Corte europea dei diritti dell’uomo
20
settembre 2011
CASE OF OAO NEFTYANAYA KOMPANIYA YUKOS v.
(Application
no. 14902/04)
This judgment was rectified on 17 January 2012
under Rule 81 of the Rules of Court
FINAL
08/03/2012
This judgment has become final under Article 44 § 2 of the Convention. It
may be subject to editorial revision.
In the
case of OAO Neftyanaya Kompaniya Yukos v.
The European Court of Human
Rights (First Section), sitting as a Chamber composed of:
Christos
Rozakis, President,
Nina Vajić,
Khanlar Hajiyev,
Dean Spielmann,
Sverre Erik Jebens,
Giorgio Malinverni, judges,
Andrey Bushev, ad hoc judge,
and Søren Nielsen, Section Registrar,
Having deliberated in private
on 24 June 2011,
Delivers the following
judgment, which was adopted on that date:
PROCEDURE
1. The case originated in an application
(no. 14902/04) against the
2. The applicant was represented by Mr
P. Gardner, a lawyer practising in
3. By a decision of 29 January 2009,
the Court declared the application partly admissible.
4. The applicant and the Government
each filed further written observations (Rule 59 § 1).
5. A hearing took place in public in
the
There appeared before the Court:
(a) for the Government
Mr G.
Matyushkin, Agent,
Mr M.
Swainston QC,
Mr T.
Brennan QC,
Ms M.
Lester,
Mr S.
Midwinter,
Mr P.
Wright,
Mr Kh. Ivanyan,
Mr V.
Starzhenetskiy,
Ms N.
Elina,
Ms O. Sirotkina
Ms O.
Yurchenko,
Ms E.
Kudelich,
Ms I.
Koganova,
Ms D.
Obyskalova,
Mr G.
Abatourov,
Mr I.
Plyushkov,
Ms V.
Utkina,
Mr O.
Ovchar,
Ms T.
Struchkova,
Mr D.
Mikhaylov,
Mr V.
Torkanovskiy,
Ms E.
Filatova, Advisers;
(b) for the applicant
Mr P.
The Court heard addresses by
Mr Gardner, Mr Matyushkin and Mr Swainston QC, as well as the answers by
Mr Gardner and Mr Swainston QC to questions put to the parties.
THE FACTS
I. THE
CIRCUMSTANCES OF THE CASE
6. The applicant, OAO Neftyanaya
Kompaniya YUKOS, was a publicly-traded private open joint-stock company
incorporated under the laws of
7. The applicant was a holding company
established by the Russian Government in 1993 to own and control a number of
stand-alone entities specialised in oil production. The company remained fully
State-owned until 1995-1996 when, through a series of tenders and auctions, it
was privatised.
A. Proceedings
in respect of the applicant company’s tax liability for the year 2000
8. Between 13 November 2002 and 4
March 2003 the Tax Inspectorate of the town of
9. As a result of the inspection, on
28 April 2003 the Tax Office drew up a report indicating a number of relatively
minor errors in the company’s tax returns and served it on the company.
10. Following the company’s objections,
on 9 June 2003 the Tax Office adopted a decision in which it found the company
liable for having filed incomplete returns in respect of certain taxes.
11. The decision of the Tax Office was
accepted and complied with by the company on 7 July 2003.
12. On 8 December 2003 the Tax Ministry
(“the Ministry”), acting as a reviewing body within the meaning of section 87
(3) of the Tax Code, carried out an additional tax inspection of the applicant
company.
13. On 29 December 2003 the Ministry
issued a report indicating that the applicant company had a large tax liability
for the year 2000. The detailed report came to over 70 pages and had 284
supporting documents in annex. The report was served on the applicant company
on the same date.
14. The Ministry established that in 2000 the
applicant company had carried out its activities through a network of 22
trading companies registered in low-tax areas of Russia (“the Republic of
Mordoviya, the town of Sarov in the Nizhniy Novgorod Region, the Republic of
Kalmykiya, the town of Trekhgornyy in the Chelyabinsk Region, the town of
Lesnoy in the Sverdlovsk Region and the Evenk Autonomous District”). For all
legal purposes, most of these entities were set up as entirely independent from
the applicant, i.e. as belonging and being controlled by third persons,
although their sole activity consisted of commissioning the applicant company
to buy crude oil on their behalf from the company’s own oil-producing
subsidiaries and either putting it up for sale on the domestic market or
abroad, or first handing it over to the company’s own oil-processing plants and
then selling it. There were no real cash transactions between the applicant
company, its oil-processing and oil-producing subsidiaries and the trading
entities, and the company’s own promissory notes and mutual offsetting were
used instead. All the money thus accumulated from sales was then transferred
unilaterally to the “Fund for Financial Support of the Production Development
of OAO Neftyanaya Kompaniya YUKOS”, a commercial entity founded, owned and run
by the applicant company. Since at all relevant times the applicant company
took part in all of the transactions of the trading companies, but acted as the
companies’ agent and never as an owner of the goods produced and processed by
its own subsidiaries and since the compensation paid by the trading entities
for its services was negligible, the applicant company’s real turnover was
never reflected in any tax documents and, consequently, in its tax returns. In
addition, most of the trading companies were in fact sham entities, as they
were neither present nor operated in the place of their registration. In
addition, they had no assets and no employees of their own.
15. The Ministry found it established,
among other things, that:
(a) the actual
movement of the traded oil was from the applicant company’s production sites to
its own processing or storage facilities;
(b) the applicant
company acted as an exporter of goods for the purpose of customs clearance,
even though the goods had formally been owned and sold by sham companies;
(c) through the use
of various techniques, the applicant company indirectly established and, at all
relevant times de facto, controlled
and owned the sham entities;
(d) all accounting
operations of the companies were carried out by the same two entities, OOO
“YUKOS” FBC and OOO “YUKOS” Invest, both dependant on or belonging to the
applicant company;
(e) the network of
sham companies was officially managed by OOO “YUKOS” RM, all official
correspondence, including tax documents, being sent from the postal address of
OOO “YUKOS” Moskva, the applicant company’s managing subsidiary;
(f) the sham
companies and the applicant company’s subsidiaries entered into transactions
with lowered prices for the purpose of reducing the taxable base of their
operations;
(g) all revenues
perceived by the sham companies were thereafter unilaterally transferred to the
applicant company;
(h) statements by
the owners and directors of the trading entities, who confessed that they had
signed documents that they had been required to sign by the officials of the
applicant company, and had never conducted any independent activity on behalf
of their companies, were true;
(i) and, lastly,
that the sham companies received tax benefits unlawfully.
16. Having regard to all this, the
Ministry decided that the activities of the sham companies served the purpose
of screening the real business activity of the applicant company, that the
transactions of these companies were sham and that it had been the applicant
company, and not the sham entities, which conducted the transactions and became
the owner of the traded goods. In view of the above, and also since neither the
sham entities nor the applicant company qualified for the tax exemptions in
question, the report concluded that the company, having acted
in bad faith, had failed properly to reflect these transactions in its tax
declarations, thus avoiding the payment of VAT, motorway tax, corporate property tax, tax for
improvement of the housing stock and socio-cultural facilities, tax in respect
of sales of fuels and lubricants and profit tax.
17. The report also noted specifically
that the tax authorities had requested the applicant company to facilitate
reciprocal tax inspections of several of its important subsidiaries. Five of
the eleven subsidiary companies refused to comply, four failed to answer, whilst
two entities filed incomplete documents. It also specified that during the
on-site inspection the applicant company failed to provide the documents
requested by the Ministry concerning the transportation of oil.
18. The report referred, inter
alia, to Articles 7 (3), 38, 39 (1) and 41 of the Tax Code, section 3 of
Law no. 1992-1 of the Russian Federation (RF) of 6 December 1991 “On
Value-Added Tax”, sections 4 and 5 (2) of RF Law no. 1759-1 of 18 October 1991
“On motorway funds in the Russian Federation”, section 21 (“Ch”) of RF Law no.
2118-1 of 27 December 1991 “On the basics of the tax system”, Article 209 (1-2)
of the Civil Code, section 2 of RF Law no. 2030-1 of 13 December 1991 “On
corporate property tax”, section 2 (1-2) of RF Law no. 2116-1 of 27 December
1991 “On corporate profit tax”, Decision no. 138-O of the Constitutional Court
of Russia of 25 July 2001 and Article 56 of the Tax Code.
19. On 12 January 2004 the applicant
company filed its detailed thirty-page objections to the report. The company
admitted that for a very short period of time it had partly owned three out of
the twenty-two organisations mentioned in the report, but denied its
involvement in the ownership and management of the remaining nineteen
companies. They maintained this position about their lack of involvement in the
companies in question throughout the proceedings.
20. During a meeting between the
representatives of the Ministry and the company on 27 January 2004, the
applicant company’s counsel were given an opportunity to state orally their
arguments against the report.
21. Having considered the company’s
objections, on 14 April 2004 the Ministry adopted a decision establishing that
the applicant company had a large outstanding tax liability for the year 2000.
As the applicant company had failed properly to declare the above-mentioned
operations in its tax declarations and to pay the corresponding taxes, in
accordance with Article 122 (3) of the Tax Code the Ministry found
that the company had underreported its tax liability for 2000 and ordered it to
pay 47,989,241,953 Russian roubles (“RUB”) (approximately 1,394,748,234 euros,
(“EUR”)) in tax arrears, RUB 32,190,599,501.40 (approximately EUR
935,580,142) in default interest and RUB 19,195,696,780 as a 40%
penalty (approximately EUR 557,899,293), totalling RUB 99,375,538,234.40
(approximately EUR 2,888,227,669). The arguments contained in the decision
were identical to those of the report of 29 December 2003. In addition,
the decision responded in detail to each of the counter-arguments advanced by
the company in its objections of 12 January 2004.
22. The decision was served on the applicant
company on 15 April 2004.
23. The company was given until 16
April 2004 to pay voluntarily the amounts due.
24. The applicant company alleged that
it had requested the Ministry to clarify the report of 29 December 2003 and
that the Ministry had failed to respond to this request.
(c) Institution
of proceedings by the Ministry
25. Under a rule which made it
unnecessary to wait until the end of the grace period if there was evidence
that the dispute between the tax authority and the taxpayer was insoluble, the
Ministry did not wait until 16 April 2004.
26. On 14 April 2004 it applied to the
27. By decision of 15 April 2004 the City
Court initiated proceedings and prohibited the applicant company from disposing
of some of its assets pending the outcome of litigation. The injunction did not
concern goods produced by the company and related cash transactions.
28. By the same decision the court
fixed the date of the preliminary hearing for 7 May 2004 and invited the applicant
company to respond to the Ministry’s claims.
29. On 23 April 2004 the applicant
company filed a motion in which it argued that the City Court had no
territorial jurisdiction over the company’s legal headquarters and requested
that the case be referred to a court in Nefteyugansk, where it was registered.
30. On 6 May 2004 the Ministry filed a
motion inviting the court to call the applicant company’s managing subsidiary
OOO “YUKOS” Moskva as a co-defendant in the case.
31. At the hearing the City Court
examined and dismissed the applicant company’s motion of 23 April 2004. Having
regard to the fact that the applicant company was operated by its own subsidiary
OOO “YUKOS” Moskva, registered and located in Moscow, the court established
that the applicant company’s real headquarters were in Moscow and not in
Nefteyugansk. In view of the above, the court concluded that it had
jurisdiction to deal with the case.
32. On 17 May 2004 the applicant
company appealed against this decision. The appeal was examined and dismissed
by the Appeals Division of the
33. The City Court also examined and
granted the Ministry’s motion of 6 May 2004. The court ordered OOO “YUKOS”
Moskva to join the proceedings as a co-defendant and adjourned the hearing
until 14 May 2004.
34. At the hearing of 7 May 2004 the
applicant company lodged with the City Court a separate action against the tax
assessment of 14 April 2004, seeking to have the assessment decision declared
unlawful. The applicant company’s brief came to 42 pages and had 22 supporting documents
in annex. This action was examined separately and dismissed as unsubstantiated
by the City Court on 27 August 2004. The judgment of 27 August 2004 was upheld
on appeal on 23 November 2004. On 30 December 2005 the Circuit Court upheld the
decisions of the lower courts.
35. In the meantime the tax assessment
case continued. On 14 May 2004 the City Court rejected the applicant company’s
request to adjourn the proceedings, having found that the applicant company’s
counterclaim did not require such adjournment of the proceedings concerning the
Ministry’s action.
36. OOO “YUKOS” Moskva also requested
that the hearing be adjourned as, it claimed, it was not ready to participate
in the proceedings.
37. This request was rejected by the
court as unfounded on the same date.
38. At the hearing the respondent
companies also requested the City Court to vary their procedural status to that
of interested parties.
39. The court rejected this request
and, on the applicant company’s motion of 15 April 2004, ordered the Ministry
to disclose its evidence. The company’s motion contained a lengthy list of
specific documents which, it alleged, should have been in the possession of the
Ministry in support of its tax claims.
40. The court then decided that the
merits of the case would be heard on 21 May 2004.
41. On 17 May 2004 the Ministry invited
the applicant company to examine the evidence in the case file at its premises.
Two company lawyers went to the Ministry on 18 May and four lawyers went on 19
May 2004.
42. According to the applicant company,
the supporting material underlying the case was first provided to the company
on 17 May 2004, when the Ministry filed approximately 24,000 pages of
documents. On 18 May 2004 the Ministry allegedly disclosed approximately a
further 45,000 pages, and a further 2,000 pages on the eve of the hearing
before the City Court, that is, on 20 May 2004.
43. Relying on a record dated 18 May
2004[1], drawn
up and signed by S. Pepelyaev and E. Aleynikova (Ministry
representative A. Bondarev allegedly refused to sign it), the applicant company
submitted that the documents in question had been presented in an
indiscriminate fashion, in unpaginated and unsorted piles placed in nineteen
plastic crates (ten of which contained six thousand pages each, with nine
others containing some four thousand pages each). All of the documents were
allegedly crammed in a room measuring three to four square metres, with two
chairs and a desk. No toilet facilities or means of refreshment were provided.
44. According to the Government, the
documents in question (42,269 pages - and not 45,000 pages as claimed by
the applicant- filed on 18 May 2004, and a further 1,292 - and not 2,000
pages as claimed by the applicant company, filed on 20 May 2004) were
well-known to the applicant company; moreover, it had already possessed these
accounting and legal documents prior to the beginning of the proceedings. The
documents allegedly reflected the relations between the applicant company and
its network of sham entities, and the entirety of the management and accounting
activities of these entities had been conducted by the applicant company from
the premises of its executive body OOO Yukos-Moskva, located in
45. The Government also submitted that
the applicant company’s lawyers could have studied the evidence both in court
and at the Ministry’s premises throughout May, June and July 2004.
46. The hearings on the merits of the case
commenced on 21 May and lasted until 26 May 2004. It appears that the applicant
company requested the court repeatedly to adjourn the proceedings, relying,
among other things, on the lack of sufficient time to study the case file.
47. The Government submitted that the
first day of the hearings, 21 May 2004, was devoted to hearing and
resolving various motions brought by the applicant company and OOO
Yukos-Moskva. On 24 May 2004, after hearing further motions by OOO Yukos-Moskva,
the court proceeded to the evidence phase of the trial. The Tax Ministry then
explained the evidence that it had submitted to the court. During this phase of
the trial, which continued on 25 May 2004, the applicant company’s
representatives were able to ask questions, and the defendants made various
motions. According to the Government, where the court found that the applicant
company had not had an opportunity to review a particular document that the
Ministry wished to refer to, the court refused to allow the document to be
entered in the record. On 26 May 2004 the applicant company was afforded an
opportunity to explain its evidence and to submit additional evidence. The
applicant company chose instead to address questions to the Ministry. The
applicant company concluded the first-instance hearing of the case with over
three hours of pleadings, whilst the Ministry limited its pleadings to brief
references to its own tax inspection report, the decision dated 14 April 2004
and the statement of claim.
48. On 26 May 2004, at the end of the
hearings, the City Court gave its judgment in which, for the most part, it
reached the same findings and came to the same conclusions as in the Ministry’s
decision of 14 April 2004. Having confirmed the factual findings of the
decision of 14 April 2004 in respect of the relations and transactions between
the sham companies and the applicant company with reference to sundry pieces of
evidence, including the statements by the nominal owners of the trading
companies, acknowledging to the true nature of their relations with the
applicant company, the court then reasoned as follows:
“... Under section 3 of RF Law no. 1992-1 of 6
December 1991 ‘On value-added tax’, part 2 of section 5 and section 4 of RF Law
no. 1759-1 of 18 October 1991 ‘On motorway funds in the Russian Federation’,
subpart ‘ch’ of section 21 of RF Law no. 2118-1 of 27 December 1991
‘On the basics of the tax system’, the sale of goods (works and services) gives
rise to an obligation to pay VAT, motorway users’ tax, tax on the sale of oil
and oil products and tax for the maintenance of the housing stock and
socio-cultural facilities.
Under part 1 of Article 38 of the Tax Code, objects of
taxation may consist of the sale of goods (works and services), assets, profit,
value of sold goods (works and services) or other objects having value,
quantity or physical characteristics on the presence of which the tax
legislation bases the obligation to pay tax.
Under part 1 of Article 39 of the Tax Code, sales are
defined as the transfer of property rights in respect of goods. Under subpart 1
and 2 of Article 209 of the Civil Code (taking into account Article 11 of the
Tax Code) the owner of goods is the person who has the rights of ownership, use
and disposal of his property, that is, the person who is entitled to carry out
at his own discretion in respect of this property any actions which are not
against the law and other legal acts and do not breach the rights and protected
interests of other persons ...
The court established that the owner of the oil sold
under contracts concluded with organisations registered in low-tax territories
had been OAO Yukos. The respondents’ arguments about the unlawfulness of the
use of the notion of de facto owner (фактический собственник) on the basis that, according to Article 10 (3) and
Article 8 (1) part 3 of the Civil Code ... there existed a presumption of good
faith on the part of parties involved in civil-law transactions and that
therefore the persons indicated as owners in the respective contracts should be
regarded as the owners, are baseless, because the above-mentioned organisations
never acquired any rights of ownership, use and disposal in respect of oil and
oil products (поскольку прав владения, пользования и распоряжения нефтью и нефтепродуктами у данных организаций не возникало).
OAO NK Yukos was therefore under an obligation to pay
[the taxes], and this obligation has not been complied with in good time.
