142/04-40-F02-3338/04-C1 of 24 August 2004 of the Federal Commercial Court of the Eastern Siberia Circuit, decision no. A19-9731/03-15-F02-4732/03-C1 of 9 January 2004 of the Federal Commercial Court of the Eastern Siberia Circuit, decision no. A33-15117/03-C3-F02-1877/04-C1 of 2 June 2004 of the Federal Commercial Court of the Eastern Siberia Circuit, decision no. KA-A41/9494-04 of 20 October 2004 of the Federal Commercial Court of the Moscow Circuit, decision no. F09-4221/04AK of 13 October 2004 of the Federal Commercial Court of the Ural Circuit, and decision no. F09-3799/04AK of 4 September 2004 of the Federal Commercial Court of the Ural Circuit). None of these cases involved a situation whereby a taxpayer had hindered a tax inspection or had deliberately sought to delay the tax proceedings.
409. By a decision of 28 July 2006 the Federal Commercial Court of the Moscow Circuit, acting as a cassation review instance, reviewed the application of the time-limits of Article 113 of the Code. The audit report prepared by the Ministry in respect of the calendar year 2001 was dated 28 February, whilst the decision to hold the taxpayer liable was issued on 29 March 2005. The Circuit Court decided that the authorities could be said to have been acting in time provided that they respected the requirements of Article 87 of the Code, which sets out a three-year time-limit for conducting tax inspections and Article 23 § 8 (1) of the Code, which sets out a four-year time-limit for the maintenance of accounting documents. The Circuit Court also specifically noted the actions of OAO Korus-holding, which had sought to hinder and complicate the tax inspection.
410. The text of Article 113 has been amended by Federal Law no. 137-FZ of 27 July 2006, which came into force on 1 January 2007. The provision now contains § 1.1., which states:
“1.1. The running of the time-limit for holding a taxpayer liable stops if [the taxpayer] actively hindered an on-site tax inspection, thus creating an insurmountable obstacle for that inspection and for the determination by the tax authorities of the amount of taxes due to the budgetary system of the Russian Federation.
The running of the time-limit [in question] is suspended on the date of adoption of a report [setting out the circumstances in which the taxpayer denied the tax authorities access to the relevant documents]. In this case, the running of the time-limit continues on the date when the above-mentioned circumstances no longer exist and a decision on continuation of the on-site tax inspection is taken.”
411. On 31 May 2007 the Federal Commercial Court of the North Caucasian Circuit, acting as a cassation review instance, reviewed the application of the time-limits of Article 113 of the Code. The audit report prepared by the Ministry in respect of the calendar years 2001-2004 was dated 18 July 2006, whilst the decision to hold the taxpayer liable was issued on 4 September 2006. Again, the Circuit Court decided that the authorities had been acting in time, regard being had to the taxpayer’s actions for the purpose of delaying and hindering the tax inspection.
412. Under Article 35 of the Code of Commercial Court Procedure of 24 July 2003 no. 95-FZ (as in force at the relevant time), claims should be brought to a court having jurisdiction over the defendant’s official place of business.
413. Article 54 of the Civil Code defines a company’s official place of business as the place of the company’s registration, unless, in accordance with the law, the company’s articles of association do not specify otherwise.
414. Decision no. 6/8 of the Plenary Session of the Supreme Court and Supreme Commercial Court of 1 July 1996 specifies that the company’s official place of business is the location of its entities.
415. Under Article 91 of the Code of Commercial Court Procedure, a party may apply for proportionate security measures, including attachment of a defendant’s assets, pending the examination of the case by the courts.
416. Article 213 of the Code of Commercial Court Procedure provides that in tax cases a court suit may be filed by the authorities when their demands have not been complied with voluntarily, or when the term for voluntary compliance has expired.
417. Article 215 of the Code of Commercial Court Procedure sets out a two-month time-limit during which a first-instance court is to finalise the examination on the merits of any case which involves mandatory payment and related penalties.
418. Article 134 of the Code of Commercial Court Procedure establishes a two-month time-limit for the preparation of the case for examination at first instance.
419. Pursuant to Article 152 of the Code, the first-instance court should examine the case and deliver its judgment within one month of a decision to list the case for a hearing.
