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CISG CASE PRESENTATION

Russia 23 June 1998 High Arbitration Court (or Presidium of Supreme Arbitration Court) of the Russian Federation [translation available]
[Cite as: http://cisgw3.law.pace.edu/cases/980623r1.html]

Primary source(s) of information for case presentation: Case text

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Case identification

DATE OF DECISIONS: 19980623 (23 June 1998)

JURISDICTION: Russian Federation

TRIBUNAL: Vysshi Arbitrazhnyi Sud Rossyiskoi Federatsii [High Arbitration Court (or Presidium of Supreme Arbitration Court) of the Russian Federation]

[Russia has two types of State courts for private law disputes: Courts of general jurisdiction (also called "People's Courts") and economic courts (also called "Arbitration Courts"). The above is the official title of the top judicial authority of the Arbitration Courts.]

JUDGE(S): M.K. Yukov (Chairman)

CASE NUMBER/DOCKET NUMBER: Resolution No. 3846/97

CASE NAME: Cooperative League of the USA v. State Department of Taxation for City of Tver

CASE HISTORY: 1st instance Decision of 24 February 1997; 2d instance Appellate Division of the Arbitration Court for the Tver District 18 April 1997; 3d instance Federal Arbitration Court for the Northwestern Region 11 June 1997 [reversed]

SELLER'S COUNTRY: United States (plaintiff)

BUYER'S COUNTRY: Russian Federation (defendant)

GOODS INVOLVED: Soymeal


Classification of issues present

APPLICATION OF CISG: Yes

APPLICABLE CISG PROVISIONS AND ISSUES

Key CISG provisions at issue: The case has to do with interpretation of a double-taxation treaty. The contract was qualified as a CISG transaction with the sole reference to this Convention the statement that "The mentioned contract was a part of an international business transaction because it meets the requirements stated in the United Nations Convention on Contracts for the International Sale of Goods 1980."

Classification of issues using UNCITRAL classification code numbers:

Unavailable

Descriptors: Unavailable

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Editorial remarks

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Citations to case abstracts, texts, and commentaries

CITATIONS TO ABSTRACTS OF DECISION

(a) UNCITRAL abstract: Unavailable

(b) Other abstracts

Unavailable

CITATIONS TO TEXT OF DECISION

Original language (Russian): [1998] Vestnik Vysshego Arbitrazhnogo Suda Rossijkoj Federatsii [The Herald of the High Arbitration Court of the Russian Federation (Moscow) No. 9, 55-59 [56]

Translation (English): Text presented below

CITATIONS TO COMMENTS ON DECISION

Unavailable

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Case text (English translation) [second draft]

Queen Mary Case Translation Programme

Resolution No. 3846/97
High Arbitration Court (or Presidium of the Supreme Arbitration Court) of Russian Federation

23 June 1998

Translation by Yelena Kalika [*]

The Presidium of the Supreme Arbitration Court of the Russian Federation has reviewed the protest of the Deputy Chairman of the Supreme Arbitration Court of the Russian Federation on the Decision of the Federal Arbitration Court for the Northwestern Region of 11 June 1997 on case No. 91 of the Arbitration Court of the Tver District.

After hearing and discussing the judicial report, the Presidium has found the following.

The Cooperative League of the USA filed a lawsuit against the State Department of Taxation for the City of Tver. The plaintiff argued that the Department's decision No. 01-06/61 of 14 January 1997 ordering the League to pay penalties for its failure to pay the corporate income tax, Value-Added tax, special tax, tax on use of highways, tax on maintenance of residential and historic buildings should be held void. The amount of the penalty was RuR [Russian rubles] 4,041,279,800.00.

The claim was sustained in the court's decision of 27 February 1997.

In its resolution of 18 April 1997, the Appellate Court partially reversed the decision of the court below (regarding RuR 75,839,800.00 of underestimated profits and penalties). The rest of the decision was left unaltered.

In its resolution of 11 June 1997, the Federal Arbitration Court for the Northwestern Region reversed the resolution of the Appellate Court and completely dismissed the claim.

It has been suggested in the protest that the resolution of the Federal Arbitration Court for the Northwestern Region should be reversed and the resolution of the Appellate Court should be reinstated.