Article 41 of the Tax Code establishes that profit is an
economic gain in monetary form or in kind, which is taken into account if it is
possible to evaluate it and in so far as it can be assessed. Under subparts 1
and 2 of section 2 of RF Law no. 2116-1 of 27 December 1991 ‘On profit tax
of enterprises and organisations’ which was then in force, the object of
taxation is the gross profit of the enterprise, decreased (or increased) in
accordance with the provisions of the present section. The gross profit is the
total of revenues (receipts) from the sale of products (works and services),
main assets (including plots of land), other property belonging to the
enterprise and the profit derived from operations other than sales, less the
sum of expenses in respect of these operations. Since it follows from the case file
that the economic profit from the sale of oil and oil products was perceived by
OAO NK Yukos, it was incumbent on [the applicant company] to comply with the
obligation to pay profit tax.
Section 2 of RF Law no. 2030-1 of 13 December 1991 ‘On
corporate property tax’ taxes the main assets, non-material assets, reserves
and receipts which are indicated on the taxpayer’s balance sheet. It follows
that the obligation to pay property tax was incumbent on the person who was
legally responsible for reflecting the main assets, non-material assets,
reserves and receipts on its balance sheet. Since it follows from the materials
of the case that OAO NK Yukos was under such an obligation, this taxpayer was
also under an obligation to pay property tax.
The court does not accept the respondent’s arguments
that the tax authorities lacked the power to levy taxes from OAO NK Yukos in
respect of the sums ... perceived by other organisations. The power of the tax
authorities to bring proceedings in courts to ensure the payment of taxes to
the budget in cases of bad-faith taxpayers is confirmed by decision no. 138-O
of the Constitutional Court of the
The court has also established that the use of tax
benefits by organisations which were dependent on OAO NK Yukos and participated
in the tax-evasion scheme set up by that company was unlawful.
Pursuant to Article 56 of the Tax Code, tax benefits
are recognised as preferences provided for in the tax legislation for certain
groups of taxpayers in comparison with other taxpayers, including the possibility
of not paying a tax or of paying it at a lower rate.
The court believes that tax payers must use their
right to such benefits in good faith.
Meanwhile, it follows from the materials of the case
that the taxpayers [concerned] used their right in bad faith.
The entities registered on the territory of the
Republic of Mordoviya (OOO Yu-Mordoviya ..., ZAO Yukos-M ..., OAO Alta-Treyd
..., OOO Ratmir ..., OOO Mars XXII ...) applied benefits governed by Law of the
Republic of Mordoviya no. 9-Z of 9 March 1999 ‘On conditions for the
efficient use of the socio-economic potential of the Republic of Mordoviya’,
which sets out a special taxation procedure for entities, for the purpose of
creating beneficial conditions for attracting capital to the territory of the Republic
of Mordoviya, developing the securities market and creating additional jobs.
Under section 2 of that law, this special taxation procedure applies in respect
of entities (including foreign entities operating through permanent
representative offices established in the territory of the Republic of
Mordoviya), established after the entry into force of the law (with the
exception of entities conducting leasing activities, banks and other credit
institutions) and whose business meets one of the following conditions: export
operations, with the resulting quarterly earnings totalling at least 15% of the
whole of the entity’s earnings; wholesale trading of combustibles and
lubricants and other kinds of hydrocarbons with the resulting quarterly earning
totalling at least 70% of the whole of the entity’s earnings; and other
conditions enumerated in that law. Pursuant to sections 3 and 4 of the Law, the
Government of the Republic of Mordoviya passed resolutions on the application
of the special taxation procedure in respect of the mentioned entities and,
consequently, on the application of the following tax rates: at the rate of 0%
in respect of profit tax in so far as it is credited to the republican and
local budgets of the Republic of Mordoviya; at the rate of 0% on motorway
users’ tax in so far as it is credited to the Territorial Road Fund of the
Republic of Mordoviya; and at the rate of 0% on corporate property tax.
Moreover, the above-mentioned entities were exempted by local government
resolutions from payment of tax for the maintenance of the housing stock and
socio-cultural facilities.
However, the special taxation procedure is provided
for [by this law] for the purposes of creating favourable conditions in order
to attract capital to the territory of the
The entity registered on the territory of the Republic
of Kalmykiya (OOO Sibirskaya Transportnaya Kompaniya ...) did not pay profit
tax, property tax, motorway users’ tax, tax on the acquisition of vehicles and
other taxes, under Law no. 12‑P-3 of the Republic of Kalmykiya of 12
March 1999 ‘On tax benefits to enterprises investing in the economy of the
Republic of Kalmykiya’, which establishes advantages in respect of taxes and
duties for the ... taxpayers that invest in the economy of the Republic of
Kalmykiya and are registered as such enterprises with the Ministry of
Investment Policy of the Republic of Kalmykiya. Moreover, the entity in
question was exempt from the payment of local taxes and ... of profit tax to
the consolidated budget.
At the same time, it follows from the presumption of
good faith on the part of taxpayers (Decisions no. 138-O of the Constitutional
Court of 25 July 2001, no. 4-O of 10 January 2002 and no. 108-O of 14 May
2002, Rulings of the Presidium of the Supreme Commercial Court no. 9408/00
dated 18 September 2001, no. 7374/01 of 18 June 2002, no. 6294/01 of 5
November 2002 and no. 11259/02 of 17 December 2002 and letter no. С5-5/уп-342 of the Deputy President of the Supreme Commercial Court of 17 April
2002) that, for the use of tax advantages to become lawful, the amount of
advantages provided and the sum of investments made by the entity should be
commensurate. Since the amounts of benefits declared for tax purposes by the
above-mentioned entities and the sums of investment made are obviously not
commensurate, application of the advantages is unlawful. The application of tax
advantages by the given entity is not aimed at improving the economy of the
The entity registered in the closed administrative
territorial formation (‘ZATO’) town of Sarov in the Nizhniy Novgorod Region
(OOO Yuksar ...) concluded a tax agreement on the provision of tax concessions
with the Sarov municipal administration. The granting of additional tax
advantages on the territory of the Sarov ZATO (Federal Nuclear Centre) in 2000
was regulated by the norms of Articles 21 and 56 of the Tax Code, section 58 of
Law no. 227-FZ of 31 December 1999 ‘On the federal budget for the year 2000’,
section 5 of Law no. 3297-1 ‘On closed administrative territorial formations’
of 14 July 1992, Item 2 of Paragraph 30 of Decree no. 222 of the Russian
Government of 13 March 2000 ‘On measures for implementation of the Federal Law
‘On the Federal Budget for 2000’ and Regulations ‘On the investment zone of the
town of Sarov’, approved by a Resolution of the Sarov Duma on 30 December 1999.
According to the tax agreement, the Sarov administration confers advantages in
respect of taxes payable into the Sarov budget to the entity in question in the
form of a reduction in the share of taxes and other compulsory payments to the
budget, up to 25% of the sums due in VAT, property tax, tax on the sale of fuel
and lubricants, motorway users’ tax, tax on vehicle owners, tax on the
acquisition of vehicles, profit tax, tax on operations with securities and
excise duties; in exchange, the entity undertakes to participate in investment
projects (programmes) implemented in the Sarov investment zone or with its
participation, aimed at raising additional budget receipts and solving the problems
of Sarov’s socio-economic development by transferring quarterly at least 1% of
the sum of the tax advantages.
At the same time, according to Paragraph 1 of section
5 of the Federal Law no. 3297-1 ‘On closed administrative territorial
formations’ of 17 July 1992, additional benefits on taxes and duties are
granted by the appropriate local government authorities to entities registered
as taxpayers with the authorities of the closed administrative territorial
formations in compliance with the above-mentioned law. Entities possessing at
least 90% of their capital assets and conducting at least 70% of their
activities on the territories of the closed administrative territorial
formations (including the requirement that at least 70% of the average number of
employees on the payroll must be made up of persons who permanently reside on
the territory of the formation in question and that at least 70% of the labour
remuneration fund must be paid to employees who permanently reside on the
territory of the formation in question) enjoy the right to obtain the benefits
in question. Given that OOO Yuksar did not actually carry out any activity on
the
Thus, the use of tax advantages by the given entity is
not aimed at improving the economy of the Sarov ZATO but pursued the aimed of
tax evasion by OAO NK Yukos in respect of its obligation to pay taxes on
production and refining operations and the sale of oil and oil products and is,
consequently, unlawful.
Entities registered in the Trekhgornyy ZATO in the
Chelyabinsk Region (OOO Kverkus ..., OOO Muskron ..., OOO Nortex ..., OOO Greis
... and OOO Virtus ...) concluded tax agreements with the administration of the
town of Trekhgornyy, according to which entities were granted advantages in
respect of profit tax, tax for the maintenance of the housing stock and
socio-cultural facilities, property tax, land tax, tax on the sale of fuel and
lubricants, motorway users’ tax, tax on vehicle users, and tax on the
acquisition of vehicles, provided that the entities remitted the sum of 5% of
the total amount of tax advantages conferred, for implementation of the town’s
socio-economic programmes, to the Trekhgornyy administration... Reasoning from
the contents and meaning of the tax agreements, it follows that their purpose
was implementation of the particularly important socio-economic task of
developing the educational, medical and housing spheres in the Trekhgornyy
ZATO. At the same time, the sums which were transferred to the budget by the
taxpayers in question were many times lower than the sums of the declared tax
advantages (the sum of investments is around 0.006% of the sum of the
advantages for each taxpayer). Thus, the investments made by the taxpayers did
not influence the development of Trekhgornyy’s economy. On the contrary, since
the above-mentioned organisations did not in fact carry out any activities,
were never located on the territory of Trekhgornyy, had no assets and none of
the production facilities necessary to buy and store oil on the territory of
Trekhgornyy, the application of tax advantages by the above-mentioned
organisations is contrary to part 1 of section 5 of RF Law no. 3297-1 of 17
July 1992 ‘On closed administrative territorial formations’.
The organisations registered in the Lesnoy ZATO in the
Sverdlovsk Region (OOO Mitra ..., OOO Vald-oyl ..., OOO Bizness-oyl ...)
concluded tax agreements on the granting of a targeted tax concession under
which organisations were granted the concession in respect of profit tax, land
tax, tax on the sales of fuel and lubricants, motorway users’ tax, vehicle
users’ tax, tax on the acquisition of vehicles, tax for the maintenance of the
housing stock and socio-cultural facilities and property tax, whilst the
organisations [in question] were under an obligation to transfer to ... the
Lesnoy municipal administration sums amounting to 5% of the sums of the granted
tax concessions, but no less than 6,000 roubles quarterly, for implementation
of the town’s socio-economic programmes. [However], the amounts received from
the taxpayers are many times lower than the totals of the declared tax
advantages. Accordingly, the investments made by the taxpayers did not
influence the development of the economy of the town of Lesnoy because the
above-mentioned organisations never carried out any activities on the territory
of Lesnoy, were never in fact located on the territory of Lesnoy and had no
assets and none of the production facilities required to sell and store oil on
the territory of Lesnoy, [and thus] the application of the tax advantages in
respect of the above-mentioned organisations is contrary to part 1 of section 5
of RF Law no. 3297-1 of 17 July 1992 ‘On closed administrative territorial
formations’.
The organisation registered in the Evenk Autonomous
District (OOO Petroleum-Treiding) without in fact carrying out any activity on
the territory of the district in question and without in fact being located on
the territory of the Evenk Autonomous District, abused its right granted by Law
no. 108 of the Evenk Autonomous District of 24 September 1998 ‘On specific
features of the tax system in the Evenk Autonomous District’. The mentioned
organisation was registered in the given district solely for the purpose of
acquiring the right to the tax concession that could be granted in the Evenk
Autonomous District. The use of the tax benefits by the organisation in
question is not aimed at strengthening of economy of the Evenk Autonomous
District, but is instead aimed at tax evasion by OAO NK Yukos in respect of
extraction and processing transactions and the sale of oil and oil products and
is thus unlawful.
Thus, the use of tax concessions by the
above-mentioned organisations is not aimed at strengthening the economy of the
regions in which they were registered but is aimed at evading the taxes due in
respect of the operations of extraction and processing transactions and the
sale of oil and oil products by OAO NK Yukos and is thus unlawful. ...”
49. The first-instance judgment also
responded to the applicant company’s submissions. As regards the argument that
the Ministry’s calculations were erroneous in that they led to double taxation
and the failure to take account of the right to a refund of VAT for export
operations, the court noted that, contrary to the applicant company’s
allegations, both the revenues and expenses of the sham entities had been taken
into account by the Ministry so as to avoid double taxation. In addition, under
Law no. 1992-1 of 6 December 1991 “On value-added tax”, in order to claim
a refund of the VAT paid during export operations a taxpayer had to justify the
claim in accordance with a special procedure and the applicant company had
failed to apply for a refund either in 2000 or at any later date. As to the
argument that the Ministry’s claim was time-barred, the court refuted it with
reference to Article 113 of the Tax Code and Decision no. 138-O of
the Constitutional Court of 21 July 2001. The court held that the rules on
limitation periods were inapplicable in the case at issue as the applicant
company had acted in bad faith. In response to the company’s argument that the
interdependency within the meaning of Article 20 of the Tax Code was only
relevant for the purposes of price correction under Article 40 of the Code, the
court observed that the interdependency of the sham companies and the applicant
company was one of the circumstances on the basis of which the tax authorities
had proved that the tax offence had been committed by the applicant company in
bad faith.
50. Accordingly, by the judgment of 26
May 2004 the court upheld the decision of 14 April 2004, albeit slightly
reducing the payable amounts by reference to the Ministry’s failure to prove
the relations of the applicant company with one of the entities mentioned in
the decision of 14 April 2004. The court ordered the applicant company to pay
RUB 47,989,073,311 (approximately EUR 1,375,080,541) in taxes, RUB
32,190,430,314 (approximately EUR 922,385,687) in default interest and RUB 19,195,606,923
(approximately EUR 550,031,575) in penalties, totalling RUB 99,375,110,548
(approximately EUR 2,847,497,802) and ordered its managing subsidiary OOO
“YUKOS” Moskva to comply with this decision. The judgment could be appealed
against by the parties within a thirty-day time-limit.
51. At the hearings of 21 to 26 May
2004 the applicant company and its managing subsidiary were represented by
eight counsel. The reasoned copy of the judgment of 26 May 2004 was produced
and became available to the parties on 28 May 2004.
52. On 1 June 2004 OOO “YUKOS” Moskva
filed an appeal against the judgment of 26 May 2004.
53. The Ministry appealed against the judgment
on 2 June 2004.
54. On 4 June 2004 the
55. On 17 June 2004 the applicant
company filed its appeal against the judgment of 26 May 2004. The brief came to
115 pages and contained 41 documents in annex. The company complained, in
particular, that the time for filing an appeal had been unlawfully abridged, in
breach of its rights to fair and adversarial proceedings, that the
first-instance judgment was ungrounded and unlawful, that the evidence in the
case was unlawful, that the first-instance court had erred in interpretation
and application of the domestic law, in that it had lacked legal authority to “assign”
the tax liabilities of one company to another, and that the court’s
interpretation of the legislation on tax concessions had been erroneous. The
company also argued that the lower court had wrongly assessed the evidence in
the case and had come to erroneous factual conclusions in respect of the
relationships between the applicant company and the sham companies, that in any
event some of the operations of the sham companies had been unrelated to the
alleged tax evasion and that the respective sums should not be “assigned” to
the applicant company, and also that the case should have been tried in the
town of Nefteyugansk, where the company was registered.
56. The Government submitted that the
applicant company attempted to delay the examination of the case by dispatching
the appeal brief to an erroneous address. According to the applicant, the above
allegation was unsubstantiated.
57. The appeal hearing in the case
lasted from 18 to 29 June 2004.
58. At the beginning of the hearing on
18 June 2004 the applicant company requested the
59. The court refused this request as
unfounded.
60. At the hearings of 21 and 28 June
2004 the applicant company filed four supplements to its appeal. The company and
its managing subsidiary were represented by ten counsel.
61. Under Article 268 of the Code of
Commercial Court Procedure the court fully re-examined the case presented by
the Ministry rather than simply reviewing the first-instance judgment.
62. At the end of the hearing of 29
June 2004 the court delivered its judgment, in which it reached largely similar
findings and came to the same conclusions as the first-instance judgment. The
court dismissed the company’s appeals as unfounded, but decided to alter the
first-instance judgment in part. In particular, it declared the Ministry’s
claims in respect of VAT partly unfounded, reduced the amount of the VAT
arrears by RUB 22,939,931 (approximately EUR 649,336) and quashed the
corresponding penalty of RUB 10,334,226 (approximately EUR 292,520).
63. The court judgment, in its relevant
parts, read as follows:
“... The parties declared under part 5 of Article 268
of the Code of Commercial Courts Procedure that there was a need to verify the
lawfulness and grounds of the first-instance judgment and to hold a fresh
hearing of the case in full.
The
The
[The court went on to review and confirm all factual
findings made by the Ministry and the first-instance court in respect of the
tax-evasion scheme set up by the applicant company.]
... Bearing in mind the above-mentioned circumstances,
the
...
The [applicant company’s] ownership of the oil is
confirmed by the interdependence of the contracting parties, by the control
that [the applicant company] had over them, by the registration of the
contracting parties on territories with a low-tax regime, by the lack of
activities by these entities at their place of registration, by the fact that
the accounting operations for these entities was carried out by OOO
Yukos-Invest or OOO Yukos-FBC, companies officially dependant on [the applicant
company], by the fact that the accounting for these entities was filed from the
addresses of [the applicant company] and OOO Yukos-Moskva, by the fact that
their bank accounts were opened in the same banks owned by [the applicant
company], by the presence and character of commercial relations between [the
applicant company] and the dependent entities, and by the use of promissory
notes and mutual offsetting between them.
...
Under the legislation then in force, such as section 3
of RF Law no. 1992-1 of 6 December 1991 ‘On value-added tax’, part 2 of
Section 5 and section 4 of RF Law no. 1759-1 of 18 October 1991 ‘On motorway
funds in the Russian Federation’, subpart ‘ch’ of section 21 of RF Law no.
2118-1 of 27 December 1991 ‘On the basics of the tax system’, the sale of
goods (works and services) gives rise to an obligation to pay VAT, motorway
users’ tax, tax on the sale of oil and oil products and the tax for the
maintenance of the housing stock and socio-cultural facilities.
