RS Q & A Controlled transactions

Controlled transactions

A representative office of a foreign organisation registered with the tax authorities of the Russian Federation and engaged in commercial activity and a Russian LLC are mutually-dependent entities (according for sub-clause 8 clause 2 Article 105.1 of the Tax Code of the Russian Federation) since the same individual works as a CEO for the LLC and head organisation of the foreign representative office. Transactions between them are not considered to be part of the controlled transactions specified in sub-clauses 1, 2, 3 clause 1 Article 105.14 of the Tax Code of the Russian Federation.
Will transactions between them be recognised as controlled and will sub-clause 1 clause 2 Article 105.14 of the Tax Code of the Russian Federation cover such transactions?
Relative to clause 2 of the Tax Code of the Russian Federation will the Russian Federation be recognised as the place of registration or the tax residency place of the foreign representative office if this representative office is registered with tax authorities in the Russian Federation?

Sub-clause 1 clause 2 Article 105.14 of the Tax Code of the Russian Federation does not apply to a representative office of a foreign company.

Transactions between the entities specified in the question are controlled irrespective of the income received from such transactions during this calendar year.

Validation of conclusion:

1. The Tax Code of the Russian Federation does not contain the notion “place of registration”. According to clause 1 Article 11 of the Tax Code of the Russian Federation institutions, notions and terms within civil, domestic and other legal branches of the Russian Federation used in the Code are applied with the meaning which is used in these legal branches, unless otherwise envisaged by the Code.

In accordance with clause 2 Article 54 of the Civil Code of the Russian Federation the registration place of a legal entity is determined by where its organisation is registered for tax-purposes, according to clause 1 Article 83 of the Tax Code of the Russian Federation.

Based on the meaning of part 2 Article 1 of Federal Law N129-FZ “On State Registration of Legal Entities and Individual Entrepreneurs” dated August 8th, 2001 (hereinafter – Law N129-FZ) recognition and confirmation of the creation, reorganisation and liquidation of legal entities by the government, acquisition of the individual entrepreneur status by individuals, termination of activity as individual entrepreneurs by individuals, other information about legal entities and individual entrepreneurs in accordance with Law N129-FZ is the purpose of registering a legal entity.

Tax control of organisations and individuals (clause 1 Article 83 of the Tax Code of the Russian Federation) is the purpose of tax registration.

Therefore, the place of registration and the tax registration place are different notions. Only the term “tax registration place” can be used for a representative office of an organisation since a representative office is not a legal entity (clause 3 Article 55 of the Civil Code of the Russian Federation) and is not registered separately anywhere.

2. The Tax Code of the Russian Federation does not determine which organisations are tax residents of the Russian Federation.

The location of the legal entity is the sole criteria for determining tax residency. Since the location of the legal entity is determined by its place of registration (clause 2 Article 54 of the Civil Code of the Russian Federation) all organisations registered in Russia are tax residents of the Russian Federation. Consequently, foreign organisations are not tax residents of the Russian Federation, therefore representative offices of these organisations in the Russian Federation are not tax residents.

This position is clearly outlined in international agreements signed by the Russian Federation on double taxation avoidance. In particular, in Article 4 of the Agreement between the Russian Federation and the Republic of Germany for the Avoidance of Double Taxation with Respect to Taxes on Income and Capital (Moscow, May 29th, 1996) (hereinafter—Agreement) it is specified that for the purposes of the Agreement the phrase “resident of the Contracting State” means any entity which according to the laws of that State is subject to taxation in that State on the basis of its place of residency, permanent place of residence, place of registration as a legal entity, location of its management body or other analogous criteria.

It is clear that determination of tax resident status in the Russian Federation is not connected with tax registration place. This status is applied to the whole organisation, not just for its separate representative offices.

Therefore, the tax registration place for a representative office of a foreign organisation cannot be called either a place of registration or a place of the tax representative office. Consequently, sub-clause 1 clause 2 Article 105.14 of the Tax Code of the Russian Federation does not cover the representative office of such an organisation.

Then by virtue of clause 1 Article 105.14 of the Tax Code of the Russian Federation transactions between the entities specified in the question will be controlled irrespective of the income received from such transactions during this calendar year.

Prepared by experts of the GARANT Legal Consulting Service
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