Is a foreign company in Russia obliged to pay any taxes on damages judged by Russian court on the illegal use of a trademark?

The Department of the Tax and Customs Policy of the Ministry of Finance of the Russian Federation has provided an explanation regarding a controversial situation, the essence of which is as follows: a foreign entity with a permanent location in the UK has received damages for the illegal use of a trademark following a number of the legal proceedings. Such payments are considered as income of the foreign legal entity on the territory of the Russian Federation. At the same time, the company had not paid a profit tax in Russia, what became a reason for the appeals filed to the Department. Having analyzed the existing legal norms, the Department of the Tax and Customs Policy of the Ministry of Finance of the Russian Federation published an information letter, where it explained the sequence of actions in such case.[1]

According to Subparagraph 4 of Paragraph1 of Article 309 of the Tax Code of the Russian Federation, the following shall be attributed to the foreign company income not related to its business activities: “The income from the use in the Russian Federation of the rights to the intellectual property subject matters.” “Other similar income” is also mentioned in the above norm. The representatives of the Department note that: “Thus, the foreign entity income being paid by the Russian entities according to the court decision regarding the indicated statements of claim shall be subject to be taxed proceeding from their kind classification in accordance with the provisions of Paragraph 1 of Article 309 of the Code…” [2]

However, provided there is an international treaty, in the case of a contentious situation, the norms of the international treaty have a priority importance over the provisions of the state law (in this case, the Tax Code). The modern economic relations have lost their territorial character and they are increasingly emerging on the territory of several states. This is usually a reason of the difficulties, while determining the amounts and place of the tax payments. To simplify the system of calculating the amount and procedure for the payments between Russia and other countries, including the UK, the bilateral treaties on avoidance of double taxation are concluded.

Thus, in accordance with the Convention between the Government of the Russian Federation and the Government of the United Kingdom of Great Britain and Northern Ireland of February 15, 1994 “On the Avoiding Double Taxation and Preventing Tax Evasion with Respect to the Taxes on Income and Property Value Increase,” a special procedure for determining tax payments is used for the residents of the participating countries.[3] In accordance with the above treaty, if the firm has an actual right to income from the intellectual property subject matters on the territory of one participating state, but the permanent location of the company is on the territory of another participating country, the tax shall be paid only on the territory of the state, where the entity is located.

Summing up, the following algorithm of actions can be derived: according to the general rule, while recovering damages in favor of a foreign company for the illegal use of a trademark, this amount is considered as the income from the use of intellectual property and it is taxed according to the legislation of the Russian Federation. However, if the treaty on avoiding double taxation is concluded between Russia and the country, where the foreign company is permanently located, its norms have a priority importance. And then, the amount and procedure for the tax payments should be determined on the basis of the content of the treaty concluded.

Despite the fact that the Letter of the Department is of an informational nature, it is should be assumed that now the tax authorities will be vigilant in monitoring the payments that the foreign companies must transfer to the Treasury of the Russian Federation after receiving the damages amounts adjudged by the courts.