Under part 1 of Article 39 of the Tax Code, sales are
defined as the transfer of property rights in respect of goods. Under subpart 1
and 2 of Article 209 of the Civil Code (taking into account Article 11 of the
Tax Code) the owner of goods is the person who has the rights of ownership, use
and disposal of his property, that is, the person who is entitled to carry out
at his own discretion in respect of this property any actions which are not
against the law and other legal acts and do not breach the rights and protected
interests of other persons...
It follows that the person who in fact has the rights
of ownership, use and disposal of the property and who, in view of these
rights, exercises in reality and at his discretion in respect of his property
any actions, including transfers of property to other persons ... is the owner
of this property.
Therefore, OAO NK Yukos, being the de facto owner of the oil, was under an
obligation to pay [the taxes], which has not been complied with in good time.
As was previously established, Article 41 of the Tax
Code sets out that profit is an economic gain in monetary form or in kind,
which is taken into account if it is possible to evaluate it and in so far as
it can be assessed, and determined in accordance with the chapters ‘Taxes in
respect of the profits of natural persons’, ‘Taxes in respect of the profits of
organisations’, and ‘Taxes in respect of the capital profits’ of the Tax Code
of the Russian Federation. Under subparts 1 and 2 of section 2 of RF Law
no. 2116-1 of 27 December 1991 ‘On profit tax of enterprises and organisations’
which was then in force, the object of taxation is the gross profit of the
enterprise, decreased (or increased) in accordance with the provisions of the
present section. The gross profit is the total of revenues (receipts) from the
sale of products (works and services), main assets (including land parcels),
other property of the enterprise and the profit derived from operations other
than sales, less the sum of expenses in respect of these operations. The court
established that the economic profit from the sale of oil and oil products was
perceived by OAO NK Yukos, [and] it was incumbent on [the applicant company] to
comply with the obligation to pay profit tax.
Section 2 of RF Law no. 2030-1 of 13 December 1991 ‘On
corporate property tax’ taxes the main assets, non-material assets, reserves
and receipts which are indicated on the taxpayer’s balance sheet. It follows
that the obligation to pay property tax was incumbent on the person who was
legally responsible for reflecting the main assets, non-material assets,
reserves and receipts on its balance sheet. Since it follows from the materials
of the on-site tax inspection that OAO NK Yukos was under such an obligation,
this taxpayer was also under an obligation to pay property tax.
The Constitutional Court of the RF in its decision of
25 July 2001 no. 138-0 stated that it followed from the meaning of the norm
contained in part 7 of Article 3 of the Tax Code of the RF that there is a
presumption of good faith on the part of taxpayers. In order to refute this and
establish the taxpayer’s bad faith, the tax authorities have the right – in
order to strike a balance between public and private interests – to carry out
necessary checks and bring subsequent claims in commercial courts in order to
guarantee the payment of taxes to the budget.
In view of the above, the tax authorities ... have the
right to carry out checks with a view to establishing the de facto owner of sold property and the de facto recipient of the economic profit, and also with a view to
establishing [the owner’s] bad faith as expressed in use of the tax-evasion
scheme. At the same time, the tax authorities establish the de facto owner with regard to the actual
relations between the parties to the transaction, irrespective of whether the
persons were declared as owners of the property in the documents submitted
during the tax inspections.
The circumstances indicating that OAO NK Yukos had in
fact the rights of ownership, use and disposal of its oil and oil products and,
at its discretion, carried out in this connection any actions, including the
sale, transfer for processing, etc., through specially registered organisations
dependant on OAO NK Yukos is confirmed by the materials of the case.
...
In view of the above, the court does not accept the
respondent’s arguments about the unlawfulness and the lack of factual basis of
the decision to levy additional taxes from OAO NK Yukos as the de facto owner of the oil and oil products.
The respondent’s argument that OAO NK Yukos had not
perceived any economic profit from the application of benefits by the entities
mentioned in the decision of the Ministry contradicts the materials of the
case. The court had established that OAO NK Yukos received economic profit in
the form of unilateral transfers of cash. OAO NK Yukos set up the Fund for
Financial Support of the Production Development of OAO NK Yukos [to this end].
...
The argument of OAO NK Yukos that the Ministry is
levying taxes in respect of transactions “within the same owner” is
unsupported, since the calculations of additional taxes (except for the
property tax in respect of which [this is inapplicable]) also take into account
the expenses connected with the acquisition of the oil and oil products.
The court does not accept the respondent’s arguments
that the tax authorities lacked the power to levy taxes from OAO NK Yukos in
respect of the sums ... perceived by other organisations. The power of the tax
authorities to bring proceedings in courts to ensure the payment of taxes to
the budget in cases of bad-faith taxpayers is confirmed by decision no. 138-O
of the Constitutional Court of the
The circumstances of the ... acquisition and sale of
the oil and oil products, taken in their entirety, as established by the
Since OAO NK Yukos intentionally committed actions
aimed at tax evasion, and its officers were aware of the unlawful character of
such actions, wished or knowingly accepted the possibility of harmful
consequences due to such actions, OAO NK Yukos must be held liable under part 3
of Article 122 of the RF Tax Code for the non-payment or incomplete payment of
taxes due to the lowering of the taxable base or incorrect calculation of the
tax or other unlawful actions (inactions) committed intentionally, in the form
of a fine equivalent to 40% of the unpaid taxes.
...
Having re-examined the case and verified the
lawfulness and grounds of the first-instance judgment in full, having examined
the evidence and having heard the arguments of the parties, the Appeal Court
has come to the conclusion that the decision of the Ministry dated 14 April
2004 ... is in compliance with the Tax Code as well as with Federal laws and
other laws on taxes...
The claims for payment of taxes, interest surcharges
and fines made in the decision of the Ministry of 14 April 2004 ... are
grounded, lawful and confirmed by the primary documents of the materials of the
inspection submitted in justification to the court. ...”
64. The appeal judgment also responded
to the applicant company’s other arguments. As regards the alleged breaches of
procedure and the lack of time for the preparation of the defence at first
instance, the court noted that it had examined this allegation and that there
had been no violation of procedure at first instance and that, in any event,
the applicant company had had ample opportunities to study the evidence relied
on by the Ministry both at the Ministry’s premises and in court. As regards the
argument that the evidence used by the Ministry was inadmissible, the court
noted that the materials of the case had been collected in full compliance with
the requirements of the domestic legislation. The court also agreed with the
first-instance court that the three-year statutory time-limit had been inapplicable
in the applicant company’s case since the company had been acting in bad faith.
65. The first-instance judgment, as
upheld on appeal, came into force on 29 June 2004.
66. The applicant company had two months
from the date of the delivery of the appeal judgment to challenge it in
third-instance cassation proceedings (кассация).
67. On 7 July 2004 the applicant
company filed a cassation appeal against the judgments of 26 May and of 29 June
2004 with the Federal Commercial Court of the Moscow Circuit (“the Circuit
Court”). The applicant company’s brief came to 77 pages and had 6 documents in
annex. The arguments in the brief were largely similar to those raised by the
applicant company on appeal, namely that the judgment was unlawful and
unfounded, that the entities mentioned in the report ought to have taken part
in the proceedings, that the trial court had had insufficient evidence to
conclude that the applicant company and other entities were interrelated, that
the evidence used by the trial court was unlawful, that the trial proceedings
had not been adversarial and that the principle of equality of arms had been
breached. In addition, the company alleged that it had had insufficient time to
study the evidence and had been unable to contest the evidence in the case,
that the Ministry had unlawfully applied to a court before the applicant company
had had an opportunity to comply voluntarily with the decision of 14 April
2004, that the entities mentioned in the report had in fact been eligible for
the tax exemptions, that the rules governing tax exemption had been wrongly
interpreted, that the Ministry’s claims had been time-barred, that the company
had had insufficient time for the preparation of the appeal, and that the case
ought to have been examined by a court in Nefteyugansk.
68. A copy of the reasoned version of
the appeal judgment of 29 June 2004 was attached to the brief.
69. It appears that on an unspecified
date the Ministry also challenged the judgments of 26 May and 29 June 2004.
70. On 17 September 2004 the Circuit
Court examined the cassation appeals and upheld in substance the judgments of
26 May and 29 June 2004.
71. In respect of the applicant
company’s allegations of unfairness in the appeal proceedings, the court noted
that both defendant companies had had ample opportunities to avail themselves
of their right to bring appeals within the statutory time-limit, as the appeal
decision was not taken until 29 June 2004, which was more than thirty
days after the date of delivery of the judgment of 26 May 2004. Furthermore,
the court observed that the evidence presented by the Ministry and examined by
the lower courts was lawful and admissible, and that it had been fully
available to the defendant companies before the commencement of the trial
hearings. The court also noted that on 14 May 2004 the City Court specifically
ordered the Ministry to disclose all the evidence in the case, that this order
had been complied with by the Ministry and that, despite the fact that the
evidence was voluminous, the applicant company had had sufficient time to
examine and challenge it repeatedly throughout the proceedings between May and
July 2004.
72. As regards the applicant company’s
complaint that the Ministry had brought proceedings before the expiry of the
time-limit for voluntary compliance with the decision of 14 April 2004, the
court noted that the Ministry and lower courts had acted in compliance with
Article 213 of the Code of Commercial Court Procedure, as there were
irreconcilable differences between the parties and, throughout the proceedings,
the applicant company had had insufficient funds to satisfy the Ministry’s
claims.
73. In respect of the applicant
company’s argument that the case should have been tried by a court in
Nefteyugansk, the court noted that the City Court had had jurisdiction over the
case under Article 54 of the Civil Code and decision no. 6/8 of the Plenary
Session of the Supreme Court and Supreme Commercial Court of 1 July 1996.
74. On the merits of the case, the
court noted that the lower courts had reached reasoned conclusions that the
applicant company was the effective owner of all goods traded by the sham
companies registered in low-tax areas, that the transactions of these entities
were in fact those of the applicant company, that neither the applicant company
nor the sham entities were eligible for the tax exemptions and that the
applicant company had perceived the entirety of the resulting profits. The
court upheld the lower courts’ conclusion that, acting in bad faith, the
applicant company had failed properly to declare its transactions for the year
2000 and to pay corresponding taxes, including VAT, profit tax, motorway users’
tax, property tax, the tax for the maintenance of the housing stock and
socio-cultural facilities and tax on the sale of fuel and lubricants.
75. The court noted some arithmetical
mistakes in the appeal judgment of 29 June 2004, increasing the penalty by
RUB 1,158,254.40 (approximately EUR 32,613) and reducing the default interest
by RUB 22,939,931 (approximately EUR 645,917) accordingly.
76. On an unspecified date the applicant
company lodged a complaint against the domestic courts’ decisions in its case
with the
77. By decision of 18 January 2005 the
78. Simultaneously to bringing the
cassation appeal, on 7 July 2004 the applicant company also challenged the
judgments of 26 May and 29 June 2004 by way of supervisory review
before the Supreme Commercial Court of Russia.
79. On 31 December 2004 the applicant
company’s case was accepted for examination by the
80. By a decision of 13 January 2005
the
81. On 19 April 2005 the Presidium of
the
82. By a decision of 14 July 2005 the
83. It appears that the legal issues
raised by G. A. Polyakova and the applicant company were different. G. A.
Polyakova was dissatisfied with the established court practice which required
the tax authorities, rather than the courts, to hold a taxpayer liable for a
tax offence within the three-year time-limit set out in Article 113 of the
Code. On the facts of her individual case, the decision of the tax authorities
was taken on time, whilst later the final decision by the courts was taken
outside the specified time-limit. As regards the applicant company, it raised
the same point which had been previously declared inadmissible by the
Constitutional Court in its decision dated 18 January 2005, namely the
refusal of the courts in its case to follow the established practice and to
declare the claims of the authorities time-barred, as they related to the year
2000 and were set out in the decision to hold the applicant liable for a tax
offence on 14 April 2004, that is, outside the three-year time-limit laid down
by Article 113 of the Code.
84. As a result of its examination, the
“... the provisions of Article 113 of the Tax Code of
the Russian Federation in their constitutional and legal sense and in the
present legal context do not exclude [the possibility] that, where the taxpayer
impedes tax supervision and the conduct of tax inspections, the court may
excuse the tax authorities’ failure to bring the proceedings in time ...”
“... In their constitutional and legal sense in the
context of the present legal regulation... [these provisions] mean that the
running of the statutory time-bar in respect of a person prosecuted for tax
offences stops on the date of the production of the tax audit report in which
the supported facts of the tax offences revealed during the inspection are
mentioned and in which there are reference to the relevant articles of the Tax
Code or - in cases where there was no need to produce such a report - from the
moment on which the respective decision of the tax authority, holding a
taxpayer liable for a tax offence, was taken. ...”
85. Three out of the nineteen judges
filed separate opinions in this case.
86. Judge V. G. Yaroslavtsev disagreed
with the majority, having noted that the
87. Judge G. A. Gadzhiev concurred with
the conclusions of the majority but would have preferred to quash, rather than
uphold, Article 113 of the Tax Code as unconstitutional and breaching the
principle of equality.
88. Judge A. L. Kononov dissented from
the majority ruling, having considered that the Constitutional Court clearly
had no competence to decide the matter and that indeed there had been no
constitutional issue to resolve as, among other things, there had been no prior
difficulties in application of Article 113 of the Tax Code and the contents of
this provision had been quite clear. He also criticised the “inexplicable” way
in which the
89. The case was then returned to the
Presidium of the
90. On 4 October 2005 the Presidium of
the
2. Enforcement
measures relating to the 2000 Tax Assessment
91. Simultaneously with the
determination of the case before the courts in respect of the applicant
company’s tax liability for the year 2000, the parties also took part in
various enforcement proceedings.
(a) Attachment
of the applicant’s property
(i) The
City Court’s decision of 15 April 2004
92. On 15 April 2004 the City Court
accepted for consideration the Ministry’s action in respect of the year 2000
and attached certain of the applicant company’s assets, excluding goods
produced by the company and related cash transactions, as a security for the claims.
The court also issued writs of execution in this respect (see paragraph 27). This decision was upheld by the
(ii) Enforcement
of attachment by the bailiffs
93. By a decision of 16 April 2004 the
bailiffs instituted enforcement proceedings in connection with the attachment.
94. On the same day they executed the
attachment order by informing the applicant company and the holder of its corporate
register, ZAO ‘M-Reestr’, of the decision of 15 April 2004.
95. According to the Government, the
applicant company impeded the execution of the writs issued by the court by
hiding its corporate register from the bailiffs. In particular, they alleged
that a few hours prior to the bailiffs’ visit, the applicant company had
cancelled its contracts with ZAO ‘M‑Reestr’. The register was then
dispatched by ordinary post to a location in
(iii) The
company’s offer of 22
April 2004
96. On 22 April 2004 the applicant
company filed its first court request to have the attachment of the entirety of
its assets replaced by the attachment of shares belonging to it in OAO
Sibirskaya neftyanaya kompaniya (“the Sibneft company”, a major Russian oil
company which had attempted unsuccessfully to merge with the applicant company
in 2003), which were allegedly worth three times as much as the then liability.
The applicant company also alleged that the attachment order adversely affected
its proper functioning and invited the authorities to opt for less intrusive
measures, insisting on the lack of any risk of asset-stripping.
97. By a decision of 23 April 2004 the
City Court examined and dismissed this request as unfounded. The court found no
evidence that the interim measures affected any of the company’s production
activities.
98. On 17 May 2004 the applicant
company appealed against the decision of 23 April 2004.
99. The outcome of court proceedings in
respect of the applicant company’s appeal of 17 May 2004 is unclear.
100. The Government provided the
following background information in connection with the company’s offer of
shares in Sibneft. The applicant company had attempted to merge with Sibneft in
May-September 2003. As a result of the initial stages of the merger, the
applicant company acquired 92% of Sibneft: 20% of these shares were bought for
cash, whilst 57.5% were exchanged for 17.2% of the applicant company’s newly
issued shares and 14.5% were swapped for 8.8% of the applicant company’s
existing shares. In November 2003 it was announced publicly that, at the
request of the former Sibneft owners, the parties had decided not to go ahead
with the merger. In February 2004 the owners of Sibneft sued the applicant
company in this connection, demanding cancellation of the operation whereby the
applicant had issued 17.2% of shares. Among other things, on 14 February
2004 they obtained an attachment order in respect of the Sibneft shares
remaining in the possession of the applicant company pending the proceedings.
On 1 March 2004 the City Court decided to cancel the issue of 17.2% shares by
the applicant company. The Government submitted that it was clear from the
above-mentioned account that on 22 April 2004, the date on which the applicant
company first made the offer of Sibneft shares, the owners of Sibneft already
anticipated suing the applicant company again, this time demanding back the
57.5% of Sibneft shares swapped for the cancelled 17.2% of the applicant
company’s shares. At the same time, the fate of the remaining issues of Sibneft
shares still in the possession of the applicant company was also uncertain.
(iv) The
applicant company’s request for an injunction against the attachment
101. On
23 April 2004 the City Court also examined the applicant company’s request for
an injunction order against the attachment and rejected it. The court noted
that the attachment did not interfere with the company’s day-to-day operations
and it was a reasonable measure aimed at securing the Ministry’s claims.
102. On 2 July 2004 the
103. It does not appear that the
applicant company brought cassation proceedings in this respect.
(b) Enforcement
of the Tax Ministry’s decision of 14 April 2004
104. In the meantime, on 7 May 2004 the
applicant company applied to the City Court with a separate action against the
tax assessment of 14 April 2004, seeking its invalidation (see
paragraph 34 and 35 above). The company also requested
interim measures in this connection.
105. Following the applicant company’s
request for interim measures, on 19 May 2004 the City Court stayed the
enforcement of the Tax Ministry’s decision of 14 April 2004, having noted that
the Ministry could have enforced the decision in the part relating to taxes and
default interests even without waiting for the outcome of the Ministry’s claim
(Article 46 of the Tax Code[2]). The
court decided, however, that this might be detrimental to the applicant company
and stayed the decision of 14 April 2004 accordingly.
106. On 27 May 2004 the applicant
company made a public announcement that:
“... it [was] under an injunction prohibiting it from
selling any of its property, including the shares owned by the company. Until
the injunction is lifted, the Company is unable to sell its assets in order to
obtain liquid funds. Consequently, if the Tax Ministry’s efforts continue, we
are very likely to enter a state of bankruptcy before the end of 2004”.
107. It appears that the City Court’s
decision of 19 May 2004 to stay the enforcement was appealed against by the
Ministry. Having examined the Ministry’s arguments at the hearing of 23 June
2004, the
108. It does not appear that the
applicant company appealed against this decision before the Circuit Court.
