On 17 June 2016 the Commercial Court of Moscow rendered a decision on the Gazprom Neft OJSC case, No. А40-2476/16-108-19 (the “Decision”).
In this decision the commercial court considered, among other things, a number of issues of how the company did tax accounting of expenses in the form of incentive, compensation and other payments made to employees when the company relocated from one city to another (in this instance, from Moscow to St. Petersburg).
In connection with the relocation, the company adopted human resources polices providing for a number of payments to company employees who had agreed to relocate, including:
1) compensation for housing rental for a period of not more than 24 months;
According to the policies, this compensation was to be paid by default in equal monthly installments together with salary payments. However, the compensation was paid in a lump sum if the employee decided to acquire housing in St. Petersburg. When it made such a lump sum compensation payment the company included the entire amount in expenses in the same period for profit tax purposes.
Following the tax authority, the commercial court decided that economically the payment of this compensation was essentially an advance on salary (Article 137 of the RF Labor Code), as a consequence of which the court declared the company’s one-time accounting of this payment for tax purposes to be illegal. The court agreed with the tax authority that the company should have included this payment in expenses for profit tax purposes evenly over the same period of time (24 months) as the standard housing rental compensation payment. The court’s reasoning for treating the disputed payment this way was primarily that under the terms of paying the compensation contemplated by the addenda to the employment contracts, if the employee left the company before the end of 24 months from the date of relocation to St. Petersburg the employee was to return the full amount of the compensation to the company. For this reason the court considered that this payment is a payment of a compensatory nature included in the remuneration (Article 129 of the RF Labor Code), and not a compensation for costs incurred by the employee related to the performance of job duties as contemplated by Article 164 of the RF Labor Code;
2) individual compensation for living arrangements at the new place of residence;
According to the company’s policies, this compensation was paid by default in four equal installments over 18 months; however, if the employee decided to acquire or build housing in St. Petersburg the entire amount of the compensation was paid in full in a lump sum.
The court found that the company did not have the right to include that compensation in expenses recorded for profit tax purposes because, despite its name, that compensation was essentially financial assistance to acquire housing which, according to the express reference of the law (Article 270 of the RF Tax Code) is not included for profit tax purposes. The court based its finding on the fact that the amount of the compensation, as established by the court, was determined by the company in its sole discretion and depended not on the actual amount of moving expenses incurred by the employee, but the evaluation of the specific employee’s value to the company. For this reason the court refused to consider this compensation as the payment of relocation allowance contemplated by Article 169 of the RF Labor Code.
It should also be noted that in its decision the commercial court stated more than once that when determining the tax treatment of payments to employees it is not the name of the payment mentioned in the policy and/or employment contract that should be evaluated, but the true nature of those payments and their economic substance.