Goltsblat BLP advises of a tax dispute judgement passed by a court of appeal that is of importance to the business community.

The first appeal court in the Bridgetown Foods case stated1 that a foreign owner's revenues from assigning exclusive intellectual property rights to a Russian entity were to be taxed at source.

The case dealt with assignment of rights to a trade mark but this position might subsequently be extended to other IP assets.

In the given case, the courts supported the tax office in relying on a 2008 Russian Ministry of Finance position2, even though the Ministry itself subsequently refuted it on several occasions.

The Ministry of Finance, the tax office and the courts effectively overlooked the direct legal rule3 cited by the taxpayer determining tax treatment of assignment of exclusive rights to IP assets:

"revenues derived by a foreign entity from sale of... property rights... not giving rise to a permanent establishment in Russia under Article 306 of the Code are not taxed at source".

Rather than analysing this rule, including with reference to Article 1226 of the Civil Code, which expressly treats such exclusive rights as property rights, the courts focused on: (a) provisions establishing tax agent duties, (b) the fact that there is no double taxation treaty with the Marshall Islands and (c) the Civil Code provisions regulating exclusive rights, which are hardly applicable in the case.

As a result, bypassing the direct Tax Code rule exempting a foreign entity's proceeds from IP right assignment from withholding tax in Russia, the courts passed a resolution we believe to be manifestly wrong. This mistake, if repeated, could adversely affect sales of IP rights including on technologies from Ukraine, Belarus and Luxembourg.

Of critical importance in cases like this are the company attorneys' ability to argue and convince the court not to pass a judgement demonstrably in contravention of the law.

Footnotes

1. Resolution No. А11-11036/2016 dated 14 August 2017

2. Letter No. 03-03-06/1/560 dated 7 October 2008

3. Clause 2, Article 309 of the Tax Code

Originally published 20 September 2017

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