(c) Enforcement
of the judgments concerning the 2000 Tax Assessment
(i) First-instance
judgment of 26 May 2004 and the appeal decision of 29 June 2004
109. As mentioned above (paragraphs 46-66), by a judgment of 26 May 2004
the City Court found in favour of the Tax Ministry, upholding the Tax
Assessment of 14 April 2004. The Tax Assessment was upheld by the
110. On 30 June 2004 the
(ii) Enforcement
proceedings in respect of the writ of 30 June 2004
111. On 30 June 2004 the bailiffs
instituted enforcement proceedings based on the above judgment and gave the applicant
company five days to pay. The applicant company was informed that it would be
liable to pay enforcement fees of 7%, totalling RUB 6,953,375,547
(approximately EUR 197,026,920), in the event of failure to honour
the debt voluntarily. Upon the Ministry’s application, the bailiffs issued
sixteen orders freezing the cash held by the applicant company in its Russian
bank accounts. The orders did not concern cash added to the accounts after 30
June 2004.
(iii) The
applicant company’s challenge to the decision of 30 June 2004
112. On 7 July 2004 the applicant
company challenged the bailiffs’ decision of 30 June 2004.
113. It argued that the decision to open
enforcement proceedings had been unlawful as it was in breach of the rules of
bailiffs’ territorial competence as the enforcement ought to have taken place
in Nefteyugansk and not in Moscow, that the five-day term for voluntary
compliance with the court decisions had been too short and that the cash-freezing
orders had made such compliance impossible.
114. On 30 July 2004 the City Court
examined and dismissed these claims as groundless. The court ruled that the
bailiffs had acted lawfully and that the cash-freezing orders did not interfere
with its ability or inability to honour its debts, as the applicant company had
been free to dispose of any cash not in the frozen accounts and any cash added
to those accounts after 30 June 2004.
115. It does not appear that the company
brought appeal proceedings against this judgment.
(d) Seizure
of 24 subsidiary companies and related proceedings
116. In the meantime, on 1 July 2004 the
bailiffs decided to seize 24 subsidiary companies belonging to the
applicant company.
117. The applicant appealed against the
decision in court.
118. By a first-instance judgment of 17
September 2004 the appeal was dismissed as unfounded. The judgment was produced
on 20 September 2004.
119. The applicant did not appeal
against the judgment before the
120. On 2 February 2005 the judgment was
upheld by the Circuit Court.
(e) The
applicant company’s proposal of 5 July 2004 and related proceedings
121. In addition to the above attempts
to stay the enforcement of the judgments concerning the 2000 Tax Assessment,
the applicant company, by a letter dated 2 July and filed on 5 July 2004,
suggested to the bailiffs for the second time that it repay its debts by using
34.5% of Sibneft stock allegedly worth over 4 billion United States dollars (“USD”,
or some EUR 3.3 billion), citing its vertically integrated structure as a
possible reason for seeking to find the least intrusive solution as well as the
need to honour its contractual debts.
122. The Government provided the following
background information in connection with the applicant’s second offer of
Sibneft shares (see paragraph 121 above). At this point, the owners of
Sibneft had already obtained a court judgment in their favour by the City Court
on 1 March 2004, ordering the applicant company to return the 57.5% of Sibneft
shares swapped for the cancelled 17.2% of the applicant company’s shares and on
6 July 2004, that is, on the day after the applicant’s second offer,
they had filed court claims demanding the return of 14.5% of the shares
previously exchanged for 8.8% of the applicant company’s existing shares. In
addition, by a decision of 6 July 2004 the owners of Sibneft had obtained
an attachment order in respect of the Sibneft shares in question.
123. On 14 July 2004 the applicant
company filed an action against the bailiffs on account of their alleged
failure to respond to the company’s offer of 5 July 2004.
124. On 17 August 2004 the City Court
dismissed this action, having noted that the failure to respond was lawful and
within the scope of the bailiffs’ discretion. The court established that some
of the steps undertaken by the applicant company during the unsuccessful merger
with the Sibneft company had been contested in a different set of proceedings
as unlawful. In addition, the applicant company’s ownership of the Sibneft
shares had been contested by third parties in two different sets of
proceedings. On the basis of these findings, the court concluded that the
bailiff had not breached the law by ignoring the company’s offer.
125. It does not appear that the
applicant company appealed against the judgment.
(f) Default
notice of 5 July
2004
126. On 5 July 2004 the applicant company received a default notice
from syndicated lenders, a group of international banks, who had previously
loaned the company USD 1 billion (EUR 821,894,430). The lenders considered that
a default had occurred as a result of the recent and well-publicised events in
respect of the applicant company and their actual or potential impact on the
applicant company’s business and assets. The notice stated that as a result of
the default notice the loans were due and payable on demand.
(g) The
company’s cassation appeal of 7 July 2004 and the motion to stay the
enforcement
127. As set out above (paragraph 67), on 7 July 2004 the applicant
company filed a cassation appeal against the court judgments on the 2000 Tax
Assessment and at the same time it moved to stay the enforcement proceedings.
It argued that its assets were highly valuable, but that it had insufficient
cash to honour the debts immediately and that the attachment of assets made any
voluntary settlement impossible. The applicant company also argued that
enforcement of the court judgments in the case would irreparably damage its
business, since a reversal of the enforcement would be impossible.
128. By a decision of 16 July 2004 the
129. This decision was upheld by the
Circuit Court on 4 August 2004.
130. By a decision of 9 July 2004 the
bailiffs levied an enforcement fee of 7% in respect of the applicant company’s
failure to comply with the execution writs of 30 June 2004 (see paragraph 110 above). The applicant company was to
pay RUB 6,848,291,175.45 (approximately EUR 190,481,640)
131. On 19 July 2004 the applicant
company challenged this decision in court.
132. By a decision of 3 August 2004 the
City Court examined the applicant company’s action and quashed the decision of
9 July 2004 as disproportionate and unjustified. The court decided that the
enforcement fee could only be levied if the respondent had acted in bad faith
and found that the bailiffs had failed to examine this question. The court also
noted that 7% was the highest possible rate and that the bailiffs’ decision
failed to explain why the fee could not be lower. Among other things, the court
referred to section 3 of Constitutional Court Ruling no. 13-P of 30 July 2001.
133. Following an appeal by the
Ministry, on 27 August 2004 the
134. The Circuit Court upheld the appeal
decision on 6 December 2004.
(i) Overall
debt in respect of 2000
135. Overall, in respect of 2000, the applicant
company was ordered to pay RUB 99,333,836,391 (approximately EUR 2,814,667,452)
(j) The
applicant company’s proposal of 13 July 2004 and related proceedings
136. On 13 July 2004 the applicant
company again repeated its offer of 34.5% of Sibneft shares to the bailiffs. On
the next day the offer was amended to include only 20% of Sibneft shares. The
domestic courts at three instances analysed this offer in detail in their
decisions of 6, 18 August and 25 October 2004 (see paragraphs 139-146 below).
(k) Seizure of shares in OAO Yuganskneftegaz
137. On 14 July 2004 the bailiffs seized
the shares of OAO Yuganskneftegas, one of the applicant company’s principal
production subsidiaries. The decision referred to the applicant company’s
inability to meet its liabilities. The attachment did not affect the applicant
company’s ability to manage OAO Yuganskneftegaz, but rather prevented the
company from selling or encumbering those shares.
(ii) The applicant company’s
challenge to the decision of 14 July 2004
138. The applicant company appealed
against this decision in court. With reference to section 59 of the Enforcement
Proceedings Act, it argued that the bailiffs ought firstly to claim assets
which were not involved in the production process, secondly those goods and
other values which were not related to the production process and, thirdly,
immovable objects, raw material and other main assets relating to the
production cycle. In addition, the applicant company referred to Ruling no. 4
of the Plenary Supreme Commercial Court “On certain questions arising out of
seizure and enforcement actions in respect of corporate shares”, dated 3 March
1999, which suggested, in respect of those companies which had been privatised
by the State as parts of bigger holding groups through the transfer of
controlling blocks of shares, that the production cycle of the respective
production unit should be preserved as much as possible. The company further
claimed that the above ruling was applicable to the case at issue, that OAO
Yuganskneftegas was a major production unit and that the bailiffs had produced
no evidence that the assets and goods and other values not involved in the
production process were insufficient. In addition, it reiterated its offer of
the shares in Sibneft.
(iii) First-instance
proceedings
139. On 6 August 2004 the City Court examined
and allowed the applicant company’s challenge of this seizure.
140. At the hearing the Ministry and
bailiffs referred to sections 9 (5) and 51 (1-4) of the Enforcement
Proceedings Act and Government Decree no. 934 “On seizure of securities”
of 12 August 1998. They argued that, under the applicable domestic law, the
seizure should be made first in respect of the cash-flow and then, under
section 46 (5) of the Enforcement Proceedings, it would be open to the bailiffs
to assess and seize the assets depending on their liquidity. They countered the
applicant company’s arguments by saying that the latter’s references were
invalid in that they related to the other stage of enforcement proceedings (the
collection of debt and not the seizure as such). Furthermore, they argued that
Ruling no. 4 of the Plenum of the
141. Having examined the parties’
submissions, the court upheld the applicant company’s arguments. It noted that
the applicant company’s references to the applicable domestic law were correct.
With regard to the non-controlling block argument, the court noted that at the
time of transfer of the shares, 25% of shares were privileged and non-voting.
For the remaining 75% of the voting stock, the 38% transferred by the State
constituted the controlling block. As regards the offer of shares in Sibneft,
the court noted that the exact quantity of the contested shares was unclear and
that the bailiffs should find out the exact figures and that they should
consider the uncontested shares as a possible means of partial settlement. The
court concluded that the decision of 14 July 2004 was unlawful and quashed
it.
142. On 9 August 2004 the Ministry
challenged the decision of 6 August 2004 on appeal.
143. On 18 August 2004 the
144. Following an appeal by the
applicant company, on 25 October 2004 the Circuit Court upheld the decision of
18 August 2004.
145. The applicant company’s attempts to
bring supervisory review proceedings against this decision proved unsuccessful.
146. The respective complaint was
dismissed by a decision of the
(l) Seizure
of shares of OAO Tomskneft-VNK and OAO Samaraneftegaz
147. In addition to seizing the shares
of OAO Yuganskneftegaz, on 14 July 2004 the bailiffs also seized the
shares of OAO Tomskneft-VNK and OAO Samaraneftegas, the applicant company’s two
other principal production units.
148. The applicant company’s complaint
against the seizure of OAO Tomskneft-VNK proved unsuccessful.
149. The City Court dismissed its
complaint as unfounded on 13 August 2004.
150. The applicant company did not
contest that judgment before the
151. On 5 November 2004 the Circuit
Court dismissed the applicant company’s cassation appeal in respect of the
judgment of 13 August 2004. The court noted that the seizure was intended to
protect the creditor’s claims and that there was no indication that the seizure
impeded the production cycle or otherwise disturbed the normal functioning of
the company.
152. The company also complained
unsuccessfully about the seizure of its shares in OAO Samaraneftegaz.
153. The City Court, acting as a
first-instance court, dismissed the appeal on 2 September 2004.
154. The applicant company failed to
appeal the judgment before the
155. On 18 January 2005 the Circuit
Court upheld the judgment.
(m) The
applicant company’s request to the Ministry of Finance dated
16 July 2004
156. On 16 July 2004 the applicant company
wrote a letter to the Ministry of Finance, applying for respite or payment in
instalments in respect of the sums due. It appears that this letter remained
unanswered. The Government submitted that the Ministry of Finance had not had
any authority to respond to the request, as the issue of respite and payment in
instalment lay within the competence of the courts.
157. On 12 August 2004 the City Court
examined the applicant company’s request to re-pay the 2000 Tax Assessment award
in instalments and rejected it as unfounded. The court noted, among other
things, that the tax debt had resulted from intentional tax evasion by the
applicant company and that the conduct of the debtor in court and during the
enforcement proceedings demonstrated that it did not intend to pay the debts
voluntarily.
158. It does not appear that the applicant
company brought any appeal proceedings in respect of this judgment.
(n) The
applicant company’s offer of 9 August 2004
159. On 9 August 2004 the applicant
company offered the bailiffs the 20% stake in Sibneft and shares in fifteen
other subsidiary companies as a settlement for its debts, requesting that the
bailiffs respond within one day.
160. It appears that the bailiffs
responded to the company’s offer on 9 September 2004. It does not appear
that the company brought any court proceedings in respect of that response.
(o) The
Ministry’s response of 22 September 2004
161. It appears that on 22 September
2004 the Ministry responded to four of the applicant company’s letters about
the settlement of the debt, rejecting the offers.
162. It does not appear that the company
brought any separate court proceedings in this respect.
(p) The
applicant company’s announcement in respect of the shares in Sibneft
163. On 8 October
2004 the applicant company announced that it would comply with the City Court’s
judgment of 1 March 2004, which had cancelled the issue of additional shares in the applicant company, used
for the purpose of acquiring Sibneft. The applicant company, acting in
compliance with the court order, instructed the registrar to return its 57.5%
stake in Sibneft to its former owners.
B. Proceedings
in respect of the applicant company’s tax liability for the year 2001
(a) Proceedings
before the Ministry
164. On 23 March 2004 the
Tax Ministry commenced tax inspection in respect of the applicant company’s
activities in 2001. The inspection ended on 30 June 2004 and on 5 July 2004 the
Ministry served the resultant report on the applicant company.
165. On the basis of the above-mentioned
report, by a decision of 2 September 2004 the Ministry issued a tax
assessment for the year 2001 (“the 2001 Tax Assessment”), finding the company
liable for having used essentially the same tax arrangement as in the previous
year. The Tax Assessment 2001 relied on a similarly wide range of evidence as
the Tax Assessment 2000, including the documentary evidence and detailed
statements of those involved in the nominal ownership and running of the
trading companies. This time the applicant company had to pay RUB 50,759,436,900 (approximately
EUR 1,424,746,313) in tax arrears, RUB 28,520,204,254 (approximately
EUR 800,522,195) in default interest and RUB 40,607,549,520 in penalties
(approximately EUR 1,139,797,051). Since the applicant company had recently
been found guilty of a similar offence, the penalty was doubled.
(b) The
applicant company’s request for a court injunction
166. On 14 September 2004 the applicant
company lodged an appeal against the decision of 2 September 2004 and requested
an injunction against the immediate enforcement of this decision.
167. On 5 October 2004 the City Court
turned down the request for an injunction and on 13 October 2004 it issued
execution writs in respect of the Ministry’s decision of 2 September 2004. The
court referred to Information Letter no. 83 of the Supreme Commercial Court of
13 August 2004, which recommended that requests for interim measures in such
situations be granted only if an applicant could demonstrate some security for
a creditor’s future claims. The court noted that, in the present case, the
applicant company clearly had insufficient cash to satisfy the creditor’s
claims, and had failed to produce any security, and dismissed the claims
accordingly.
168. The judgment of 5 October 2004 was
upheld by the
2. Enforcement
measures relating to the 2001 Tax Assessment
(a) Enforcement
of additional taxes and interest surcharges
169. As the 2001 Tax Assessment was
similar to the 2000 Tax Assessment, the Ministry decided to enforce it directly
in the part relating to additional taxes and interest surcharges, without
taking the matter to the courts. The applicant company was to pay the amounts
due by 4 September 2004.
170. On 9 September 2004 the bailiffs
instituted enforcement proceedings in connection with the decision of 2
September 2004. The company was to pay
RUB 50,759,436,900 (approximately EUR 1,424,746,313) in tax arrears and
RUB 28,520,204,254 (approximately EUR 800,522,195) in default interest.
171. It appears that the 2001 Tax
Assessment, in the part relating to additional taxes and interest surcharges,
was upheld by the City Court on 11 October 2004. The judgment of 11
October 2004 was upheld on appeal on 16 February 2005. The Circuit Court
upheld the decisions of the lower courts on 9 December 2005.
172. The applicant company’s request for
an injunction pending those proceedings was unsuccessful. The City Court
dismissed it in its judgment of 5 October 2004. The refusal was upheld by
the
173. On 3 September 2004 the Ministry
applied to the City Court to recover the penalties arising from the 2001 Tax
Assessment. .
174. It appears that on 11 October 2004
the action was examined and granted by the City Court. The judgment in the case
was produced on 15 October 2004.
175. According to the applicant company,
its appeal against the judgment of 15[3] October 2004 was dismissed
by the
176. On 19 November 2004 the bailiffs
instituted enforcement proceedings in respect of the Tax Assessment 2001 in the
part relating to penalties. The company was to pay RUB 39,113,140,826 in
penalties (approximately EUR 1,097,851,399)[4].
(c) 7%
enforcement fee in respect of additional taxes and interest surcharges
177. On 20 September 2004 the bailiffs decided
to impose a 7% enforcement fee in respect of the applicant company’s failure to
abide by the 2001 Tax Assessment in the part relating to taxes and interest
surcharges. The applicant company was to pay RUB 5,549,574,880.78
(approximately EUR 155,693,193).
178. The resolution was served on the
applicant company on 1 October 2004.
179. On 29 October 2004 the City Court
examined and dismissed the challenge to the decision of 20 September 2004 as
groundless.
180. It does appear that the company
pursued appeal proceedings.
181. On 1 December 2004 the company appealed
in cassation against the judgment of 29 October 2004.
182. The appeal was dismissed by the
Circuit Court on 3 March 2005.
(d)
7% enforcement fee in respect of penalties
183. On 9 December 2004 the bailiff
decided to impose a 7% enforcement fee in respect the applicant company’s
failure to abide by the 2001 Tax Assessment in the part relating to penalties.
The company was to pay a 7% enforcement fee of RUB 7,102,488,295 or
approximately EUR 190,077,377.
184. On 23 December 2004 the company
challenged this decision in court.
185. On 3 February 2005 the City Court
dismissed the action.
186. The applicant company failed to appeal
the judgment of 3 February 2005.
187. The Circuit Court upheld the judgment of
3 February 2005 on 16 June 2005.
(e) Overall
debt in respect of 2001
188. Overall, in respect of 2001 the
applicant company was ordered to pay RUB 132,539,253,849.78 (approximately EUR
3,710,836,129).
C. Proceedings
in respect of the applicant company’s tax liability for the year 2002
189. On 29 October 2004 the Ministry produced
an audit report in respect of the applicant company’s activities for the year
2002. The report was received by the company on 1 November 2004.
190. On 16 November 2004 the Ministry
took a decision to levy further tax liabilities, this time in respect of the
year 2002 (“the 2002 Tax Assessment”). The applicant company was to pay RUB
90,286,552,485 (approximately EUR 2,425,825,387) in taxes, RUB
31,485,110,355.58 (approximately EUR 845,944,140) in default interest and RUB 72,040,907,796
(approximately EUR 1,935,600,133) in penalties.