420. Article 65 (3) of the Code of Commercial Court Procedure makes it mandatory for a party to disclose all evidence relied upon in their claims or objections prior to the beginning of the hearings in a case.
421. In paragraph 35 of Information Letter no. 82, dated 13 August 2004, the Supreme Commercial Court gave the following recommendation in respect of whether the trial court ought to accept and examine evidence that was previously undisclosed by the parties prior to the beginning of the hearings in a case:
“Any evidence undisclosed by the parties to the case prior to the hearing, but submitted later during the examination of the evidence, shall be examined by the commercial court at first instance regardless of the reasons for which the procedure for disclosure of evidence was breached ...”
422. Under Articles 257 and 259 of the Code of Commercial Court Procedure participants in the proceedings have one month from the delivery of the first-instance judgment to lodge an appeal.
423. Under Article 267 of the Code of Commercial Courts Procedure, an appeal court must examine an appeal lodged against the first-instance judgment within one month, starting from the date of its filing. This term includes any time necessary for case preparation and for reaching the appeal decision. By federal law no. 205-FZ dated 19 July 2009 the time-limit was increased to two months. By federal law no. 69-FZ dated 30 April 2010 the provision in question has been amended. The time-limit became extendable up to six months depending on the complexity of the case and the number of participants. The provision also made it clear that the time-limit started running on expiry of the time-limit for lodging an appeal.
424. Under Article 268 of the Code, an appeal court fully re-examines the case using the evidence contained in the case and any newly-presented additional evidence. In examining procedural motions by the parties, including requests to call and hear additional witnesses or adduce and examine additional pieces of evidence, the appeal court is not bound by previous refusals of the same motions by the first-instance court.
425. Under Articles 180, 271 and 318 of the Code, the first-instance judgment becomes enforceable on the date of the entry into force of the appeal decision confirming it. The enforcement takes place on the basis on a writ issued by the respective court.
426. In accordance with Article 286 of the Code, a cassation instance court, among other things, reviews the lower courts’
427. Article 283 of the Code provides for a possibility of applying for a stay of enforcement of the lower courts’ decisions. The applicant must show that it would be impossible to reverse the effects of an immediate enforcement of the lower courts’ decisions if the cassation appeal were successful.
428. In its rulings no. 7-P dated 6 June 1995, no. 14-P dated 13 June
429. In 1996 the respondent legal entity was involved in a series of intertwined transactions (rent contracts and loan agreements) with two third parties: as a result, the respondent leased a building in central Moscow to the third parties, but was able to avoid inclusion of the rent payments in the taxable base of its operations by claiming that they were interest payments in respect of the loan agreement. The Ministry discovered the tax evasion scheme, re-characterised the transactions in question as rent and ordered the taxpayer to pay RUB 2 billion in back taxes.
430. The case was examined in three rounds of court proceedings by the courts at three levels of jurisdiction. Having regard to the substance of the transactions entered into by the respondent, the terms of payment and execution of the contested contracts, and, generally, to the conduct of the respondent company and the third parties, the courts decided that the contractual arrangement had been sham, re-characterised the arrangement as rent and upheld the Ministry’s decision.
431. In the first round of proceedings the courts adopted their decisions on the following dates: 1 December 1997, 27 January 1998 and 30 March 1998.
432. In the second round of proceedings the decisions were adopted by the first-instance and appeal courts on 26 May 1998 and 21 July 1998. The decision of the cassation court was taken on an unspecified date.
433. The third round of proceedings involved decisions on 17 November 1998, 25 January 1999 and 2 March 1999.
434. The respondent legal entity entered into a loan agreement with a third party; the tax authorities considered it a sham, re-characterised it as a rent contract and reassessed the tax due in respect of the profits made. The lower courts disagreed and quashed the tax authority’s decision. By a decision of 17 September 1998 the cassation court quashed the lower courts’ decisions and ordered that the matter be re-examined, giving due regard to all relevant circumstances, including the substance of the transaction. The courts were to reconsider all relevant clauses in the agreement in question, the conduct of the parties and the fact of physical occupation of the allegedly rented space.
435. The respondent legal entity is a bank which in 2001-2002 conducted business by buying and then reselling precious metals. To avoid the payment of full VAT on its sales operations in this respect, the bank entered into commission agreements with the sellers from which it bought the metals, in order to be considered not as the owner of the traded goods, but merely as the sellers’ agent.