It is the opinion of the Presidium that the mentioned judicial acts shall be reversed and the case shall be remanded to the Trial Court for the following reasons:

As follows from the materials of the case, the Cooperative League of the USA (incorporated under the laws of the USA) established its Tver representative office in February 1994.

On 26 February 1994, the Administration of the Tver District and the plaintiff concluded a contract. On 1 July 1994, the parties made an amendment to the contract. Both the contract and the amendment provided that the delivery of soymeal for the Tver District enterprises would be made.

According to the resolution of Head of Administration of the Tver District of 12 July 1994, the public joint-stock company "Tverzernoproduct" was assigned the duties to deliver the goods from the port of destination, to use them for producing the mixed fodder, and to distribute the goods to the consumers. The income derived from distribution of soymeal was supposed to be transferred to the accounts of a representative office of the Cooperative League of the USA and later to be used for crediting the agricultural enterprises in the district.

In order to fulfill its obligations to the Administration of the Tver District, the Cooperative League of the USA made the contract No. 14940617 with "Tverzernoproduct". The contract was for the period from 17 July 1994 to 31 December 1995.

In order to execute the contract, a quantity of soymeal in the amount of RuR 1,744,899,200 was imported into the Russian Federation.

"Tverzernoproduct" transferred payments to the accounts of the representative office of the Cooperative League of the USA at the Tver branch of the Moscow Regional Commercial Bank "Kladezbank" after each sale to the enterprises located in the district.

After reviewing the activities of the parties in selling the soymeal, the Arbitration Court for the Tver District came to the conclusion that the plaintiff carried no activities in the Russian Federation. The income for the transaction was received by the Cooperative League of the USA as a result of an international business transaction. In such circumstances, the income is not taxable in the Russian Federation.

The Federal Arbitration Court for the Northwestern Region completely dismissed the claim on the ground that the plaintiff did not meet the requirements relieving foreign legal entities from paying income taxes which were stated in Article 3(a) of the Law of the Russian Federation on Corporate Income Taxes.

The conclusions of the courts below were not based on the legislation and international treaties of the Russian Federation governing taxation of foreign entities in the Russian Federation.

The mentioned contract was a part of an international business transaction because it meets the requirements stated in the United Nations Convention on Contracts for the International Sale of Goods 1980.

Income of a foreign legal entity received from an international business transaction shall not be taxed in the Russian Federation if such a transaction is concluded exclusively on behalf of this foreign legal entity.

The Cooperative League of the USA carries its activity in the Russian Federation through its permanent representative office. One of the forms of this activity, in particular, is the league's participation in the commercial importing of soymeal into the Russian Federation. The transaction was made in order to create conditions for the crediting agricultural enterprises.

According to Article 1 of the Law of the Russian Federation on Corporate Income Taxes, corporate income taxes shall be paid by companies, firms, and any other organizations incorporated in foreign States which exercise business activities in the Russian Federation through their permanent representative offices.

Therefore, the conclusions of the trial and appellate courts that the plaintiff carried no business activities in the Russian Federation were wrong.

The conclusion of the Federal Arbitration Court for the Northwestern Region that pursuant to Article 3 of the Law of the Russian Federation on Corporate Income Taxes the plaintiff had to pay the taxes from all the funds transferred to its bank account was also wrong.

The mentioned provision determines peculiarities of calculating income taxes which should be paid by the foreign legal entities. One peculiarity about this case is that part of a foreign legal entity's income derived from an international business transaction relates to the permanent representative office of this entity and, therefore, is taxable in the Russian Federation.

The terms of delivery of soymeal by the Cooperative League of the USA, which had been reviewed by the courts below in relation with Incoterms, were irrelevant for the purposes of taxation in the case.

Pursuant to Article 6 of the Treaty between the Russian Federation and the United States of America on Avoidance of double taxation and prevention of tax evasion in relation to income taxes (dated 17 June 1992) the income of an entity permanently residing in one of these States shall be taxed in this State only if this entity does not carry any business activities in the other State though its permanent representative office in that other State. Should an entity permanently residing in one of the States carry any business activities in the other State, the income of such an entity is taxable in the other state only in the part derived from activities of such a representative office.