191. The decision established the use of
the same tax-evasion scheme (in respect of profit tax, VAT, corporate property
tax and motorway users’ tax) as in the decisions concerning the years 2000 and
2001. It mentioned that the company had carried out its activities through OOO
Ratmir, OOO Alta-Treid, ZAO Yukos-M, OOO Yu-Mordoviya, OOO Ratibor, OOO
Petroleum treyding, OOO Evoyl, OOO Fargoyl, most of which had also been used by
the applicant company in previous years. The entities in question, acting in
breach of Article 575 of the Civil Code, which prohibits grants and gifts
between independently functioning commercial entities, had transferred the
entirety of their profits unilaterally to a fund owned and controlled by the
applicant company. The decision mentioned that the transfers had been wrongly
reflected in the applicant company’s financial accounting and that the company
had failed to explain the origin of these funds and had failed to take these
sums into account for tax purposes. Accordingly, the applicant company had
failed to pay taxes in respect of these amounts.
192. The decision referred to several
other mistakes in the applicant company’s tax declarations. In particular, the
tax in respect of the company’s securities transactions was wrongly calculated,
there were many general mistakes in the company’s financial accounting, and
there were some mistakes in the company’s request for reimbursement of the VAT
on export operations (e.g. on one occasion the company failed to submit the
required sales contract; it also mentioned one contract but received the money
on the basis of a different contract; on some occasions the company failed to
submit documents proving customs clearance, indicated wrongly calculated sums,
and made multiple mistakes in VAT export documents). There were further
multiple mistakes in tax deductions in respect of internal VAT.
193. The decision also established that the
applicant company had used sham entities to lower its group taxes, that the
entities and the company’s subsidiaries had entered into transactions with
reduced prices, that on some occasions the company had declared the extracted
oil as “hydrocarbon liquid” in order to lower the applicable price even
further, that there were no cash transactions between the entities and
subsidiaries and that the company’s own promissory notes and mutual offsetting
had been used instead and that the whole set-up, which had no economic purpose
other than tax evasion, had resulted in massive tax evasion by the applicant
company. The decision also noted that use of tax concessions in the Republic of
Mordoviya and the Evenk Autonomous District by the sham entities had been
unlawful, because they had failed to qualify for the exemptions and also
because they had been sham companies. The decision was detailed in respect of
the composition and all the activities of the sham entities: the Ministry
analysed the entirety of their activities month by month.
194. The applicant company had until 17
November 2004 to meet the debts voluntarily.
2. Enforcement
measures relating to the 2002 Tax Assessment
(a) Enforcement
of additional taxes, interest surcharges and penalties
195. By a decision of 18 November 2004
bailiffs proceeded to enforcement of the decision of 16 November 2004 in so far
as it related to additional taxes and interest surcharges.
196. The City Court joined the
proceedings by which the applicant company tried to contest the decision of 16
November 2004 and on 23 December 2004 it examined and, in the most part,
dismissed the applicant company’s appeals against the decision of 16 November
2004. The court declared the Ministry’s conclusions partly unfounded and
reduced the company’s tax liability by RUB 325,628,742 (approximately EUR 8,752,543),
its default interest payments by RUB 98,515,758 (approximately EUR 2,647,995)
and the penalty by RUB 851,419,688 (approximately EUR 22,885,227). The court
also ordered the applicant to pay the penalty in question.
197. This decision was upheld by the
198. On 28 December 2004 the applicant
company also appealed against the Ministry’s decision in respect of the year
2002, in so far as it had ordered that the tax debts and default interest
payments be collected directly.
199. It appears that on 7 February 2005
the City Court examined and dismissed the claim as unfounded. The judgment was
upheld on appeal on 4 April 2005. The Circuit Court upheld the decisions
of the lower courts on 15 June 2005.
(b) 7%
enforcement fee in respect of additional taxes and interest surcharges
200. On 9 December 2004 the bailiffs decided
to impose a 7% enforcement fee in respect of the applicant company’s failure to
comply voluntarily with the 2002 Tax Assessment in the part relating to
additional taxes and surcharge interests.
201. On 23 December 2004 the company
appealed against this decision in court, initially claiming that the decision
had been unlawful and asking to reduce the fee to 1%. The company then withdrew
its claim in the part relating to the reduction of the fee.
202. On 10 February 2005 the City Court
judgment dismissed the appeal.
203. It does not appear that the company
brought any proceedings before the
204. The applicant company’s cassation appeal
was examined and dismissed by the Circuit Court on 16 June 2005.
(c) Overall
debt in respect of 2002
205. Overall in respect of the year 2002
(excluding the 7% enforcement fee), the applicant company was ordered to pay
RUB 192,537,006,448.58 (approximately EUR 4,344,549,434).
(d) Written
information report communicated by ZAO PricewaterhouseCoopers Audit to the
applicant company’s management in respect of the year 2002
206. In their observations of 15 April
2005 the Government submitted a copy of a report communicated to the applicant
company’s management by its auditor ZAO PricewaterhouseCoopers Audit. The
applicant company did not comment on the contents of the report.
207. In contrast to “ordinary” audit
reports, which were made public, the internal information report was produced
exclusively for the applicant company’s management.
208. The report noted specifically that
the applicant company’s “Fund for Financial Support of the Production
Development of OAO Neftyanaya Kompaniya YUKOS” was in breach of the domestic
law in that the relevant legislation disallowed unilateral transfers and gifts
between commercial entities. It also noted that the applicant company’s
accounting policy in respect of the operations involving promissory notes had
been incompatible with the legislation in force and provided a distorted view
of the company’s activities.
209. In addition, on 15 June 2007 the
applicant company’s auditor, ZAO PricewaterhouseCoopers Audit, disavowed its audit
certifications in respect of the applicant company’s financial statements for
the years 1995-2004 on account of the applicant company’s deliberate attempts
to conceal its tax-evasion scheme, as well as its failure to disclose all
relevant documents during the respective inspections conducted by the company’s
auditors at the time.
D. Proceedings
in respect of the applicant company’s tax liability for the year 2003
210. On 28 October 2004 the Tax Ministry
commenced a tax inspection in respect of the year 2003, which resulted in an
audit report that was dated 19 November 2004 and served on the applicant
company on the same date.
211. On the basis of the report, by a
decision of 6 December 2004 the Ministry levied tax liabilities for the year
2003 (“the 2003 Tax Assessment”), consisting of RUB 86,228,187,852
(approximately EUR 2,327,114,103) in taxes, RUB 15,235,930,657.66
(approximately EUR 411,185,136) in default interest and RUB 68,939,326,976.40
(approximately EUR 1,860,524,778) in penalties.
212. The decision established that the
company was guilty of having evaded taxes (in particular, VAT, profit tax and
advertising tax) by using the same arrangement as in previous years. The
decision mentioned the following entities registered either in the
213. The decision also mentioned that some of
the applicant company’s expenses were unjustifiably deducted from the company’s
taxable income, that the company failed to account for some of its operations
with promissory notes, that there were some mistakes in calculation of the VAT
owed by the company and that the company had evaded payment of advertising tax
in Moscow.
214. The applicant company had one day
to comply with the decision, that is, until 7 December 2004.
2. Enforcement
measures relating to the 2003 Tax Assessment
(a) Enforcement
of additional taxes, interest surcharges and penalties
215. On 9 December 2004 the bailiffs
proceeded to enforcement of the decision of 6 December 2004 in so far as it
related to taxes and interest surcharges.
216. It appears that the City Court
joined the proceedings by which the applicant company tried to contest the
decision of 9 December 2004 and on 28 April 2005 it examined the company’s
challenge. In respect of the company’s request to recalculate automatically the
export VAT on operations conducted by the sham entities in the course of these
proceedings, the court noted the request was unsubstantiated and also lodged
out of time. In particular, the company had failed to submit a proper claim
with monthly calculations and evidence that the goods in question had indeed
been exported. The court also addressed the applicant company’s argument that
Article 75 (3) of the Tax Code prevented the authorities from levying
the interest surcharges. It noted that the provision in question only applied
to cases in which the sole reason for the taxpayer’s inability to pay tax debts
was the seizure of its assets and cash funds. On the facts, the applicant
company was unable to pay because it had insufficient funds and not because its
assets were frozen. The court concluded that the applicant company’s argument
was unfounded. The court also reduced the amount of additional taxes to be paid
to RUB 86,221,835,476.37 (EUR 2,399,884,085) and the amount of fines to RUB
68,918,264,491 (EUR 1,918,259,397). The amount of interest surcharges was
reduced accordingly. The exact figure of the interest surcharges to be paid by
the applicant is unclear.
217. The judgment was upheld on appeal
on 16 August 2005.
218. The applicant company appealed on
cassation.
219. On 5 December 2005 the Circuit
Court upheld the decisions of the lower courts.
220. The bailiffs instituted enforcement
proceedings in respect of the payment of fines on 4 October 2005.
221. On 17 March 2006 the bailiffs decided to
impose a 7% enforcement fee in respect of the applicant company’s failure to
comply voluntarily with the 2003 Tax Assessment. The applicant company was to
pay RUB 7,102,488,296 (EUR 211,872,906) in respect of the
unpaid reassessed taxes and interest surcharges and RUB 4,824,278,304
(EUR 143,912,080) in respect of the unpaid fines.
(c) Overall
debt in respect of the year 2003
222. Overall, in respect of 2003
(excluding the 7% enforcement fee and the interest surcharges, the exact amount
of which is unclear) the applicant company was ordered to pay RUB
155,140,099,967.37 (approximately EUR 4,318,143,482).
E. Forced
auctioning of OAO Yuganskneftegaz
223. On 20 July 2004 the Ministry of
Justice announced the forthcoming evaluation and sale of OAO Yuganskneftegaz as
a part of its ongoing enforcement procedures.
224. On 22 July 2004 the applicant
company announced that:
“...the company management [is] currently making every
effort to raise additional funds in order to repay, as soon as possible, the
tax liability and to finance current operations. However, should those efforts
prove unsuccessful and Yuganskneftegaz [be] sold, in the present circumstances,
the management of the Company would be compelled to announce the bankruptcy of
Russia’s largest oil company”.
1. Valuation report
of 17 September 2004
225. On 17 September 2004 the valuation
commissioned by the bailiffs and the Ministry of Justice from Dresdner
Kleinwort Wasserstein, the investment branch of Dresdner Bank AG (working in
Russia as ZAO Dresdner bank), for the purposes of the enforcement
proceedings, estimated that 100% of shares in OAO Yuganskneftegas were worth
between USD 15.7 and 18.3 billion (between EUR 15.2 and 17.7 billion),
excluding the pending and probable tax liabilities of this entity.
226. The report evaluated 100% of the
price of OAO Yuganskneftegaz as a separate entity and, having deduced its
corresponding obligations, calculated the cost of its shares, on the basis of
which it would be possible to calculate the price of one share in
OAO Yuganskneftegaz.
227. It was specifically mentioned in
the report that the valuation was not an opinion concerning the attainable
price in the event of the sale of OAO Yuganskneftegaz or any kind of
recommendation concerning the starting bid of the auction in the event of the sale
of Yuganskneftegaz by the Ministry of Justice or any other State institution,
or any recommendation concerning particular actions to be undertaken by the
Ministry of Justice with a view to levying the judicially determined or
estimated amount of the applicant company’s tax debt.
228. Among the basic risks affecting the
price of OAO Yuganskneftegaz, the report mentioned the tax claims, the validity
of oil extraction licences, future oil prices, export quotas etc. The report
also mentioned that the price of OAO Yuganskneftegaz as a part of the applicant
company could be substantially different from the price of OAO Yuganskneftegaz
as a separate entity. The report also mentioned various valuations of
OAO Yuganskneftegaz made by third parties, including investment
institutions and banks, and ranging from USD 9 to 22 billion (between
EUR 7.4 to 18.1 billion). It also mentioned that, because of the size of
OAO Yuganskneftegaz, not many buyers would be financially capable of acquiring
it.
229. The valuation (between USD 15.7 and
18.3 billion or EUR 15.2 and 17.7 billion) did not take account of already
pending and probable tax claims against OAO Yuganskneftegaz. If and when
lodged, these claims would “substantially influence the assessment” of the
equity of OAO Yuganskneftegaz. The claims already announced (as on that
date) were USD 951.3 million.
230. In carrying out the valuation, the
report used the following three methods: the method of discounted cash flows, a
method based on the analysis of comparable transactions, and a method based on
the analysis of comparable publicly-held companies.
231. The report also specifically noted
that:
“...the decision concerning the starting bid of the
auction is a tactical one and should strike a balance between the desire to
reach the highest price on the one hand, and the need to attract the maximum
number of potential buyers on the other. Because of this, the starting bid is most
likely to be different from the assessment of the price.”
2. Service of the
valuation report on the applicant company on 13 October 2004
232. A copy of the valuation report was served
on the applicant company on 13 October 2004.
233. It does not appear that the applicant
company contested the report’s valuations report before the courts.
234. On 21 October 2004 the bailiffs
confirmed to the Ministry that they had collected 79,584,690,127 RUB
(approximately EUR 2,183,447,331).
3. The applicant
company’s reply of 4 November 2004
235. On 4 November 2004 the applicant
company responded to the valuation report. It disagreed with the decision to
evaluate and sell OAO Yuganskneftegaz, and would have preferred to sell
its other assets first. The applicant company informed the bailiffs that it had
already honoured a major part of the debt (apparently referring to its tax
liability for the year 2000 only) and that the remaining sum was USD 2.5
billion (around EUR 2 billion). The company claimed that
it would be more reasonable to lift the seizure and let it dispose of its minor
assets in order to honour the remaining debt.
236. As regards OAO Yuganskneftegas, the
company referred to independent valuations by JP Morgan PLC, valuing the
subsidiary at “no less than USD 14 billion (some EUR 11 billion)” and “between
USD 16.1 billion (EUR 12.6 billion) and USD 22.1 billion (EUR 17.378 billion), including
tax liabilities” respectively.
237. The letter mentioned that the
Ministry had brought tax claims against OAO Yuganskneftegaz totalling USD 2.903
billion.
4. The bailiffs’
decision of 18 November 2004
238. On 18 November 2004 the bailiffs
noted that the applicant company’s debt to the Ministry on that date was RUB
204,902,386,620 (approximately EUR 5,506,781,584 or USD 7,147,250,717).
Having referred to sections 4, 46 (6), 54 (2) and 88 of the Enforcement
Proceedings Act, the bailiffs decided to sell 76.79 % of the shares in OAO
Yuganskneftegas at an auction which would take place on 19 December 2004. The
published minimum bidding price for 76.79 % of the shares in OAO Yuganskneftegas
was RUB 246,753,447,303.18 (approximately USD 8.65 billion or
EUR 6.63 billion).
239. The sale was entrusted to the
Russian Fund of Federal Property (“the Property Fund”), a specialised State
Institution in charge of organising sales of federal property and the property
of those who had debts towards the State.
240. On the same date, the Property Fund
issued a regulation setting out the parameters and rules that would govern the
auction, including the number of shares to be sold (43 ordinary shares
representing 76.79% of the capital of OAO Yuganskneftegaz), the starting price
(RUB 248.6 billion or some USD 8.85 billion), the date and place of the
auction (19 December 2004), the eligibility requirements for bidders (the
auction was open to all perspective bidders, including foreign individuals and
legal entities), which included a cash deposit of RUB 49.4 billion (USD
1.7 billion, or 20% of the starting price), to be paid no later than the day
before the auction.
5. Court action
against the decision of 18 November 2004
241. The decision of 18 November 2004
was challenged in court on 26 November 2004.
242. It appears that on 3 December 2004
the City Court dismissed the appeal against the decision of 18 November 2004.
243. On 21 January and 3 May 2005 that
judgment was upheld on appeal and in cassation respectively.
244. The applicant company argued that
the valuation report had failed to give a market valuation of the asset and
that the decision of 18 November 2004 failed to mention a specific price
for OAO Yuganskneftegaz. In response, the courts noted that 43 ordinary and
13 privileged shares in OAO Yuganskneftegaz had been seized by the
bailiffs in satisfaction of the applicant company’s liability, that the shares
had been valued by ZAO Dresdner Bank and that the applicant company had
been informed of all of the bailiffs’ actions in the course of the enforcement
proceedings. They also noted that the seizure of shares in OAO Yuganskneftegaz
had previously been declared lawful, that the applicant company had been
properly notified of all of the steps taken by the bailiffs in the course of
the enforcement proceedings and could bring court proceedings against them,
that the valuation by ZAO Dresdner Bank had not been contested by the applicant
in accordance with the special procedure provided for by the legislation in
force, and that the bailiffs had properly indicated the amount of the applicant
company’s debt and requested the Fund to sell the amount of shares necessary to
satisfy the debt.
6. Announcement
about the sale of OAO Yuganskneftegaz
245. In the meantime, on 19 November 2004, the
Russian Gazette, an official Government newspaper, published an announcement
about the sale of 76.79% of shares in OAO Yuganskneftegaz at a public auction
organised by the Property Fund. The only two conditions for participating in
the auction were to file an application between 19 November and
18 December 2004 and to make a deposit payment.
246. On 10 December 2004 OOO
Gazpromneft, ZAO Intercom and OAO First Venture Company filed applications with
the Federal Antimonopoly Service and thus were expected to bid at the auction.
247. The media reported that OAO Gazprom, a
parent company of OOO Gazpromneft, had begun negotiating a financing
arrangement with a consortium of international banks to finance its bid at the
auction. It was also reported that a number of non-Russian companies, such as
ENI, Chevron Texaco, China National Petroleum Corporation and E.ON, had
expressed interest in participating in the auction.
248. On 17 December 2004 the bailiffs
noted that the applicant company’s consolidated debt on that date, regard being
had also to the 2001 Tax Assessment, was RUB 344,222,156,424.22
(EUR 9,210,844,560.93, or USD 12,365,545,256.86).
7. The applicant
company’s application for bankruptcy in the
(a) Filing of bankruptcy petition and
request for injunctive relief
249. On 14 December 2004 the applicant
company filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code
in the U.S. Bankruptcy Court for the Southern District of Texas, Houston
Division (“the U.S. Bankruptcy Court”).