436. The domestic courts took account of the substance of the bank’s transactions (terms of payment, actual circumstances of delivery and other relevant factual details) and, having established that in reality the bank had been buying and reselling the precious metals, re-characterised the bank’s activity as sales. The courts referred to Article 209 of the Civil Code (containing the legal definition of an owner) and concluded that the bank first bought the precious metals, thus becoming the “owner” within the meaning of the said provision and thereafter resold the goods. They found the bank liable for tax evasion under Article 122 of the Tax Code, ordered it to pay reassessed VAT in the amount of RUB 1,091,123,539.42, default interest of RUB 408,289.76 and penalties of RUB 436,391,918.65.
437. The first-instance judgment was adopted on 3 November 2004 and upheld on appeal on 11 January 2005.
438. OAO Ufimskiy NPZ, the main production unit of one of the biggest Russian oil companies, OAO Bashneft, physically located in the town of Ufa, used the domestic tax offshore territory situated in the town of Baykonur, the territory rented by Russia from the Republic of Kazakhstan for its space-related projects. The town’s tax regime was similar to that in the closed administrative-territorial formations (see above).
439. On 1 February 2001 the respondents OAO Ufimskiy NPZ and ZAO Bort-M, a letter-box entity registered in Baykonur, entered into a rent agreement whereby the entirety of OAO Ufimskiy NPZ’s production facilities were rented by ZAO Bort-M in exchange for nominal compensation. Since ZAO Bort-M was registered in Baykonur, the activity of OAO Ufimskiy NPZ enjoyed lower rates in respect of excise duties. The tax authorities discovered “the scheme” and contested it in court as sham and therefore null and void.
440. On 8 October 2002 the first-instance court had regard to the substance of the transaction and, having established that, despite the contractual arrangement, OAO Ufimskiy NPZ had continued to operate the facilities in question, that furthermore the letter-box entity was never properly registered and licensed as the operator of oil processing and oil storage facilities in accordance with the relevant law, and that the letter-box entity could not operate the facility because it had rented only one part of the production cycle (which, in technological terms, could not be split in two), that the sole aim and effect of the arrangement was tax evasion and that OAO Ufimskiy NPZ and ZAO Bort-M had “malicious intent” to evade taxes, upheld the tax authorities’ claim.
441. The first-instance judgment was upheld on appeal and in cassation on 17 December 2002 and 19 March 2003 respectively.
442. These cases are essentially follow-ups to the previous case: OAO Novo-Ufimskiy NPZ is the second main production unit of OAO Bashneft and was involved in exactly the same tax-evasion scheme, using the sham offshore entities ZAO Bort-M and OOO Korus-Baykonur. The domestic courts examined all three cases at three instances and granted the Ministry’s claims. The decisions in the first set of proceedings were taken on 9 October, 16 December 2002 and 13 March 2003. The decisions in the second set of proceedings were taken on 19 September 2002, 5 December 2002 and 28 February 2003. The decisions in the third set of proceedings were taken on 18 December 2002, 20 February 2003 and 26 May 2003.
443. This case concerns exactly the same tax-evasion scheme as in the previous cases, but involves OAO MNPZ, a major oil-processing facility located in Moscow and owned by the Government of Moscow, as the defendant.
444. The decisions in the case were taken on 29 October and 27 December 2004.
445. This case also concerns the tax-evasion scheme described in the previous cases. The Ministry assessed the company, apparently a sham entity belonging to an oil producer, and found that it owed additional taxes, surcharges and penalties. The entity prevailed at first instance on 15 May 2003. On 10 October 2003 the cassation court quashed the first-instance judgment, as the lower court had failed to take into account the relevance of the entity’s activity for the economy of the town of Baykonur, which was one of the criteria the law considered relevant to the issue of the lawfulness of tax exemptions.
446. The case concerns the same tax-evasion scheme as in the previous cases (involving the sham renting agreement), but the offshore territory at issue is the town of Ozersk and the taxpayer is OAO Novokuybyshevskiy NPZ, one of the applicant company’s subsidiary oil-processing units.