In every state, such income means the income such a representative office could have derived, if it had been an independent entity carrying the same or similar activities in the same or similar situation.

The court should have determined what part of the plaintiff's income was derived from its permanent representative office's activities, taking into account that the foreign legal entity was a seller of the goods, the Russian organizations were buyers, and the permanent representative office was a liaison in the international business transaction. Such income is taxable in the Russian Federation.

Pursuant to Article 3 of the Law of the Russian Federation on Corporate Income Taxes only a part of the income of a foreign legal entity derived from its activities in the Russian Federation shall be taxable.

The taxable income shall be calculated either in accordance with Article 2 of the Law of the Russian Federation on Corporate Income Taxes (as the difference between proceeds from sales of products and expenses in relation with the manufacturing and sales included in the price of the goods/services) or in accordance with the conditional method pursuant to Article 3 (v) of the above mentioned law and Provision 4.9.4 of the Instruction of the Russian State Tax Service on Income Taxes of Foreign Legal Entities dated 16 June 1995 (on the basis of expenses and gross revenue of a permanent representative office. The norm of profitability is 25%).

In the present case, it is impossible to determine the income derived by a foreign legal entity in the Russian Federation from activities of its representative office since there is no information on what part of the income from sale of the Soya was derived from the plaintiff's carrying its activities through its representative office in the Russian Federation. Therefore, the conditional method should have been used in order to calculate the income.

In the report of the Tax Inspectorate, there are data on the expenses of the representative office of a foreign legal entity in the Russian Federation, as well as on the income derived by this entity from an international business transaction.

The mentioned data were not analyzed by the courts below.

On remand the court should determine the amount of taxable income of the representative office of a foreign legal entity.

Besides, the court must evaluate the requirements of tax authorities that the Cooperative League of the USA pay the Value-Added tax, special tax, tax on use of highways, tax on maintenance of residential and historic buildings.

It should be taken into consideration that pursuant to Article 11 of the Law of the Russian Federation on the Bases of Taxation in the Russian Federation taxpayer's obligations shall arise if a taxpayer has the object of taxation and in the circumstances stated in the legislation.

In accordance with the Law of the Russian Federation on the Value-Added Tax, the object of taxation shall be the turnover in the Russian Federation received from goods sold, work performed, services provided, and goods imported into the Russian Federation in accordance with the customs regime established in accordance with the legislation of the Russian Federation. Payments of taxes on the goods imported into the Russian Federation shall be made simultaneously with payments of custom duties.

According to the Regulation on the residential and historic buildings maintenance in the city of Tver (approved by the decision No. 57 of the Tver City Duma on 12/28/94), foreign legal entities shall pay the said tax. The object of taxation shall be the volume of sales of goods, work performed, services provided, and the gross revenue from the sales of goods.

Pursuant to Article 5 of the Law of the Russian Federation on the road funds in the Russian Federation foreign legal entities shall pay the tax on use of highways. The object of taxation shall be profits received from sales of goods, work performed, services provided, and the difference between the selling price and the cost of goods sold.

The court did not determine whether the objects of taxation were present. Neither did it determine whether the plaintiff had to pay such taxes.

In these circumstances, neither the Trial Court nor the Appellate Court had any reasons to sustain the claims. The Federal Arbitration Court for the Northwestern Region also did not have a reason to dismiss the claim completely.

On the above mentioned grounds and pursuant to Articles 187-189 of the Arbitration Procedural Code of the Russian Federation, the Presidium of the Supreme Arbitration Court holds:

The Decision of 24 February 1997, the Resolution of the Appellate Division of the Arbitration Court for the Tver District of 18 April 1997 on case No. 91, and the Decision of the Federal Arbitration Court for the Northwestern Region of 11 June 1997 on the same case are reversed.

The case is remanded to the Trial Court.

Acting as Chairman
of the Supreme Arbitration Court
of the Russian Federation
 
 
M.K. Yukov


FOOTNOTE

* Yelena Kalika, a law student at the Pace University School of Law, has studied at the Moscow State Law Academy, interned with a Moscow law firm, and is a Research Assistant at the Pace Institute of International Commercial Law.

All translations should be verified by cross-checking against the original text.

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