250. Simultaneously, the applicant
company filed a request for injunctive relief, pursuant to section 105 of the
U.S. Bankruptcy Code in order, among other things, to enforce the automatic
stay set out in section 362 (a) of the Bankruptcy Code by enjoining
certain parties from participating in the Yuganskneftegaz Auction. The request
was directed specifically against “... defendants the Russian Federation, OOO
Gazpromneft, ZAO Intercom, OAO First Venture Company, ABN Amro, BNP Paribas,
Calyon, Deutsche Bank, JP Morgan and Dresdner Kleinwort Wasserstein ...”.
251. Under
(c) Temporary restraining order of 16
December 2004
252. On 16 December 2004, having
examined the applicant company’s request, the U.S. Bankruptcy Court issued a
temporary restraining order barring certain specific entities from taking any
actions with respect to the shares in OAO Yuganskneftegaz, including participation
in the auction. Among other things, Judge Letitia Z. Clark stated the
following:
“... The court is mindful of the need for deference to
the judicial determination of another jurisdiction. This is ... of exceptional importance
when it involves that of agencies of another sovereign state. However, in the
instant case, the [applicant company] has made a showing that it needs a short
additional time to hold its shareholder meeting scheduled for December 20, 2004
and may elect to file for bankruptcy under Russian law in order to proceed with
a more orderly adjustment of its assets and debts in accordance with Russian
law or to continue to seek international arbitration ...”.
253. The entities mentioned in the order were
(a) the three companies registered to bid at the Auction, including OOO
Gazpromneft, ZAO Intercom and OAO First Venture Company, (b) six western
financial institutions that had announced their intention to fund OOO
Gazpromneft’s bid at the auction (ABN Amro, BNP Paribas, Calyon, Deutsche Bank,
JP Morgan and Dresdner Kleinwort Wasserstein) and (c) those persons in active
concert or participation with them.
(d) Outcome of the bankruptcy
proceedings in the
254. On 24 February 2005 the U.S.
Bankruptcy Court dismissed the applicant company’s petition for bankruptcy with
reference to section 1112 (b) of U.S. Bankruptcy Code which gave the
court discretion to dismiss a case “in the best interest of the creditors and
the estate”.
255. The court noted that most of the
applicant company’s assets were oil and gas within Russia, so that the court’s
ability to carry out a re-organisation without the cooperation of the Russian
government was extremely limited, that the applicant company sought to
substitute U.S. law in place of Russian, European Convention and/or
international law, that the applicant company had commenced proceedings in
other fora,
including the European Court of Human Rights, and the court did not feel that
it was uniquely qualified or more able that these other fora to consider the issues presented. Lastly, the
court noted that the vast majority of the business and financial activities of
the applicant company continued to occur in
8. Auction of 19
December 2004
256. On 19 December 2004 the Property
Fund auctioned 76.79% of the shares in OAO Yuganskneftegaz. It appears that
media reporters were able to attend the auction.
257. There were two participants in the
auction, OOO Baykalfinansgrup and OOO Gazpromneft. OOO Baykalfinansgrup, the
only bidder in the auction, made two bids, first of USD 8.65 billion and then
of RUB 260,753,447,303.18 (USD 9.4 billion or EUR 7.05 billion). It
appears that whilst taking part in the auction OOO Gazpromneft was prevented
from bidding by the injunction of 16 December 2004 (see paragraph 253 above).
9. The decisions
and reports concerning the outcome of the auction
258. On 21 December 2004 the Ministry of
Justice issued a report accepting that the Property Fund had properly carried
out the services due under the contract of 18 November 2004.
259. On
21 December 2004 the Property Fund publicly reported the sale of the shares in
OAO Yuganskneftegaz.
260. On 31 December 2004 the bailiffs
issued a resolution confirming the results of the auction. The resolution
stated that OOO Baykalfinansgrup had won the auction for 43 shares in OAO
Yuganskneftegaz (76.79% of its stock) for RUB 260,753,447,303.18 (approximately
EUR 6,896,341,940 or USD 9,396,960,842). By the time that resolution
was issued, the money had already been transferred to the bailiffs.
10. Takeover of OOO Baykalfinansgrup
by OAO Rosneft
261. According to press reports of 31
December 2004, OAO Rosneft, a State-owned oil company, acquired
262. In its consolidated financial
statements 2003-2005, dated 15 May 2005,OAO Rosneft declared:
“... In late December 2004 [OAO Rosneft] acquired a
100% interest in [OOO Baykalfinansgrup], which a few days earlier had won an
auction for the sale of a 76.79% interest in [OAO Yuganskneftegaz], which
represents 100% of the common shares of [OAO Yuganskneftegaz]. ...”
11. Court
proceedings in connection with the auction
263. It appears that on 26 May 2005 the
applicant company filed an action in the City Court against the Property Fund,
OOO Baykalfinansgrup, OAO Rosneft, OOO Gazpromneft, OAO Gazprom and the
Ministry of Justice, seeking to annul the auctioning of 43 shares in OAO
Yuganskneftegas and the deed of sale. It also claimed damages in excess of RUB
324 billion.
264. The action was examined and
dismissed by the City Court on 28 February 2007. The court decided that both
the Ministry of Justice and the Property Fund[5] had acted within their
statutory powers, that the auction procedure had been fully complied with and
that the applicant company’s allegation about the auction participants acting
in concert had been unsupported by any evidence.
265. The judgment was upheld by the
266. On 27 January 2005 the applicant
company also initiated parallel proceedings against OAO Rosneft, OOO
Baykalfinansgrup, Deutsche Bank AG, Deutsche Bank AG London, Deutsche Bank
Luxembourg S.A., Deutsche Bank Trust Company Americas and the
267. The applicant company voluntarily
withdrew the entire proceedings on 28 March 2005, after its bankruptcy petition
was dismissed by the U.S. Bankruptcy Court.
268. It does not appear that any enforcement
measures took place in respect of the applicant company after the auctioning of
OAO Yuganskneftegaz until September 2005.
269. On 8 September 2005 a consortium of
foreign banks represented by the French bank Société Générale (“the banks”)
filed an application with the City Court for recognition and enforcement of an
English High Court judgment ordering the applicant company to re-pay the
contractual debt of USD 482 million (around EUR 385 million), resulting from
the applicant company’s default under a USD 1 billion loan agreement dated 24
September 2003.
270. On 22 September 2005, at the banks’
request, the bailiffs again attached the applicant company’s property.
271. In October 2005 the applicant
company challenged this order.
272. On 30 November 2005 the City Court
dismissed the appeal as groundless.
273. The first-instance judgment was
upheld by the
274. In the meantime, on 28 September 2005,
the City Court allowed recognition and enforcement of the English High Court
judgment.
275. On 5 December 2005 the Circuit
Court granted the applicant company’s cassation appeal and quashed the judgment
of 28 September 2005. It remitted the case for a fresh hearing.
276. On 21 December 2005, having
re-examined the case, the City Court allowed the banks’ claims.
277. On 25 January 2006 the applicant
company appealed against the judgment of 21 December 2005.
278. On 2 March 2006 the Circuit Court
dismissed the appeal.
279. It appears that on 13 December 2005
the banks reached an agreement with the Rosneft company to sell to the latter
the applicant company’s debt to the banks.
280. On 6 March 2006 the banks lodged a
petition with the City Court to declare the applicant company bankrupt.
281. On 9 March 2006 bankruptcy
proceedings were initiated against the applicant company upon the banks’
petition. It appears that the Ministry decided to join the proceedings as one
of the bankruptcy creditors in respect of remaining tax debts of the 2000-2003
Tax Assessments still owed by the applicant company.
282. On 14 March 2006 the banks notified
the City Court about the decision to sell the debts owed by the applicant
company to Rosneft.
283. On 29 March 2006 the City Court
substituted Rosneft in the place of the banks as a bankruptcy creditor. By the
same decision the court imposed a supervision order on the applicant company
and appointed Mr Eduard Rebgun as the applicant company’s interim receiver. It
also prohibited the company’s management from disposing of any of its property
exceeding RUB 30 million in value.
284. On 6 and 7 April 2006 the applicant
company appealed against the decision of 29 March 2006 on all three
points.
285. On 27 April 2006 the
286. On 21 June 2006 the applicant
company appealed against the lower courts’ decisions to the Circuit Court. The
outcome of these proceedings is unclear.
287. On 21 April 2006 the Ministry
submitted a claim to the City Court, seeking to be included in the list of the
applicant company’s creditors for the amount of 353,766,625,235.66 RUB
(approximately EUR 10,435,809,153), along with 2,118 pages of documentation. The
claim was based on the company’s reassessed tax liability for the year 2004.
288. In June 2006 the City Court made a
number of rulings concerning the formation of the list of creditors. In
particular, on 1 and 7 June 2006 the City Court held hearings on the claim. On
14 June 2006 the final hearing of the claim was held. The court allowed the
claims in its entirety and dismissed the application for stay.
289. On 21 June 2006 the City Court
delivered a full version of the judgment of 14 June 2006. It decided to include
the Ministry in the list of the applicant company’s creditors for the amount
claimed and refused to stay the proceedings.
290. On 3 and 6 July the applicant company
appealed against the judgment of 14 June 2006 concerning the allowed claims.
291. On 4, 7 and 11 August 2006 the
292. On the latter date the
293. It appears that on 18 August 2006
the
294. On 25 July 2006 the Committee of
Creditors rejected the rehabilitation plan offered by the management and
recommended the applicant company’s liquidation.
295. On 31 July 2006 the applicant
company appealed against this decision.
296. On 4 August 2006 the City Court
examined the applicant company’s situation, declared that the company was
bankrupt and dismissed its management. The court appointed Mr E. Rebgun as the
applicant company’s trustee. It also refused the company’s request to stay the
proceedings.
297. Both parties appealed on 15 August
2006
298. The judgment was upheld on appeal
and entered into force on 26 September 2006.
299. It appears that on 22 August 2006
Mr E. Rebgun, acting as the trustee in the company’s bankruptcy proceedings,
revoked the authority of all counsel appointed by the applicant company’s
previous management, including Mr P. Gardner.
300. On 23 October 2006 Mr E. Rebgun
appointed a consortium of independent appraisers led by ZAO Roseko (“the
consortium”), selected through an open tender, to inventory and evaluate the
applicant company’s assets with a view to auctioning them.
301. The consortium carried out its
evaluation from October 2006 to July 2007.
302. From
27 March to 15 August 2007 Mr E. Rebgun held 17 public auctions at which all of
the applicant company’s assets were sold in line with the evaluations which had
been made earlier by the consortium. The aggregate proceeds amounted to over
RUB 860 billion (around USD 33.3 billion). The assets sold included a 20% stake
in OAO Sibneft (sold, along with 12 fully owned subsidiaries, blocks of shares
in 5 more entities and some exchange notes, for RUB 151.536 billion, or some
EUR 4.387 billion), 9.44% of shares of OAO Rosneft (sold, along with 12
exchange notes of OAO Yuganskneftegaz, for RUB 197.840 billion, or some EUR
5.728 billion) and scores of the company’s subsidiary companies.
303. By a decision of 12 November 2007,
the full version of which was produced on 15 November, the City Court examined
the applicant company’s situation, heard the report by Mr E. Rebgun and decided
to terminate the liquidation proceedings. The applicant company ceased to
exist, leaving over RUB 227.1 billion (around USD 9.2 billion) in unsatisfied
liabilities.
304. On 21 November 2007 a certificate
was issued to the effect that the applicant company had been liquidated on the
basis of the court decision.
305. It appears that a company Glendale
Group Limited and Yukos Capital S.A.R.L. contested the decision of 12 November
2007 before the
306. The outcome of these proceedings
remains unclear.
II. Relevant
domestic law and practice
307. Under Article 57 of the Constitution
of Russia, everyone is liable to pay taxes and duties established by law.
308. Article 44 of the Tax Code of 31
July 1998 no. 146-FZ (as in force at the relevant time) states that an
obligation to pay a tax or a duty arises, alters or ceases in accordance with
that Code and other legislative acts on taxes and fees.
309. Articles 45 and 80 of the Tax Code
provide that, as a general rule, taxpayers must comply with their obligation to
pay a tax on their own initiative, and define a tax declaration as the written
statement by taxpayers on their revenues and expenses, sources of revenue, tax
benefits and the calculated sum of the tax, as well as other data related to
calculation and payment of the tax.
310. Under Article 45, in the event of
non-payment or incomplete payment of the tax in due time, the tax authorities
may levy the tax liability directly from the taxpayer’s bank account.
311. Article 11 (2) of the Tax Code
defines a branch of an organisation as a geographically separate department,
with stable employment posts.
312. Under Articles 82 and 87 of the Tax
Code, the tax authorities may carry out documentary and on-site tax inspections
of taxpayers. Such inspections may cover only the three calendar years of the
taxpayer’s activity directly preceding the year of inspection. In exceptional
cases the authorities are allowed to carry out repeated on-site tax
inspections. Such cases include, among other things, on-site inspections
conducted by way of supervision of the activities of the tax authority that
conducted the initial audit (Article 87 (3) of the Code).
313. Article 101 (4) 2 of the Tax Code
states that the tax authority may use as evidence during its inspections
documents earlier demanded by the authority from a taxpayer, documents
submitted or obtained during documentary and on-site tax inspections of that
taxpayer as well as other documents in the possession of the authority.
314. Under Article 100 (5) of the Tax
Code a taxpayer has two months to file a detailed reply to the report drawn up
by the tax authorities on the outcome of the tax inspection.
315. Under Article 81 of the Tax Code, a
taxpayer may not be fined in respect of any errors if, prior to commencement of
the on-site tax inspection for the relevant year, it files amended tax returns and
voluntarily satisfies the related tax liabilities, including default interest.
316. By order no. BG-3-29/159 dated 2
April 2003 the Tax Ministry decided that the period for performance of the
demand to pay tax addressed to a taxpayer may not exceed ten calendar days from
the date of its receipt by the taxpayer.
317. The Government relied on the
following cases as examples of typical terms given to taxpayers for voluntary
payment of reassessed taxes and surcharges:
318. On 13 November 2000 the Tax
Ministry demanded that respondent OAO Slavneft-YANOS pay reassessed taxes and
interest surcharges amounting to over RUB 53 million within one day. The court decisions
in the case were taken on 11 June 2003, 7 October 2003 and 19 January 2004.
(b) Case
no. A33-16983/01-S3a-F02-1826/02-S1
319. On 31 May 2001 the Tax Ministry
ordered the Municipal Housing and Utilities Infrastructure of the Kansk
District to pay reassessed taxes in the amount of RUB 814,581.54 within one
day. The first judgment of 9 April 2002 was upheld by the cassation
instance on 16 July 2002.
(c) Case
no. F04/1724-594/A27-2004
320. On 23 January 2003 the Tax Ministry
ordered FGUP PO Progress to pay reassessed taxes in the amount of
RUB 72,827,208 within one day. The court decisions were taken on 4
September, 16 December 2003 and 5 April 2004 respectively.
321. On seven occasions in 2003 the Tax
Ministry ordered OOO Krasnaya Rybka to pay reassessed taxes and interest
surcharges in the overall amount of RUB 760,043.19 within one day. The
first-instance judgment in the case, dated 13 February 2004, was upheld by a
cassation decision of 16 June 2004.
(f) Case
no. F04-2648/2005(10969-A61-37)
322. On 25 August 2004 the Tax Ministry
ordered OOO YamalGIS-Servis to pay reassessed taxes in the amount of RUB
268,083 on the same day. The court decisions upholding the demand were taken on
9 December 2004, 24 February and 4 May 2005.
323. Article 38 of the Tax Code provides
that objects of taxation may be operations involving the retailing of goods,
works and services, property, profit, income, value of retailed goods, works
and services or other objects having cost, quantitative or physical parameters
on the existence of which the tax legislation bases the obligation to pay tax.
324. Article 39 of the Code defines
retailing of goods, works and services as, inter alia, the transfer (including
exchange of services, works and goods) in return for compensation of property
rights in respect of goods and results of works from one person to another, as
well as the rendering of services from one person to another in exchange for
compensation.
325. Article 41 of the Code defines
profits as economic gains in monetary form or in kind.
(a) Before
the entry into force of the Second Part of the Tax Code on 1 January 2001
326. Section 3 of RF Law no. 1992-1
of 6 December 1991 “On Value-Added Tax” (as in force at the relevant time)
subjects to VAT, among other things, the turnover generated by the retailing of
goods, works and services on the territory of Russia, the rates of which range
between 10% and 20%. Under section 5 of the Law, exported goods are exempt from
payment of the tax. The exemption becomes effective only if the taxpayer
properly justifies the claim. Until these documents are filed, the tax remains
payable under the non-export rate.
327. Letter no. B3-8-05/848, 04-03-08 of
the State Tax Service of Russia and the Ministry of Finance, dated 21 December
1995, stated that taxpayers were to file the following documents to justify
this tax exemption: a contract concluded between the legal personality taxpayer
registered in Russia with its foreign partner, proof of payment in respect of
the goods, and a customs declaration bearing the appropriate stamp of the
customs body, confirming the export of goods from the customs
(b) After
the entry into force of the Second Part of the Tax Code on 1 January 2001
328. In respect of VAT, the applicable
tax rate is 0% if the traded goods are placed in an “export” customs regime and
physically removed from the customs territory of the
329. For the zero rate to become
effective and in order to claim the VAT refund, it is necessary to justify the
claim by filing the following documents with the tax authorities (Article 165
of the Tax Code): the export contract concluded between the taxpayer and the
foreign buyer, a bank statement confirming receipt of funds from the foreign
buyer by a Russian bank duly registered with the tax authorities, a relevant
customs declaration bearing the stamp of the customs bodies confirming the
export of the goods from the customs territory of Russia, and copies of relevant
transport bills and shipping documents, bearing the stamps of the customs
bodies, confirming the export of goods from the customs territory of Russia.
330. On 14 July 2003 the
331. The relevant documents are to be
filed with the competent tax authority within 180 days from the date of the
customs clearance of the goods in question (Article 165 (9) of the Tax Code).
Until these documents are filed, the tax remains payable under the non-export
rate. A taxpayer is not precluded from filing the documents in question even
after the expiry of the time-limit in question (Article 176 of the Tax Code).
332. By a decision of 28 April 2003
(case no. F09-1159/03-AK) in the case of ZAO Aktsionernaya neftyanaya kompaniya
v. the Tax Ministry, the Federal Commercial Court of the Ural District, acting
as a cassation review court, rejected the company’s claims for VAT refunds with
reference to its failure to satisfy the requirements of Article 165 of the
Code. The company could not prove the fact of actual payment for the allegedly
exported goods.
