In July, the Federal Tax Service (the “FTS”) clarified that when a company’s permanent establishment in Russia accounts for expenses incurred by the company outside Russia, it must (i) adhere to the provisions of the respective international treaties on avoidance of double taxation and Russian tax law; and (ii) consider the position of the Supreme Commercial Court of the Russian Federation (the “SCC”) regarding the possibility of accounting for such expenses.

As reported in the June 2012 edition of the Legal Digest, the SCC recognised as invalid the provisions of the Guidelines that do not allow the permanent establishment of a foreign organisation in Russia to use the accrual method to account for expenses transferred to it by the given foreign organisation. The SCC noted that when an international treaty concluded between Russia and a foreign country does not contain the term “method to determine profit relating to a permanent establishment”, the provisions of the Tax Code of the Russian Federation (the “Code”) must be applied. Among other things, the Code (Chapter 25) stipulates the procedure for calculating income and expenses when applying the accrual method.

Based on the SCC’s position and the FTS’ comments, permanent establishments in Russia may confidently apply the accrual method when accounting for expenses transferred to them by foreign holding companies.

[Letter No. ЕD-4-3/11376@ of the Federal Tax Service of the Russian Federation, dated 11 July 2012; Decision No. 1896/12 of the Supreme Commercial Court of the Russian Federation, dated 27 April 2012]