On December 8 2010 the Moscow State Commercial Court issued its decision in a case involving an analysis of whether the collection of information can result in an entity being deemed to constitute a permanent establishment under Russian law and the double tax treaty between Russia and the United States.(1)


The taxpayer, Bloomberg LP, produces information products, including analytical databases. Between 2006 and 2007 it had a representative office in Moscow, where a number of employees gathered information which was incorporated into its databases. Sales of the products were made primarily from the UK office, but payments for these sales were made directly to a US bank account. However, Russian value-added tax (VAT) legislation required that VAT returns on such sales be filed in Russia and that VAT be paid there.

The outcome of the taxpayer's field audit for the fiscal year 2006 to 2007 was that the authorities held the taxpayer's activities in Russia to constitute a permanent establishment. Accordingly, they issued a claim for additional tax. The taxpayer disputed the finding and appealed.


The two principal issues were:

  • whether activities related to information gathering result in an entity being deemed a permanent establishment, given that under the US-Russia tax treaty, collecting information as a preparatory and auxiliary activity is excluded from the general definition of the activities of a permanent establishment; and
  • if a permanent establishment existed, how much income should be attributable to such activity.

Tax authorities' view
The authorities maintained that a permanent establishment existed and that the activities of employees in Russia were an integral part of the taxpayer's activities, which were aimed at creating databases and assembling analytical data. The taxpayer derived revenue from clients for such databases and data. Thus, such activity formed part of the taxpayer's core activities, rather than being an auxiliary or preparatory activity.

On the issue of the income attributable to such activity, the authorities considered that, in general, all payments for products which were sold to Russian customers and on which VAT was paid should be regarded as revenue of the permanent establishment. It agreed to take into account certain expenses incurred by the taxpayer.

Taxpayer's view
The taxpayer argued that as the collection of information is mentioned in the list of exclusions from the general definition of the term 'permanent establishment' under the relevant tax treaty, and as such activity was auxiliary and preparatory in nature, the fact of collecting such information does not make an entity a permanent establishment. Moreover, the taxpayer stressed that such information was not sold, but was provided free of charge.

On the second matter, the taxpayer referred to the Amadeus database to demonstrate that similar activities in Europe resulted in profits of between 4% and 6%. Hence, the taxable base for corporate profit tax should not include all payments on which Russian VAT was paid, as most of them effectively related to sales from non-Russian offices, while payments were made directly to a US bank account.


Overall, the court upheld the tax authority's reasoning. It concluded that collecting information and selling products based on such information were the taxpayer's principal business activities. As the Russian office not only collected information, but also analysed and processed it, its endeavours were part of this principal business activity. Thus, the Russian office's activities could not be regarded as auxiliary or preparatory, and therefore the taxpayer had had a permanent establishment in Russia in between 2006 and 2007. On this point, the court referred to the Organisation for Economic Cooperation and Development (OECD) Commentary to the Model Tax Treaty, despite the fact that Russia is not an OECD member. Moreover, the court made numerous references to the Ministry of Finance's guidance on interpreting tax treaties.

On the issue of the attribution of profits, the court declined to refer to the Amadeus database, as it stated that there was no evidence that its information was reliable. Moreover, it stated that the activities of similar companies in Europe did not necessarily present an appropriate point of comparison or mean that such activities are deemed to be profit making in Russia.

The court agreed with the authorities' argument that a tax base is determined on the basis of the deduction of permitted expenses from the taxpayer's gross revenue from Russian sources. In so doing, it apparently disregarded the separate and independent enterprise approach for which the Russia-US tax treaty explicitly provides. Instead, it used the direct method, taking into account all of Bloomberg's sales in Russia, including those unrelated to the activities of a permanent establishment. Tax professionals have been highly critical of this approach.


The court which decided the matter was a first instance court, but the decision was not appealed and is now in force.

However, tax practitioners and others have criticised some of the court's conclusions, particularly regarding the attribution of profits. It appears that a significant part of the revenue in question related to sales activities of the taxpayer's offices outside Russia and therefore should not be taxed in Russia, as there is no 'force of attraction' principle under Russian law and no tax treaty applied. Previously, Russian courts have upheld the principle of attribution of profits to a permanent establishment on the basis of a separate enterprise approach. The present decision appears to contradict the findings of higher jurisprudence and may yet be revised. Also at issue is the question of whether a tax treaty may be reinterpreted in a manner that differs from the literal meaning of the text on the basis of the OECD commentary.

Nevertheless, the immediate conclusion from this case is that the activities of non-resident companies in Russia through a representative office should be re-assessed. It is important to:

  • mitigate the risk of activities that the taxpayer regards as auxiliary and preparatory giving rise to classification as a permanent establishment; and
  • ensure that such an entity is properly registered if its activities may meet the standard for being classified as a permanent establishment.

As a result of the decision, representative offices that submit VAT returns without paying profits tax, although they make no sales in Russia, are now in a high-risk group. The contributory factors to the decision appear to include:

  • the absence of clear job descriptions indicating the auxiliary nature of the activities;
  • the apparent absence of a clear description of the office's representative functions;
  • the failure to separate activities; and
  • an underestimation of the risks of being classified as a permanent establishment.

The court's frequent references to the Ministry of Finance's interpretations of the tax treaty were also significant. Although they are not binding, such clarifications will evidently play an influential part in the consideration of such cases.


(1) A40-94391/10-142-134.

For further information on this topic please contact Denis Schekin or Roustam Vakhitovat Pepeliaev Group by telephone (+7 495 967 0007), fax (+7 495 967 0008) or email ([email protected] or [email protected]).