10.06.08

The Tax Authorities keep a close watch on companies’ expenses for outsourcing management positions. In a recent case, they denied a company deductions made for expenses related to hiring a managing director. Their reasoning was that the director's functions coincided with those of the general directors of the organization, his fee was significantly higher than the market rate for a director’s salary, and the service reports did not explain the specific services conducted by the managing director. Furthermore, while the managing director was employed, the company was loss making.

A court pointed out that the Tax Code (TC) does not define what ratio of expenses to financial profits justifies the expenses as economically feasible. Criteria for determining economic feasibility of expenses is provided in Article 40 of the TC, but the tax authorities did not present an appropriate evidence to support their claim.

(Resolution # Ф09-3216/08-С2 from May 7, 2008 of the Federal Arbitration Court of the Urals region)

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