Tax-free transfer of property within a holding/business group is provided for by Article 251, Paragraph 1, Subparagraph 11 of the Tax Code. It would be natural to assume that the same opportunity is provided for property transfers from parent company to a subsidiary company, as well as the opposite (Article 251, Paragraph 1, Subparagraph 11, Points 1 and 2 of the TC).
However, practical experience shows that the tax authorities do not always agree with the legality of tax-free property transfers from a subsidiary to the parent company.
Tax authorities qualify this transfer as a donation which is prohibited between commercial organizations (Article 575 of the Civil Code of the RF) and on multiple occasions have tried to assess additional tax on the companies. Moreover, in some cases, the courts have taken the side of the tax authorities on the position that Article 251, Paragraph 1, Subparagraph 11 of the Tax Code is not applicable to relations between commercial organizations, referring to Article 575 of the Civil Code. In other cases, the courts have expressed the opposite view by supporting taxpayers. For example, The Federal Arbitration Court of the Volga District, in its Ruling on Case #А65-5602/2007-СА1-7 from December 6, 2007, stated that “transfer of property to the founder does not contradict the regulations of Article 575 of the Civil Code as the abovementioned article is not applicable in this case.”
Finally, there is an opportunity to put this prolonged discussion to rest: the Presidium of the Supreme Arbitration Court accepted for consideration a case regarding the transfer of property within a holding structure (Court Order for Case ВАС-8989/12 from October 3, 2012).
The facts of the case are as follows.
The Company decided to purchase from its subsidiary (a share of 99.99996%) real estate properties for the creation of new ventures. The subsidiary’s Board of Directors made a decision to transfer the properties to the parent company. Both parties processed statements of transfer and acceptance of property, but the Office of the Russian State Register refused to register the transfer of ownership rights. The Register referred to the fact that parent company “has no proprietary rights to the property of its subsidiary and legislation in effect does not provide for a company’s voluntary resignation of property. Moreover, the transaction between the parent company and its subsidiary is a unilateral transaction, does not require compensation, and thus is a supererogatory transaction.”
The Company contested the State Register’s denial, but the courts of three jurisdictions dismissed the claims. Under the guidance of Article 575, Paragraph 1, Subparagraph 4, the courts have ruled that a tax-free gift is not possible between commercial organizations.
Russia’s Supreme Arbitration Court, upon transferring the case to the Presidium of the Court ruled that the transaction was qualified as a gift in error. Three judges reached the decision that a unilateral transaction does not in itself indicate a gift deed. “Gifting of property assumes the presence of free will of the giver intending to transfer vested property to another entity specifically as a gift (with a purpose to benefit the receiving party), and not for any other reason ensuing from economic relations between the parties.”
Economic efficiency in a relationship between the parent company and its subsidiary may create a need for the reverse transfer of a property. In these circumstances, the absence of direct compensation is of the particular nature of the relationship between a parent company and its subsidiaries which, from an economic point of view, may be considered as a “unified economic entity.” Taking into consideration the controlled status of the subsidiary company in relation to the parent company and the common goals of their business activity whose realization may require redistribution of resources between the parent and subsidiary companies, classification of any uncompensated property transfers between these entities as gift deeds is incorrect.
We hope that outcome of this case will bring positive results for the business community and the Presidium of the Supreme Arbitration Court will maintain the opinion expressed by the judges.
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