447. The scheme operated from January 1999 and was prosecuted in 2004. The first-instance judgment in favour of the Ministry was taken on 13 August 2004. The court applied the same ‘substance over form’ approach as in the previous cases and, having assessed the defendants’ conduct, the character of their relations and statements by the officials of the entities, granted the Ministry’s claims and also ordered OAO Novokuybyshevskiy NPZ to pay RUB 120,688,860 in reassessed taxes.
448. This is a follow-up to the previous case: in the first-instance judgment the court declared the defendants’ contractual arrangement to be sham and unlawful and ordered OAO Novokuybyshevskiy NPZ to pay RUB 252,963,364 in reassessed taxes.
449. The first-instance judgment in the case, dated 19 October 2004, was upheld on appeal on 19 October 2004.
450. This is a follow-up to the previous cases and involved OAO Syzranskiy NPZ, a production unit belonging to the applicant company. The rent agreement between the letter-box entity and the applicant company’s production unit was declared sham and annulled. OAO Syzranskiy NPZ was ordered to pay RUB 30,309,119 in reassessed taxes.
451. The first-instance judgment of 18 August 2004 was upheld on appeal on 4 November 2004.
452. The respondent legal entity is a privately-owned enterprise specialised in importing and assembling computer equipment. In 1995 the respondent disguised a portion of its sales as loan agreements with its clients in order to avoid payment of VAT. The first-instance judgment and the appeal decision in the case were taken on 31 August and 11 October 1995. On 17 September 1996 the Presidium of the Supreme Commercial Court of Russia reviewed the lower courts’
453’s request for a VAT refund. In addition, the courts recovered the unpaid VAT with penalties.
454. The domestic courts reached their respective decisions on 22 November 2001, 29 April and 8 July 2002.
455. The respondent legal entity is the main production unit of OAO NK Russneft, a large Russian private oil company, which was involved in a dispute with the Ministry over VAT refunds in respect of its export operations. The courts established that in 2001 the respondent entered into a series of transactions with a number of third parties, aimed at deceiving the Ministry and claiming an artificially increased VAT refund. The courts took account of the overall economic effect of the transactions in their entirety, numerous discrepancies and contradictions between the contractual arrangements, the actual movement of oil, the documents certifying the customs clearance of the goods in question, etc., and refused to recognise them as valid for the purposes of reimbursement of VAT. The courts concluded that the Ministry had been acting lawfully by refusing the respondent company’s request for a refund of export VAT.
456. The domestic courts reached their respective decisions on 30 June 2003, 31 May and 16 September 2004.
457. This is essentially a follow-up to the previous cases. The courts reached similar conclusions in respect of the respondent company and recovered RUB 5,000,000 in overpaid VAT in favour of the Ministry.
458. The decisions in the case during the first round of proceedings were taken on 19 December 2002, 19 March 2003 and 27 June 2003.
459. The second round of proceedings resulted in the first-instance judgment of 19 December 2002, the appeal decision of 19 March 2003 and the supervisory review decision of 23 December 2003.
460. The first respondent legal entity is a big producer of grains, cereals and related processed products. It was involved in a dispute with the Ministry over VAT refunds in respect of export operations, whereby it had commissioned the second respondent to sell certain equipment abroad. The equipment was bought by the third respondent and resold “at an economic loss” to an entity registered in a foreign offshore location. Having regard to various circumstances, including the conduct of the entities involved and the fact that no actual hard cash had been paid for the equipment in question, the Ministry applied to court, asking it to invalidate the transactions in question as sham. The first-instance court dismissed the claim but the appeal and cassation review courts subsequently reversed that judgment, essentially upholding the Ministry’s approach.
461. The domestic courts took their respective decisions on 14 April 2003, 4 August 2003 and 10 December 2003.
462. The first respondent legal entity was involved in a dispute with the Ministry over VAT refunds in respect of export operations, whereby it had entered in complex relations with the other two respondents to sell certain goods abroad. Having regard to various circumstances, including the conduct of the entities involved and the fact that no actual hard cash had been paid for the goods in question, the Ministry applied to court, asking it to invalidate the transactions in question as sham and therefore null and void. The courts at three instances upheld the Ministry’s approach.
