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Opinion of Russian Supreme Arbitral Court on application of Russia-Turkey tax treaty — Orbitax Tax News & Alerts

Details of the opinion of the Russian Supreme Arbitral Court of 27 November 2007 on the issue of permanent establishment in respect of corporate property tax have become available.

(a) Facts. A Turkish entity carried on construction projects in Russia for a period shorter than 18 months. Under Art. 5(3) of the Russia-Turkey tax treaty, such a construction project does not qualify as a permanent establishment. However, under the Russian Tax Code, a permanent establishment of a foreign entity is considered a taxpayer of corporate property tax in Russia. In consequence, the tax authorities assessed corporate property tax based on the fixed assets of the Turkish company involved in the construction project. The taxpayer appealed to the court, and the lower courts upheld the position of the taxpayer.

(b) Opinion. The Supreme Arbitral Court did not support the decisions of lower courts, and clarified that the Russia-Turkey tax treaty (Art. 2(3)) applies only in respect of the tax on profits of enterprises and organizations, and of income tax of individuals, and that corporate property tax is not covered by the treaty. As such, the Tax Code definition of permanent establishment should be used instead of that of the tax treaty. As the Tax Code did not set a minimum time limit for a construction site to qualify as a permanent establishment, the entity should therefore be seen as a taxpayer for corporate property tax purposes