333. By a decision of 17 February 2004
(case no. F09-187/04-AK) in the case of OOO Firma Galaktika v. the Tax
Ministry, the Federal Commercial Court of the Ural District, acting as a
cassation review court, rejected the company’s claims for VAT refunds with
reference to its failure to satisfy the requirements of Article 165 of the
Code. The company failed to submit a proper bank statement confirming receipt
of funds from the foreign buyer.
334. By a decision of 3 May 2005 (case
no. A56-31805/04) in the case of ZAO Stroitelnyy trest no. 28 v. the Tax
Ministry, the Federal Commercial Court of the North Western District examined
the decisions of lower courts whereby the company had been refused VAT refunds
at first instance (by a judgment of 11 October 2004 – the company failed
to submit the properly stamped customs declaration confirming the actual export
of the goods) and had subsequently been granted them on appeal (by a decision
of 21 January 2005 – the appeal court decided that the fact of the actual
export had been established by a final court decision in a related court
dispute). The cassation court quashed the appeal decision, having noted that
the requirements set out in Article 165 of the Code were strict and unequivocal
and that the law did not allow for any replacement of the customs declaration
by other means of proof.
335. By a decision of 9 March 2005 (case
no. F09-563/05-AK) in the case of OAO Kachkanarskiy gorno-obogatitelnyy
kombinat Vanadiy v. the Tax Ministry, the Federal Commercial Court of the Ural
District quashed the decisions of lower courts whereby the company had been
granted VAT refunds. The cassation court noted that the requirements set out in
Article 165 of the Code were strict and unambiguous and that the law required
the taxpayer to prove the actual export solely by means of the properly stamped
customs declaration, which had not been done by the company in the present
case. Accordingly, the court rejected the company’s claims.
336. By a decision of 27 September 2005
(case no. F09-4252/05-C2) in the case of OAO Nauchno-proizvodstvennyy centr
vysokotochnoy tekhniki Izhmash v. the Tax Ministry, the Federal Commercial
Court of the Ural District, acting as a cassation review court, rejected the
company’s claims for VAT refunds with reference to its failure to satisfy the
requirements of Article 165 of the Code in a timely manner, that is, within six
months.
337. Section 5 (2) of RF Law no. 1759-1
of 18 October 1991 “On motorway funds in the Russian Federation” provides for a
1% motorway users’ tax from the turnover of the retail of goods, works and
services, payable by all motorway users. Section 4 also makes subject to a 25%
tax the turnover (excluding VAT) of companies trading in fuels and lubricants.
338. This tax was abolished from 1
January 2003.
4. Tax
for the maintenance of the housing stock and socio-cultural facilities
339. Section 21 (“Ch”) of RF Law no.
2118-1 of 27 December 1991 “On the foundations of the tax system” imposes a tax
of up to 1.5% for the maintenance of the housing stock and socio-economic
facilities.
340. This tax was abolished with the
entry into force of the Second Part of the Tax Code on 1 January 2001.
(a) Before
the entry into force of the Second Part of the Tax Code on 1 January 2001
341. Section 2 (1-2) of RF Law no.
2030-1 of 13 December 1991 “On corporate property tax” provided for a tax of up
to 2% in respect of organisations’ property.
(b) After
the entry into force of the Second Part of the Tax Code on 1 January 2001
342. Chapter 30 of the Tax Code provides
for a tax of up to 2.2% in respect of organisations’ property. The exact rate
is defined by the regional authorities.
(a) Before
the entry into force of the Second Part of the Tax Code on 1 January 2001
343. Law no. 2116-1 of 27 December 1991
“On profit tax on enterprises and organisations” (sections 2 and 5) provided
for a profit tax, the rate of which could vary depending on the type of taxable
activity and the rate fixed by the local authorities. The mandatory rate to be
transferred to the Federal budget was 11%.
(b) After
the entry into force of the Second Part of the Tax Code on 1 January 2001
344. Chapter 25 of the Tax Code provides
for a profit tax of up to 24% (6.5% to be transferred to the Federal budget and
the rest to the regional budget).
345. Section 21 (1) “z” of RF Law no.
2118-1 of 27 December 1991 “On the foundations of the tax system” imposed a tax
in respect of the cost of advertisement services.
346. This tax was abolished from 1
January 2005.
347. Article 56 of the Tax Code defines a
tax benefit as a full or partial exemption from the payment of taxes, granted
by the tax legislation.
348. In letter no. 04/06/08, dated 21
October 1998, the Ministry of Finance noted, inter alia:
“...[that] experience in creating and operating free
economic zones in the Russian Federation, established pursuant to both federal
laws (the special economic zone in the Kaliningrad region) and resolutions of
the authorities of constituent entities of the Federation (Kalmykiya, Tuva), [has]
demonstrate[d] that the creation of such zones across such vast areas in the
absence of a proper analysis of investment projects leads to abuses of the tax
and customs incentives granted and, accordingly, to serious losses suffered by
the federal and local budgets, as reported by the Ministry of Finance of Russia
to the Government of Russia on multiple occasions.”
2. Requirements
relating to the registration of taxpayers
349. Under Article 83 (1) of the Tax
Code, taxpayers which are legal entities are required to register with the tax
authorities at their headquarters (location of their executive bodies), at the
location of their branches and at the location of any real estate and places
where vehicles belonging to them are registered.
350. Special registration rules applied
in respect of large taxpayers, including the applicant company.
351. By Decree no. АП-3-10/399 of the Tax Ministry, dated 15 December
1999, such taxpayers are required to register at their main location, at the
location of their branches and at the location of real estate and places where
vehicles belonging to them are registered, and in certain specific tax offices
(inter-district level or as specifically indicated by the Ministry).
352. Annex 3 to the Decree contains the
form “On subsidiary and dependant companies and subsidiary enterprises”, to be
filled in by the taxpayer. During registration the taxpayer is required to
indicate all of its subsidiary and dependant companies.
353. In respect of domestic off-shore
territories, according to commentators, this requirement means that in practice
the taxpayer’s executive body should always be physically located and
functioning on the territory of the off-shore. If the taxpayer fails to comply
with the requirement, the tax authorities could declare its registration void
with the subsequent recovery of the entirety of the perceived tax benefits (see
A.V. Bryzgalin, Practical Tax
Encyclopaedia,
3. Closed
administrative-territorial formations (the town of
354. Under section 5 of Law no. 3297-1
of the Russian Federation “On closed administrative-territorial formations”,
tax concessions are provided to businesses if, inter alia, they have at least 90% of their fixed assets and
conduct at least 70% of their activities on the territory of the respective
formation (including a requirement that at least 70% of their employees be made
up of persons permanently residing in the ZATO in question, and that at least
70% of their wage bill be paid to employees permanently residing in that
territory).
355. Letter no. AП-6-01/505
of the Tax Ministry, dated 24 June 1999, contained Methodological Directions to
the tax bodies on issues concerning the lawfulness of the use of additional tax
benefits granted by local authorities in the closed administrative-territorial
formations. It stated that the tax authorities ought to verify the actual
presence of the taxpayer’s assets on the territory in question by checking its
accounting records and financial statements, and by confirming the physical
location of the organisation at the indicated address and the fact of genuine
performance by the taxpayer’s employees at the taxpayer’s registered location.
(b) Case
no. A42-6604/00-15-818/01 (The Tax Ministry v. OOO Pribrezhnoe), referred to by
the applicant company
356. The respondent legal entity was OOO
Pribrezhnoe, registered in the closed administrative territorial formation town
of
357. The final decision in the case was
taken by the Court of Cassation on 5 June 2002.
4. The
358. Under Law no. 9-FZ of the Republic
of Mordoviya of 9 March 1999 “On the conditions of efficient use of the
socio-economic potential of the Republic of Mordoviya”, tax concessions are
granted to taxpayers whose entities were established after the entry into force
of that law and whose activities meet certain conditions, including but not
limited to the following:
(a) they conduct export
operations, the quarterly proceeds from which account for at least 15%of the
business’s total earnings;
(b) they engage in wholesale
trade in fuel and lubricants and other types of hydrocarbon raw materials, the
quarterly proceeds from which account for at least 70% of the business’ total
earnings.
359. Section 1 of the Law states that
“this Law establishes concessions with the objective of creating favourable
conditions for attracting capital into the territory of the Republic of
Mordoviya, strengthening the socio-economic potential of the Republic of
Mordoviya, developing the securities market and creating new jobs through
special arrangements for the taxation of organisations”.
5. The
360. Law no. 12-P-3 of the
(a) the taxpayer is not a user
of mineral resources in the territory of the Republic;
(b) the taxpayer is registered
with the Ministry of Investment Policy of the
(c) the enterprise’s
investment in the economy of the Republic meets the criteria established by the
Ministry of Investment Policy of the Republic in accordance with this law.
361. By a decision of 16 April 2002
(case no. F08-1134/2002-402) in the case of OOO Simpleks v. the Tax Ministry,
the Federal Commercial Court of the North-Caucasian District quashed the
decisions of lower courts and instructed them to investigate further whether
the taxpayer had indeed complied with the conditions mentioned in the law, had
acted in good faith in this respect and had indeed made any investments in the
local economy.
362. By a decision dated 29 April 2002
(case no. F08-1368/2002-506A) in the case of OOO Impuls v. the Tax Ministry,
the Federal Commercial Court of the North-Caucasian District quashed the
decisions of lower courts and instructed them to investigate further whether
the taxpayer had indeed complied with the conditions mentioned in the law, had
acted in good faith in this respect and indeed made any investments in the
local economy.
363. By a decision of 20 May 2002 (case no.
F08-1678/2002-614A) in the case of OOO Sibirskaya transportnaya kompaniya (one
of the sham entities belonging to the applicant company) v. the Tax Ministry,
the Federal Commercial Court of the North-Caucasian District ruled as follows:
“[b]ased on the content and meaning of the
[above-mentioned] law and Resolution no. 7 of the Elista Town Administration,
[the purpose of the municipal legislation] is to attract funds from various
investors for development of the regional and local economies, given the lack
of funds in the regional and local budgets and the need for their replenishment
to ensure the activities of the Kalmyk Republic and the town of Elista ...
The case documents show that RUB 27,196 came from the
plaintiff for development of the regional and local economies, whereas RUB
6,918,617 did not enter the regional and local budgets directly. Thus, the
investments made by [OOO Sibirskaya transkportnaya kompaniya] amount to 0.4% of
the amount of taxes that would otherwise have been payable by it. They have no
effect on the development of the economy [and] do not cover the budgetary
losses related to the granting of incentives to taxpayers; on the contrary,
they have consequences in the form of unfair enrichment at the expense of
budgetary funds. Thus, given that the amount of the investments made by the
plaintiff is incommensurate to the amount of incentives used, the plaintiff
abused its right, that is, it acted in bad faith”.
Accordingly, the court quashed
the decisions of the lower courts and instructed them to investigate further
whether the taxpayer had complied with the above-mentioned conditions and
whether it had acted in good faith.
364. By a decision of 28 May 2002 (case
no. F08-1793/2002) in the case of ZAO Telekom Zapad Komplekt v. the Tax
Ministry, the Federal Commercial Court of the North-Caucasian District ruled
that:
“[b]ased on the meaning and contents of the
[above-mentioned] law and Resolution no. 7 of the Elista Town Administration,
it follows that [the purpose of the municipal legislation] is to attract funds
from various investors for development of the regional and local economies,
given the lack of funds in the regional and local budgets and the need for
their replenishment to ensure the activities of the Kalmyk Republic and the
town of Elista...
... [the court has to examine] the proportion between
the investments made by the [taxpayer] and the amount of tax that did not enter
the budget [in order] to resolve the issue of the plaintiff’s good faith and
its abuse of its rights”.
Accordingly, the court quashed
the decisions of the lower courts and instructed them to investigate further
whether the taxpayer had complied with the above-mentioned conditions and had
acted in good faith.
365. By a decision of 4 June 2002 (case
no. F08-1864/2002-697A) in the case of ZAO Promyshlennaya korporaciya Shar v.
the Tax Ministry, the Federal Commercial Court of the North-Caucasian District
quashed the decisions of the lower courts and instructed them to investigate
further whether the taxpayer had indeed complied with the conditions mentioned
in the law, had acted in good faith in this respect and had indeed made any
investments in the local economy.
366. By a decision of 5 August 2002
(case no. F08-2762/2002-1009A) in the case of OOO Promet v. the Tax Ministry,
the Federal Commercial Court of the North-Caucasian District quashed the
decisions of the lower courts and instructed them to investigate further
whether the taxpayer had indeed complied with the conditions mentioned in the
law, had acted in good faith in this respect and had indeed made any
investments in the local economy.
367. By a decision of 13 August 2002 (case
no. F08-2892/2002-1051A) in the case of OOO TD Dion v. the Tax Ministry, the
Federal Commercial Court of the North-Caucasian District quashed the decisions
of the lower courts and instructed them to investigate further whether the
taxpayer had indeed complied with the conditions mentioned in the law, had
acted in good faith in this respect and had indeed made any investments in the
local economy.
368. By a decision of 29 August 2002
(case no. F08-3158/2002-1140A) in the case of ZAO Stanford v. the Tax Ministry,
the Federal Commercial Court of the North-Caucasian District quashed the
decisions of the lower courts and instructed them to investigate further
whether the taxpayer had indeed complied with the conditions mentioned in the
law, had acted in good faith in this respect and had indeed made any
investments in the local economy.
369. By a decision of 20 February 2003
(cases nos. F08-270/2003-91A and F08-1679/2002-622A) in a dispute between the
Tax Ministry and OOO “Vostochnaya perestrakhovochnaya kompaniya”, the Federal
Commercial Court of the North-Caucasian Circuit found as follows:
“The investments made by the [taxpayer] amount to
0.14% of the amount of taxes that would otherwise have been payable by it. They
have no effect on the development of the economy... but ... their effect is
unfair enrichment .... Therefore, [as] the amount of investments by [the
taxpayer] was incommensurate to the amount of the benefits received, [the
taxpayer] abused its right, that is, it acted in bad faith”
370. By a decision of 20 February 2003
(case no. F08-268/2003-98A) in the case of OOO Bazis Sekyuritis v. the Tax
Ministry, the Federal Commercial Court of the North-Caucasian District quashed the
decisions of the lower courts and instructed them to investigate further
whether the taxpayer had indeed complied with the conditions mentioned in the
law, had acted in good faith in this respect and had indeed made any
investments in the local economy.
371. By a decision of 8 April 2003 (case
no. F08-1013/2003-383A) in the case of OOO Gravite v. the Tax Ministry, the
Federal Commercial Court of the North-Caucasian District quashed the decisions
of the lower courts and instructed them to investigate further whether the
taxpayer had indeed complied with the conditions mentioned in the law, had
acted in good faith in this respect and had indeed made any investments in the
local economy.
6. The
Evenk Autonomous District
372. Under section 9 of Law no. 108 of
the Evenk Autonomous District “On specific features of the tax system in the
Evenk Autonomous District” of 24 September 1998, substantially lower tax rates
apply to local businesses whose activities meet certain conditions with regard
to the special taxation procedure set out in section 8 of that Law.
D. The
use and interpretation of terms of civil legislation in tax disputes
373. Under Article 11 of the Tax Code,
the institutions, notions and terms of the civil legislation of
E. General
principles governing the status of legal entities
1. Presumption
of independence
374. Under Article 2 of Civil Code of
30 November 1994 no. 51-FZ (as in force at the relevant time), the legal
status of parties involved in civil-law transactions, the grounds for the
creation of ownership and other property rights and the order of exercising
those rights are defined by the civil legislation, which also regulates
contractual and other obligations.
375. The civil legislation regulates the
relations between persons engaged in business activities or in those activities
performed with their participation, on the assumption that business activity is
an independent activity performed at one’s own risk and aimed at systematically
deriving a profit from the use of property, the sale of commodities, the
performance of work or the rendering of services by those persons registered in
this capacity in conformity with the legally-established procedure.
376. It is formally prohibited to make
any unilateral property transfers (gifts, grants or gratuitous loans) between
independent commercial legal entities (Articles 575 and 690 of the Civil Code).
Unilateral property transfers are permitted by Article 251 (1) 11 of the Tax
Code and not counted for the purposes of profit tax if they are made between
associated entities, where one of them holds more than 50% of shares in the
equity of the other entity.
2. Rules
applicable to subsidiary and dependant companies
377. Article 105 of the Civil Code
provides that a subsidiary company is one controlled by another company, either
through ownership of the subsidiary company’s shares, by virtue of a contract
or by any other means.
378. The controlling company is jointly
responsible for debts incurred by the subsidiary company as a result of
compliance with the controlling company’s instructions. The controlling company
may be held vicariously responsible for a debt of the subsidiary company in the
event of the latter’s insolvency.
379. Article 106 of the Code provides
that a company is dependant when the other company owns over 20% of the first
company’s voting stock. A company which purchases over 20% of the voting shares
in other companies is obliged to make this information public.
380. Similar rules are established in
respect of limited liability companies (обществa с ограниченной ответственностью) by section 6 of Law no. 14-FZ on limited
liability companies of 8 February 1998.
F. Definition
of a property owner
381. Article 209 of the Civil Code
defines an owner as the person who has the rights of possession, use and
disposal of his property. In respect of this property, the owner is entitled,
at his will, to perform any actions not contradicting the law and the other
legal acts, and not violating the rights and legally protected interests of
other persons.
G. Contractual
freedom and its limits
1. Presumption
of good faith and prohibition on abuse of rights
382. Articles
9 and 10 of the Civil Code provide that the parties involved in civil-law
transactions are free to act contractually within the limits defined by law.
383. Article 10 (1 and 2) of the Code
states specifically that parties involved in civil-law transactions are
prohibited from abusing their rights. In such cases, the courts may deny legal
protection in respect of the right which is being abused. Article 10 (3)
establishes a refutable presumption of good faith and reasonableness of actions
on the parties in civil-law transactions.
2. Examples
of the case-law of the domestic courts concerning the notion of bad faith
384. In its decision no. 24-P dated 12
October 1998, the Constitutional Court of Russia for the first time made use
and interpreted the notion of “bad/good faith” to assess the legal consequence
of the conduct of taxpayers in its jurisprudence. In this case this was done to
define the moment at which a taxpayer can be said to have discharged his or her
constitutional obligation to pay taxes.
385. In its decision no. 138-O dated 25
July 2001, the
Constitutional Court of Russia again confirmed that there existed a refutable
presumption that the taxpayer was acting in good faith and that a finding that
a taxpayer had acted in bad faith could have unfavourable legal consequences
for the taxpayer. The case again concerned the definition of a moment at which
a taxpayer can be said to have discharged his or her constitutional obligation
to pay taxes.