463. The domestic courts took their respective decisions on 28 December 2002, 10 April 2003 and 1 July 2003.
464. The respondent entity was involved in a dispute with the Ministry over the latter’s refusal to refund the VAT in respect of the entity’s export operations. The Ministry uncovered an arrangement whereby there had been no hard cash transactions between the parties to the export operation, the respondent had “traded at a loss” and the allegedly exported produce had had nothing to do with the respondent’s usual business activity. Having regard to various circumstances, including the conduct of the entities involved, the courts at three instances upheld the Ministry’s approach.
465. The domestic courts took their respective decisions on 29 October 2002, 6 February 2003 and 17 April 2003.
466. By a decision dated 15 May 1997 in the case of the Tax Ministry against Commercial Bank Mechel-Bank and OAO Mechel (no. F09-162/97-AK), the Federal Commercial Court of the Ural Circuit quashed the decisions of lower courts in which they had upheld the lawfulness of a “kickback” contract which had been concluded between the respondent bank and the respondent company. The Circuit Court ruled that the lower courts had failed to study and to take account of all of the circumstances relevant to the case at issue. In particular, the court noted the finding that the contract had been concluded specifically to avoid the payment of taxes. Accordingly, it reversed and invalidated the contract as unlawful, contrary to the legal order and morality, and ordered that the proceeds (RUB 1.5 bn) derived by the parties from the contract be seized in favour of the State.
467. In a decision of 9 December 1997 in case no. 5246/97, the Presidium of the Supreme Commercial Court of Russia invalidated a loan secured by a promissory note and a related pay-off agreement as imaginary and sham respectively. The court had regard to the terms of contracts concluded between the parties and the manner of their execution, in particular the fact that the loan had never been used by the borrower; it concluded that the transactions in question covered the sale of a promissory note and invalidated them as sham.
468. In a decision of 6 October 1998 in case no. 6202/97 the Presidium of the Supreme Commercial Court of Russia invalidated two contracts for the sale of securities and a related loan agreement as sham, having regard to the terms of contracts in question, the manner of their execution and the contractual prices. The court established that the sales contracts in fact covered the loan agreement secured by the pledge of securities and remitted the case for re-trial.
469. The Enforcement Proceedings Act (Law no. 119-FZ) of 21 July 1997 (as in force at the relevant time) establishes the procedure by which a creditor may enforce a court award against a presumably solvent legal entity debtor. According to Article 46 § 6 of the Act, execution was to be levied against the debtor’s property “in such amount and such scope as is required to ensure the satisfaction of claims set out in the enforcement document”.
470. Russian legislation provides for a set of special procedures in respect of presumably insolvent legal entity debtors (see section O below).
471. Under section 9 (3) of the Enforcement Proceedings Act, on an application by the creditor, the bailiff institutes enforcement proceedings, fixes the time-limit for enforcement of the execution writ - which may not exceed five days from the date of institution of enforcement proceedings - and notifies the debtor accordingly.
472. Article 324 of the Commercial Procedure Code sets out a procedure whereby a court may alter the method and order of enforcement of a final court decision. Among other thing, it provides as follows:
“1. If there are circumstances which make it difficult to enforce the judicial act, the commercial court which issued a writ may, upon an application by the creditor, debtor or bailiff, grant respite in respect of the enforcement or arrange for the payment in instalments, or otherwise change the method or order of enforcement. ...”
473. At the same time, Articles 62, 64 (1) and (2) of the Tax Code specify that a respite or possibility of repaying in instalments concerns only the taxes, and not the interest surcharges and penalties, and may be granted by a court only for a period from one to six months from the original deadline for payment, may only be granted on specific grounds enumerated in the law and cannot be granted if there are tax proceedings pending against the applicant (Article 62 (1)).
474. The Enforcement Proceedings Act provides for three possibilities, namely: (a) to postpone enforcement actions for a term of up to 10 days (section 19); (b) to suspend the enforcement proceedings (section 21); or (c) to defer the execution of enforcement of a debt or arrange for payment in instalments (section 18).
475. With regard to (a), the bailiff takes the decision in the “appropriate circumstances” either on an application by the debtor or of its own motion.
476. With regard to (b), the decision may only be taken in seven enumerated cases: if the bailiff applied to the court with a request to interpret the judicial act; on a request from a debtor who has been drafted to serve in the army; if the debtor is on a long-term mission; if the debtor is hospitalised and being treated; if the actions of the bailiff are being contested in court; if the debtor himself or his property is being searched for; if the debtor or creditor are on holiday and cannot be contacted.
