25.07.08

Tax authorities often assess additional taxes, fees and fines on branches and representative offices even though it may no always be legal for them do so.

According to civil legislation, a separate subdivision of a company is not recognized as an independent legal entity (Article 55 of the Civil Code of RF). Because the Tax Code states that only legal entities and individuals are recognized as taxpayers (article 19 of the Tax Code [TC]), separate subdivisions of Russian companies cannot be seen as separate from their main office for tax purposes (Article 11 Paragraph 2 of the TC).

At the same time, the TC recognizes branches and representative offices of foreign companies as legal entities (Article 11 paragraph 2 of the TC) and, therefore, as independent taxpayers. This provision is logical considering that foreign companies may conduct entrepreneur activities in Russia only through branches and representative offices.

The ax status of a branch or a representative office thus depends on whether it represents a Russian or a foreign company.

Judicial opinion on this matter has been inconsistent, with some courts recognizing the status of entities that the Tax Authorities had fined, and other courts turning a blind eye to it.

Tax experts believe that rulings of the Presidium of the Supreme Arbitration Court of the RF (SAC of the RF) #13617/05 from April 3, 2007 and #1782/06 from July 4, 2007 will make judicial practice on this matter more uniform.

Independent Subdivisions of Russian Companies

The SAC of the RF recently heard a case involving the branch of a Russian credit company held liable for tax infractions. Lower courts ruled the decision of tax authorities legal on the basis that the branch conducts banking activities on behalf of a legal entity and, consequently, is recognized as acting independently and therefore is an independent tax payer.

However, the SAC Decree #13617/05 from April 3, 2007 points out that, according to article 107 of the TC of the RF, branch of a Russian company may not be recognized as an entity able to bear liability for tax violations. The court reasoned its point of view, in part, by a precedent set by paragraph 9 of the Decree of the Plenum of Supreme Court of the RF and the Plenum of the SAC of the RF #41/9 from June 11, 1999.

There is hope that this new decree will lead to greater judicial consistency.

Independent Subdivisions of Foreign Companies

In another case, the tax authorities took a branch of a foreign company to court to collect a fine against it.

A trial court and appellate court dismissed the case in part because the foreign company itself and not its branch must be held accountable.

The appellate court also stated that its jurisdiction extends to foreign companies – but not branches or representative offices (Article 2, Paragraph 1 of the Civil Code of the RF; articles 27, 247 and 248 of the Arbitration Procedure Code of the RF).

The SAC, however, overturned this decision, saying that according to article 11 of the TC of the RF, the concept of “foreign organization” includes all at once a foreign legal entity as well as its branches and representative offices. Consequently, a branch or a representation of a foreign legal entity created in Russia is recognized for tax purposes as a taxpaying organization with tax liability and liability for tax violations according to article 19 of the TC of the RF.

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Source: Internet-resource “Gaap.ru”