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Russia’s Constitutional Court reported via its official website that it had ruled Article 165, Paragraph 5, Line 2, Point 1 of the Tax Code unconstitutional. The court’s press service reported that the matter, brought up by the Supreme Arbitration Court’s (SAC) request, was reexamined on November 27 during an open session.

The SAC’s call for review was the main reason that the matter was reexamined.

The part of the Tax Code in question stated that, during business transactions with foreign purchasers not required to pay Value-Added Tax (VAT), the taxpaying party has the right to include the sum of VAT into the price of the goods that they are exporting. Since the taxpaying party has already paid this same amount of VAT to their Russian suppliers when they purchased the goods in Russia, adding VAT into the price of their goods is a way to compensate for this in their budget.

In order to establish when the zero-percent tax rate can be used on the exportation of goods, the tax authorities should have a fixed procedure on payments for goods being bought and sold between a foreign purchaser and a supplying organization.

According to the literal meaning of the law, the original version of the contract signed between the purchaser and a third party located in Russia should be submitted, in addition to the copy of the contract, in which the taxpayer is not included as a participating party. The contract should be in accordance with the laws of the purchaser’s country of origin and translated into their native language. Any other documentation is not considered to be sufficient verification on the part of the taxpayers for implementing the zero-percent tax rate.

In November 2006, a case was filed in the SAC by the OOO (LLC) Lesoeksportnaya ASV, who signed an export contract with the Australian company Vieland PTY Limited. An addendum to the contract stipulated that the director of the foreign company could pay for the goods and so he paid for them through his personal account and not from the company’s account.

The same year, the tax authorities refused to compensate the OOO for the amount paid in VAT under the zero-percent tax rate because the OOO did not submit their original commercial contract. In addition, the tax authorities came to the decision to hold companies liable for failure to submit original versions of contracts.

The Krasnoyarsk District’s Arbitration Court and the Third Appellate Arbitration Court upheld this decision.

The SAC believed that the conditions of the ruling unjustifiably limited taxpayers’ right to use the zero-percent VAT rate.

The Constitutional Court agreed with the SAC and ruled that the disputed rule (in particular, the part that stipulates the necessary conditions that must be met for the taxpayer to have the right to use the zero-percent VAT rate upon presenting the tax authorities with only a copy of their commercial contract) was inconsistent with Articles 34 (Part 1), 19 (Part 1), and 57 of the Russian Constitution. 

The Constitutional Court also called for the federal legislature to introduce the necessary legal mechanisms for repayment of VAT under circumstances such as those previously described.

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