477. As regards (c), the debtor, creditor or bailiff has the right to request the court to defer the execution of enforcement of a debt or arrange for payment in instalments if there are “circumstances impeding the enforcement actions”.
478. If the debtor does not comply within the specified time-limit, under section 9 (5) of the Enforcement Proceedings Act the bailiff, on an application by the creditor, has the right to make an inventory of the debtor’s property and to seize it.
479. Under section 9 (5) of the Law on Enforcement Proceedings the bailiff is empowered to seize any of the debtor’s assets to secure enforcement. In seizing the debtor’s assets the bailiffs are obliged to follow the order of priority of arrest and sale set out in section 46 (2) of the Law on Enforcement, which provides:
“... execution under enforcement documents shall, in the first priority, be levied on the debtor’s monetary funds in roubles and in foreign currency, and on other valuables, including those kept in banks and other credit institutions”.
At the same time, the Supreme Commercial Court specified in its Information Letter no. 6, dated 25 July 1996:
“... the freezing of cash ... may not be imposed on the respondent’s account and on amounts that will enter this account in the future ...”.
In its Resolution no. 11 of 9 December 2002 the Plenary Supreme Commercial Court ruled:
“... arrest on cash owned by the debtor shall be imposed not on its account in credit institutions but on cash that is on the accounts, within the limits of the monetary claims ...”
480. Section 46 (5) of the Enforcement Proceedings Act provides that, if a debtor lacks sufficient cash funds to satisfy the creditor’s claims, the debt may be levied from the other forms of the debtor’s property, unless the federal law states otherwise. The debtor has the right to indicate his preferred order of priority, but the final order is determined by the bailiff.
481. Section 51 of the Enforcement Proceedings Act establishes a one-month time-limit for the seizure of the debtor’s property from the date on which the ruling on the institution of enforcement proceedings is served. The seizure is intended, inter alia, to secure the safety of the debtor’s property and the creditor’s claims, which shall be subject to a subsequent transfer to the creditor or to a subsequent sale. The seizure of securities is carried out in conformity with the procedure defined by the Government of the Russian Federation in Decree no. 934 “On the seizure of securities”, dated 12 August 1998.
482. Section 59 of the Enforcement Proceedings Act establishes the order of priority in the seizure and forced sale of a debtor’s property in three stages. Firstly, the bailiff sells property which is not immediately involved in the debtor’s production cycle (securities, cash on the debtor’s deposit and other accounts, currency valuables, cars, office equipment, etc.); secondly, finished products (goods) and other material values not immediately involved in production and not intended to play an immediate part in it; and, thirdly, real-estate objects, as well as raw and other materials, machine-tools and equipment and other fixed assets, intended for immediate involvement in production.
483. In Ruling no. 4 “On certain questions arising out of seizure and enforcement actions in respect of corporate shares”, dated 3 March 1999, the Plenum of the Supreme Commercial Court decided that in respect of companies which had been privatised by the State as parts of bigger holding groups through the transfer of controlling blocks of shares, the production cycle of the respective production unit should be preserved as much as possible.
484. Section 81 of the Enforcement Proceedings Act penalises a debtor’s failure to comply voluntarily with a writ of execution with a 7% enforcement fee. Under Section 77 of the Act the fee is a priority payment which should be made by the debtor even before it begins repaying the principal debt.
485. In ruling no. 13-P of 30 July 2001 the Constitutional Court of Russia described the enforcement fee as an administrative penal sanction having a fixed monetary expression, exacted by compulsion, formalised by the decision of an authorised official and levied in favour of the State. The Constitutional Court struck the above provision down as unconstitutional, in so far as it did not allow the debtor to excuse his failure to comply with the writ by reference to certain extraordinary, objectively inevitable circumstances and to other unforeseeable and insurmountable obstacles beyond the debtor’s control.
