On April 21, 2016 the Commercial Court of Chelyabinsk Region rendered a decision on the case of OOO Gazpromneft Chelyabinsk, No. А76-15351/2015 (the “Decision”).
In this decision the commercial court declared economically justified the system of revolving loans existing under cash pooling agreements between OAO Gazprom Neft, its subsidiaries and banks.
The court found that the tax authority’s claims against OOO Gazpromneft Chelyabinsk (the “Company”), which is a wholly-owned subsidiary of OAO Gazprom Neft (the “Parent Company”), consisted in the fact that, in the tax authority’s opinion, the Company’s actions were not economically justified when it disbursed short-term loans to the Parent Company at a lower interest rate than the rates at which the Company itself paid interest on loans raised from the Parent Company in the same periods.
The court found that the Company had disbursed short-term loans to the Parent Company as part of a cash pooling system in which fund balances on the accounts of the Parent Company’s subsidiaries, including the Company, were accumulated on the Parent Company’s accounts and redistributed by the Parent Company as needed among those subsidiaries with the help of revolving loan agreements. The court agreed with the Company that the cash pooling system makes it possible to avoid considerable costs associated with raising short-term loans from lending institutions, which offer higher interest rates, allows it to effectively control cash flows within the group of companies and to minimize the group’s credit risks associated with raising bank loans. The court also bore in mind that use of the cash pooling mechanism is expressly set forth in the Gazprom Neft Group’s fiscal policy.
At the same time, the Company demonstrated to the court that it had raised borrowed funds from the Parent Company on long-term financing principles and this was intended to achieve investment goals, namely, for the Company to acquire a chain of gas stations and tank farms. The Company was able to prove, in particular, that:
- profits from the Company’s day-to-day operations were insufficient to achieve those capital goals;
- raising a long-term loan and spending it on investments led to an increase in the Company’s key production and financial indicators, a rise in the number of its employees, increased revenue of the Company and, as a consequence, in the amount of taxes paid by the Company;
- the purposes of loans provided by the Company as part of the cash pooling system and loans provided to the Company to resolve investment tasks differ considerably (targeted financing of a long-term investment program and short-term placement of available cash) and in terms of their repayment dates, which makes it impossible to directly compare interest rates on these types of loans.
As a result, although interest rates differ, the court declared that it was lawful for the Company to deduct all of the expenses (interest) for loans provided by the Parent Company, thereby indirectly confirming that it is possible to use the cash pooling system in Russian tax regulation.
At the same time, it should be noted that in its decision the court relied on quite a broad base of evidence showing that the transactions carried out had real economic substance and transparency. One may suppose that absent such evidence the court’s findings on whether it was lawful for the Company to deduct the disputed interest could have been entirely different.