A landmark decision was made by the Presidium of the Supreme Arbitration Court of the Russian Federation in a dispute between the Interregional Inspection #1 of the Federal Tax Service and the Northern Kuzbas coal-mining company.
The company took a loan of 11 billion rubles from Severstal-Resource, a shareholder company. In 2008, after the sale of ArcelorMittal mine, loan rights were transferred to a Luxemburg company called ArcelorMittal Finance. The company expensed the interest from the loan.
However, the Tax Code limits the size of a loan received from an affiliated entity by three times the amount of the borrower’s capital. The company's loan exceeded this amount, which allowed the tax authorities to refuse to allow the loan’s interest to be expensed. The company was assessed 159 million rubles in profit taxes and penalties.
The Presidium of the Supreme Arbitration Court in its ruling № ВАС-8654/11 from August 12, 2011, announced that issues related to assessment of costs for tax purposes are within national jurisdiction.
By this decision Presidium of the SAC closed the chapter on disputes about “thin capitalization”.
The Supreme Arbitration Court then took a position completely opposite from the courts of first three instances, overturning the previous decisions.
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