The Appeal Court of Russia has ruled in Case no. А40-28065/13 on 25^th February 2015 regarding fees paid for the use of know how. The fees are not deductible for corporate income tax purposes if the transaction is a fake.

Summary of the case:

LLC Equant (Licensee) and Equant Network Services International Ltd (ENSIL) (Licensor), a resident of Ireland, entered into a licence agreement on 1 January 2003. The Licensor granted to the Licensee a non-exclusive right to use the know-how/technology as a combination of technical information in the field of telecommunications (the Information). Based on this Agreement, LLC Equant paid to ENSIL a periodic fee for the use of the Information, which was equal to 4.2% of the gross income from sales of network services. Both LLC Equant and ENSIL belong to France Telecom Orange group.

The tax authorities calculated additional corporate income tax liabilities to LLC for 2008 and 2009, claiming that the fee for the use of the Information in the amount of RUB 372 million paid to ENSIL in 2008 and 2009 was not deductible for corporate income tax purposes.

LLC Equant challenged the tax authorities’ decision and appealed to the Arbitration Court of Moscow. However, the latter supported the tax authorities’ position and dismissed the taxpayer’s claim. Therefore, LLC subsequently filed an appeal against the above judgment with the Appeal Court. The issue was whether the fee for the use of the Information paid to ENSIL was tax deductible for corporate income tax purposes.

The Appeal Court reconfirmed the judgment of the Court of the First Instance and dismissed the taxpayer’s appeal. The Appeal Court considered that the companies were associated and that the information could not be a licence agreement as the information had no profitable value. Therefore, the Appeal Court reaffirmed the court judgment and canceled the taxpayer’s appeal. According to articles 252 and 264 of the Tax Code, the fees paid for the use of Information were not eligible as tax deductible expenses.