486. The Government referred to over a dozen cases from across Russia which, they claimed, confirmed that that the 7% enforcement fee was levied by bailiffs as a matter of standard practice in the event of the debtor’s failure to pay, routinely and without exceptions, even if the debtor was a State-owned entity or indeed a State body. Here are some examples: enforcement proceedings dated 19 January 2001 no. 6-26/2001, in respect of RUB 304,078,000, owed by a State-owned private-law entity GUP Tatvodokanal; enforcement proceedings dated 18 November 2005 no. 3068/62/2/2006 in respect of RUB 108,083,008.64, owed by the Ministry of Education of the town of Kazan; enforcement proceedings dated 18 December 2002 no. 2-12/2002 in respect of RUB 19,0311,000, owed by OAO Tatavtodor; enforcement proceedings dated 25 February 2004 no. 7-18/04 in respect of RUB 445,336,550.84, owed by OAO Vertolety-MI; enforcement proceedings dated 13 November 2001 no. 5-17/2001 in respect of RUB 917,787,000, owed by FKP Kazanskiy zavod tochnogo mashinostroeniya imeni M. I. Kalinina.
487. Section 53 of the Enforcement Proceedings Act requires the bailiff to evaluate the arrested property on the basis of market prices on the date of execution of the enforcement writ. Should valuation be problematic for technical or any other reasons, the bailiff is to appoint a specialist to carry out the valuation.
488. According to a Decree of the Ministry of Justice dated 27 October 1998, the bailiff is obliged to appoint a specialist to conduct the valuation if the seized property is shares or other securities (ценные бумаги). Under the same Decree the bailiff is to inform the debtor and creditor of the resulting valuation.
489. Section 54 of the Enforcement Proceedings Act requires the bailiff to sell the arrested property in satisfaction of the debt within two months of the date of seizure. The sale is carried out by a specialised institution on the basis of a commission contract with the bailiff.
490. According to Government Decree no. 418 “On the Russian Fund of Federal Property” of 29 November 2001 and Government Decree no. 260 “On the Sale of Seized, Confiscated and Other Property ...” of 19 April 2002, the Fund is entrusted with the task, inter alia, of auctioning property seized in satisfaction of the debts owed to Russia.
491. Section 77 of the Enforcement Proceedings Act provides that, in respect of the sums levied from the debtor, including the proceeds from the forced sale of the debtor’s property, the bailiffs first recover enforcement fees and all related payments and the remainder is used in satisfaction of the creditors’ claims.
492. If the proceeds from the forced sale(s) are insufficient to satisfy all creditors, the following order of priority applies (section 78 of the Enforcement Proceedings Act): tort claims, employment and labour-related claims, claims made on behalf of the Pension Fund and the Social Security Fund of Russia, claims made on behalf of the budgets of various territorial levels and finally all other claims.
493. Under section 90 of the Enforcement Proceedings Act, all actions by the bailiff in the course of enforcement proceedings can be appealed against within ten days from the date of proper notification of the action in question.
494. Any damage inflicted on the debtor as a result of the bailiff’s omission is compensated in accordance with the applicable legislation.
495. The enforcement of court awards and more generally debt claims against insolvent or presumably insolvent debtor legal entities are regulated by the Insolvency (Bankruptcy) Act of 26 October 2002 (Law no. 127-FZ).
496. Section 3 of the Insolvency (Bankruptcy) Act defines the state of bankruptcy of a legal entity as follows:
“A legal entity is regarded as being unable to satisfy the claims of creditors in respect of pecuniary obligations and (or) to fulfil its obligations in respect of mandatory payments if the respective obligations and (or) obligation are not complied with within three months of the date on which compliance should have occurred.”
497. In accordance with section 4 of the Act, the obligations are, as a general rule, defined/recognised by the court on the date of examination of the bankruptcy petition.
498. Bankruptcy proceedings in respect of a legal entity may only be instituted by a court if the overall amount of debt claims exceeds RUB 100,000 (section 6 of the Act).
499. Under section 7 of the Act the debtor, the debtor’s creditors in respect of pecuniary claims and State bodies competent to take part in bankruptcy proceedings in which the State is a creditor in respect of mandatory payments are entitled to bring a bankruptcy petition.
500. Whilst the executive body of the debtor has the right to file for bankruptcy in circumstances where it is obvious that the debtor would be unable to fulfil its obligation in due time (section 8 of the Act), it has a legal duty to do so if the forced seizure of the debtor’s property in satisfaction of a claim would make the debtor’s economic activity extremely difficult or impossible (section 9 of the Act). In this latter respect, the petition should be brought within one month from the date on which the respective relevant circumstances occurred.
501. Failure to abide by the above rules exposes the offender to civil liability action by virtue of section 10 of the Act and may also make the offender vicariously liable for any resulting damage.
502. The admissibility of the bankruptcy petition is examined by a single-judge bench (section 48 of the Act). Having declared the petition well-founded (admissible), the judge is to impose a supervision order in respect of the debtor (see below).
503. The merits of the bankruptcy petition should be examined by a court within seven months of the date of its filing (section 51 of the Act).
504. Having examined the merits of the bankruptcy petition, the court takes one of the following decisions (section 52 of the Act): (a) it declares the debtor bankrupt and applies the liquidation procedure in respect of the debtor; (b) it rejects the request to declare the debtor bankrupt; (c) it introduces a “financial improvement order” in respect of the debtor; (d) it applies the procedure of external management; (e) it discontinues the bankruptcy proceedings; (f) it disallows the bankruptcy petition; (g) it approves the friendly settlement of the case.
505. The following five procedures may be applicable in respect of the debtor in a bankruptcy case (section 27 of the Act): (a) supervision order; (b) financial improvement order; (c) external management; (d) liquidation; (e) friendly settlement.
506. A supervision order is defined as the first procedure applied to the debtor (see above). It consists of securing the debtor’s property, analysing its financial condition, composing the list of creditors and carrying out the first assembly of creditors (section 2 of the Act). The decision to impose a supervision order is taken by a judge in accordance with section 9 of the Act. It can be appealed against to a higher court. In the decision, the judge should also appoint an interim receiver.
507. A financial improvement order is a bankruptcy procedure intended to re-establish the debtor’s solvency and consisting in repayment of the debts in accordance with a debt repayment schedule (section 2 of the Act).
508. External management is a bankruptcy procedure intended to re-establish the debtor’s solvency (section 2 of the Act).
509. Liquidation is a bankruptcy procedure applied in respect of a debtor who has been declared bankrupt. It is essentially the sale of the debtor’s property by a court-appointed trustee in proportionate satisfaction of the creditors’ claims (section 2 of the Act).
510. Friendly settlement is a bankruptcy procedure applicable at any stage of bankruptcy proceedings whereby the creditors and the debtor reach an agreement in respect of the debtor’s liability (section 2 of the Act).
511. The automatic consequences of the decision to adopt a supervision order in respect of the debtor legal entity (section 63 of the Act) are, in particular, the following: all debts due after the date of the decision are recoverable only pursuant to a special procedure; enforcement of execution writs already issued, including any pecuniary claims (with the exception of those relating to payment of salaries and tort claims) against the debtor, is halted, and the seizure in respect of the debtor’s property is lifted.
512. The law also introduces some restrictions in respect of operations with the debtor’s shares and the actions of the debtor itself (section 64 of the Act). However, the debtor’s management team remains in place, subject to limitations restricting their ability to dispose of the debtor’s property above a certain value (more than 5% of the book costs of the debtor’s property) or to indebt the debtor further by contracting loans, issuing guaranties or sureties, transferring debts to third parties or transferring the debtor’s property for external management by a third party.
513. An interim receiver is appointed by a court in accordance with sections 45 and 65 of the Act. At this stage of proceedings, he or she has no management functions and is essentially responsible for securing the debtor’s property, watching over the activities of the debtor’s management, analysing the debtor’s financial condition and identifying the debtor’s creditors. The interim receiver is accountable to a court and is in charge of organising the first meeting of creditors.
514. For a period of thirty days from the date of publication of the supervision order notice, the creditors have the right to file their claims against the debtor (section 71 of the Act). The claims may be included in the list of creditors on the basis of the court’s decision.
515. At least ten days prior to the date of termination of the supervision order, the interim receiver must organise the first meeting of creditors (section 72 of the Act). At the meeting, the creditors are competent, among other things, to decide either: (a) to introduce a financial supervision order and lodge the relevant request with the court; (b) to introduce an external management order and lodge the respective request with the court; or (c) to request the court to declare the debtor bankrupt and impose a liquidation order (section 73 of the Act).
VIOLATED_ARTICLES: 6
VIOLATED_PARAGRAPHS: 6-1
6-3
VIOLATED_BULLETPOINTS: 6-3-b
NON_VIOLATED_ARTICLES: 14
18
P1
NON_VIOLATED_PARAGRAPHS: P1-1