386. The domestic commercial courts
applied this approach in a number of cases concerning the eligibility of
taxpayers to tax concessions in the
387. In its decision no. 168-O of 8
April 2004 the
3. Rules
governing sham transactions
388. Under Article 153 of the Civil
Code, transactions are defined as activities of natural and legal persons
creating, altering and terminating their civil rights and obligations.
389. Article 166 of the Civil Code
states that a transaction may be declared invalid on the grounds established by
that Code, either by force of its being recognized as such by the court (a
voidable transaction, оспоримая сделка), or regardless of such recognition (a void
transaction, ничтожная сделка).
390. Under Article 167 of the Civil
Code, void transactions entail no legal consequences, apart from those relating
to their invalidity, and are invalid from the moment they are conducted.
391. Article 170 (2) establishes
specific rules in respect of two types of void transactions: ‘imaginary’
transactions (“мнимая сделка”, effected only for form’s sake, without the
intention to create the corresponding legal consequences) and ‘sham’
transactions (“притворная сделка”, which are effected for the purpose of
screening other transactions). This provision condemns both imaginary and sham
transactions as void.
392. It also provides that in the event
of sham transactions, the rules governing the transaction that was in fact
intended by the parties may be applied by a court, regard being had to the
substance of this transaction (the so-called “substance over form” rule).
393. Under Article 45 (2) 3 of the Tax
Code the power to re-characterise transactions by a taxpayer with third
parties, their legal status and the nature of the taxpayer’s activity in tax
disputes lies with the courts (as opposed to executive bodies). Section 7 of
Law no. 943-1 of 21 March 1991 “On Tax Authorities in the Russian Federation”
vests the power to contest such transactions and recover everything received in
such transactions with the State budget.
394. Comments on the Civil Code (O.N.
Sadikov, Comments on the Civil Code,
Yuridicheskaya firma Kontrakt Infra-M, Moscow, 1998) states, with reference to
Bulletin no. 11 of the Supreme Court of RSFSR (page 2), that any evidence
admitted by the rules on civil procedure may also serve as proof of the
invalidity of sham transactions.
H. General
rules on price formation and the price adjustment mechanism
395. Article 40 (1) of the Tax Code
requires that the parties trade at market prices. It also establishes a
refutable presumption that the prices agreed to by the parties correspond to
market levels and are used for taxation purposes.
I. Price
adjustment mechanism of the Tax Code
396. Under Article 40 (2) of the Tax
Code, the tax authorities are empowered to overrule the above presumption by
verifying and correcting the prices for taxation purposes. A finding that the
prices were lowered usually leads to the conclusion that the taxpayer
understated the taxable base and thus failed properly to pay his taxes (see
Article 122 of the Tax Code below).
397. This may happen only (1) when the
parties are interdependent within the meaning of Article 20 of the Tax Code;
(2) in the event of barter transactions, or; (3) international transactions;
(4) when the prices set by a taxpayer during the same short period for certain
identical types of goods, work or services fluctuate by more than 20%.
398. Article 20 (1) of the Tax Code
defines interdependent parties as natural persons and (or) organisations whose
mutual relations may influence the terms or economic results of their
respective activities or the activities of the parties that they represent. In
particular, (a) one organisation has a direct and (or) indirect interest in
another organisation, and the aggregate share of such interest is more than
20%. The share accounted for by the indirect interest held by one organisation
in another, through a chain of separate organisations, is defined as the
product of the direct interest shares that the organisations in this chain hold
in one another; (b) one natural person is subordinate to another natural person
ex officio; (c) in the case of
individuals, they are spouses, relatives, adopters or adoptees, guardians or
wards under the family law of the Russian Federation.
399. Article 20 (2) of the Tax Code
provides that the court may recognize persons as interdependent on other
grounds, not provided for by Item 1 of that Article, if the relations between
these persons may have influenced the results of transactions in the sale of
goods (work, services).
J. Applicable
tax offences and related penalties
400. Article 122 §§ 1 and 3 of the Tax
Code imposes a penalty of 40% of the unpaid tax liability on intentional non-payment
or incomplete payment of the tax due, as a result of understating the taxable
base. Articles 112 § 2 and 114 § 4 of the Tax Code provide for a 100% increase
in this penalty in the event of a repeated offence by the same taxpayer.
Article 114 § 3 of the Code also provides for a possibility of reducing the
fine by half if there were extenuating circumstances on the facts of the case.
401. Article 114 § 7 of the Code makes
it mandatory to recover the penalties in court. This rule does not apply to
reassessed fines and interest surcharges.
402. Article 75 of the Tax Code provides
for payment of an interest surcharge by taxpayers in cases of late payment of
the taxes due. The interest surcharge amounts to one three-hundredth of the
statutory rate for each day of the delay. Persons and entities that were unable
to meet their tax liabilities in due time because their bank account was
suspended by the tax authority or a court are excused from payment of the
interest surcharge for the duration of the respective suspension (Article 75 §
3 of the Tax Code).
1. Situation prior to the Constitutional Court’s
decision of 14 July 2005
403. In accordance with Article 113 § 1
of the Tax Code (Chapter 15 General provisions concerning liability for tax
offences), a person could not be held liable for a tax offence under Article
122 of the Code if three years had expired since the first day after the end of
the tax period during which the offence was committed. The above provision only
applied to the payment of fines. Article 115 of the Code sets out an additional
six-month time-limit within which the authorities must collect the fines. It
starts running from the date of adoption of the relevant audit report.
404. As regards the reassessed taxes and
interest surcharges, Article 87 of the Tax Code (as in force as the relevant
time) limited the ability of the authorities to carry out tax inspections by
stating that “the[y] ... [may] only be carried out in respect of the activities
of the relevant taxpayer ... during the three calendar years immediately
preceding the year of the tax inspection” (see also decision no. 3803/01 of the
Supreme Commercial Court below).
(b) Practice directions by the
405. In
paragraph 36 of Resolution of the Plenum of the Supreme Commercial Court no. 5
dated 28 February 2001 “On certain issues arising from application of the first
part of the Tax Code”, the court indicated to the lower courts that “a taxpayer
is considered to have been held liable [within the meaning of Article 113 of
the Tax Code] on the date on which the head of the [relevant] tax body or his
deputy takes a decision to hold this person liable of a tax offence in
accordance with [the rules set out in] the Code”.
406. This interpretation was subsequently used
by the Presidium of the
(c) Case
no. F09-3155/05-AK (OAO Bashselstroy v. the Tax Ministry)
407. On 30 September 2003 the Federal
Commercial Court of the Ural Circuit reviewed and quashed the lower courts’
decisions in a tax dispute involving the Tax Ministry and a private
shareholding. Among other things, the Circuit Court stated that the time-limit
set out in Article 113 of the Code started running from the date on which the
relevant facts came to the attention of the competent authorities (as a result
of a tax inspection or other types of tax control).
(d) Cases
referred to by the applicant company
408. In a number of cases pre-dating the
decision of the Constitutional Court of 14 July 2005, the courts applied
Article 113 in line with an interpretation given by Resolution no. 5 of the Plenum
of the Supreme Commercial Court of 28 February 2001 (see decision no.
F04/7-1527/A27-2002 of 4 January 2003 of the Federal Commercial Court
of the Western Siberia Circuit, decision no. F04/7-1527/A27-2002 of
8 January 2003 of the Federal Commercial Court of the Northern Western
Circuit, decision no. F03-A59/03-2/745 of 23 April 2003 of the Federal
Commercial Court of the Far-Eastern Circuit, decision no. A48-1188/03-2 of
12 November 2003 of the Federal Commercial Court of the Central Circuit,
decision no. A82-471/2004-8 of 8 October 2004 of the Federal Commercial Court
of the Volgo-Vyatskyy Circuit, decision no. F03-A73/04-2/947 of 19 May 2004 of
the Federal Commercial Court of the Far Eastern Circuit, decision no.
A19-3142/04-40-F02-3338/04-C1 of 24 August 2004 of the Federal Commercial
Court of the Eastern Siberia Circuit, decision no.
A19-9731/03-15-F02-4732/03-C1 of 9 January 2004 of the Federal Commercial
Court of the Eastern Siberia Circuit, decision no.
A33-15117/03-C3-F02-1877/04-C1 of 2 June 2004 of the Federal Commercial Court
of the Eastern Siberia Circuit, decision no. KA-A41/9494-04 of 20 October 2004
of the Federal Commercial Court of the Moscow Circuit, decision no.
F09-4221/04AK of 13 October 2004 of the Federal Commercial Court of the Ural
Circuit, and decision no. F09-3799/04AK of 4 September 2004 of the Federal
Commercial Court of the Ural Circuit). None of these cases involved a situation
whereby a taxpayer had hindered a tax inspection or had deliberately sought to
delay the tax proceedings.
2. Situation after the Constitutional Court’s
decision of 14 July 2005
(a) Case
no. KA-A40/5876-06 (OAO Korus-holding v. the Tax Ministry)
409. By a decision of 28 July 2006 the
Federal Commercial Court of the Moscow Circuit, acting as a cassation review
instance, reviewed the application of the time-limits of Article 113 of the
Code. The audit report prepared by the Ministry in respect of the calendar year
2001 was dated 28 February, whilst the decision to hold the taxpayer
liable was issued on 29 March 2005. The Circuit Court decided that the
authorities could be said to have been acting in time provided that they
respected the requirements of Article 87 of the Code, which sets out a
three-year time-limit for conducting tax inspections and Article 23 § 8 (1) of
the Code, which sets out a four-year time-limit for the maintenance of
accounting documents. The Circuit Court also specifically noted the actions of
OAO Korus-holding, which had sought to hinder and complicate the tax
inspection.
(b) 2006 amendments to Article 113 of the Tax Code
410. The text of Article 113 has been amended
by Federal Law no. 137-FZ of 27 July 2006, which came into force on 1
January 2007. The provision now contains § 1.1., which states:
“1.1. The running of the time-limit for
holding a taxpayer liable stops if [the taxpayer] actively hindered an on-site
tax inspection, thus creating an insurmountable obstacle for that inspection
and for the determination by the tax authorities of the amount of taxes due to
the budgetary system of the Russian Federation.
The running of the
time-limit [in question] is suspended on the date of adoption of a report
[setting out the circumstances in which the taxpayer denied the tax authorities
access to the relevant documents]. In this case, the running of the time-limit
continues on the date when the above-mentioned circumstances no longer exist
and a decision on continuation of the on-site tax inspection is taken.”
(c) Case
no. F08-2786/2007-1290A (the Tax Ministry v. N. A. Borshcheva)
411. On 31 May 2007 the Federal
Commercial Court of the North Caucasian Circuit, acting as a cassation review
instance, reviewed the application of the time-limits of Article 113 of the
Code. The audit report prepared by the Ministry in respect of the calendar
years 2001-2004 was dated 18 July 2006, whilst the decision to hold the
taxpayer liable was issued on 4 September 2006. Again, the Circuit Court
decided that the authorities had been acting in time, regard being had to the
taxpayer’s actions for the purpose of delaying and hindering the tax
inspection.
L. Applicable
rules on court procedure
412. Under Article 35 of the Code of
Commercial Court Procedure of 24 July 2003 no. 95-FZ (as in force at the
relevant time), claims should be brought to a court having jurisdiction over
the defendant’s official place of business.
413. Article 54 of the Civil Code
defines a company’s official place of business as the place of the company’s
registration, unless, in accordance with the law, the company’s articles of
association do not specify otherwise.
414. Decision no. 6/8 of the Plenary
Session of the Supreme Court and Supreme Commercial Court of 1 July 1996
specifies that the company’s official place of business is the location of its
entities.
415. Under Article 91 of the Code of
Commercial Court Procedure, a party may apply for proportionate security
measures, including attachment of a defendant’s assets, pending the examination
of the case by the courts.
416. Article 213 of the Code of
Commercial Court Procedure provides that in tax cases a court suit may be filed
by the authorities when their demands have not been complied with voluntarily,
or when the term for voluntary compliance has expired.
(d) Time-limits
for examination of cases concerning mandatory payments and penalties
417. Article 215 of the Code of
Commercial Court Procedure sets out a two-month time-limit during which a
first-instance court is to finalise the examination on the merits of any case
which involves mandatory payment and related penalties.
(e) Time-limits for the preparation and
examination of the case at first instance
418. Article 134 of the Code of
Commercial Court Procedure establishes a two-month time-limit for the
preparation of the case for examination at first instance.
419. Pursuant to Article 152 of the
Code, the first-instance court should examine the case and deliver its judgment
within one month of a decision to list the case for a hearing.
(f) Rules
on adding evidence to the case after the beginning of the hearing
420. Article 65 (3) of the Code of
Commercial Court Procedure makes it mandatory for a party to disclose all
evidence relied upon in their claims or objections prior to the beginning of
the hearings in a case.
421. In paragraph 35 of Information
Letter no. 82, dated 13 August 2004, the
“Any evidence undisclosed by the parties to the case
prior to the hearing, but submitted later during the examination of the
evidence, shall be examined by the commercial court at first instance
regardless of the reasons for which the procedure for disclosure of evidence
was breached ...”
(g) Right
to lodge an appeal against the first-instance judgment
422. Under
Articles 257 and 259 of the Code of Commercial Court Procedure participants in
the proceedings have one month from the delivery of the first-instance judgment
to lodge an appeal.
423. Under Article 267 of the Code of Commercial Courts Procedure, an appeal court must
examine an appeal lodged against the first-instance judgment within one month,
starting from the date of its filing. This term includes any time necessary for
case preparation and for reaching the appeal decision. By federal law no.
205-FZ dated 19 July 2009 the time-limit was increased to two months. By
federal law no. 69-FZ dated 30 April 2010 the provision in question has been
amended. The time-limit became extendable up to six months depending on the
complexity of the case and the number of participants. The provision also made
it clear that the time-limit started running on expiry of the time-limit for
lodging an appeal.
424. Under Article 268 of the Code, an
appeal court fully re-examines the case using the evidence contained in the
case and any newly-presented additional evidence. In examining procedural
motions by the parties, including requests to call and hear additional
witnesses or adduce and examine additional pieces of evidence, the appeal court
is not bound by previous refusals of the same motions by the first-instance
court.
425. Under Articles 180, 271 and 318 of
the Code, the first-instance judgment becomes enforceable on the date of the
entry into force of the appeal decision confirming it. The enforcement takes
place on the basis on a writ issued by the respective court.
426. In accordance with Article 286 of
the Code, a cassation instance court, among other things, reviews the lower
courts’ decisions and verifies whether the conclusions of the lower courts in
respect of both law and fact correspond to the circumstances of the case.
427. Article 283 of the Code provides
for a possibility of applying for a stay of enforcement of the lower courts’
decisions. The applicant must show that it would be impossible to reverse the
effects of an immediate enforcement of the lower courts’ decisions if the
cassation appeal were successful.
428. In its rulings no. 7-P dated 6 June
1995, no. 14-P dated 13 June 1996 and no. 14-P dated 28 October 1999,
the Constitutional Court formulated and reiterated the principle that the
constitutional right to judicial protection could not be respected unless
courts examined in substance the factual circumstances of the case, without
merely limiting themselves to formalistic application of the legal norms. It
has frequently referred to this principle in subsequent rulings.
1. Court disputes involving
re-characterisation of sham arrangements
(a) Case
no. A40-31714/97-2-312 (the Tax Ministry v. OOO TF Grin Haus)
429. In 1996 the respondent legal entity
was involved in a series of intertwined transactions (rent contracts and loan
agreements) with two third parties: as a result, the respondent leased a
building in central Moscow to the third parties, but was able to avoid
inclusion of the rent payments in the taxable base of its operations by
claiming that they were interest payments in respect of the loan agreement. The
Ministry discovered the tax evasion scheme, re-characterised the transactions
in question as rent and ordered the taxpayer to pay RUB 2 billion in back
taxes.
430. The case was examined in three
rounds of court proceedings by the courts at three levels of jurisdiction. Having
regard to the substance of the transactions entered into by the respondent, the
terms of payment and execution of the contested contracts, and, generally, to
the conduct of the respondent company and the third parties, the courts decided
that the contractual arrangement had been sham, re-characterised the
arrangement as rent and upheld the Ministry’s decision.
431. In the first round of proceedings
the courts adopted their decisions on the following dates: 1 December 1997, 27
January 1998 and 30 March 1998.
432. In the second round of proceedings
the decisions were adopted by the first-instance and appeal courts on
26 May 1998 and 21 July 1998. The decision of the cassation court was
taken on an unspecified date.
433. The third round of proceedings
involved decisions on 17 November 1998, 25 January 1999 and 2 March 1999.
(b) Case
no. KA-A40/2183-98 (the Tax Ministry v. AuRoKom GMBH)
434. The respondent legal entity entered
into a loan agreement with a third party; the tax authorities considered it a
sham, re-characterised it as a rent contract and reassessed the tax due in
respect of the profits made. The lower courts disagreed and quashed the tax
authority’s decision. By a decision of 17 September 1998 the cassation court
quashed the lower courts’ decisions and ordered that the matter be re-examined,
giving due regard to all relevant circumstances, including the substance of the
transaction. The courts were to reconsider all relevant clauses in the
agreement in question, the conduct of the parties and the fact of physical
occupation of the allegedly rented space.
(c) Case
no. A40/36819/04-75-387 (the Tax Ministry v. OAO AKB Rossiyskiy Kapital)
435. The respondent legal entity is a
bank which in 2001-2002 conducted business by buying and then reselling
precious metals. To avoid the payment of full VAT on its sales operations in
this respect, the bank entered into commission agreements with the sellers from
which it bought the metals, in order to be considered not as the owner of the
traded goods, but merely as the sellers’ agent.
436. The domestic courts took account of
the substance of the bank’s transactions (terms of payment, actual
circumstances of delivery and other relevant factual details) and, having
established that in reality the bank had been buying and reselling the precious
metals, re-characterised the bank’s activity as sales. The courts referred to
Article 209 of the Civil Code (containing the legal definition of an owner) and
concluded that the bank first bought the precious metals, thus becoming the
“owner” within the meaning of the said provision and thereafter resold the goods.
They found the bank liable for tax evasion under Article 122 of the Tax Code,
ordered it to pay reassessed VAT in the amount of RUB 1,091,123,539.42, default
interest of RUB 408,289.76 and penalties of RUB 436,391,918.65.
437. The first-instance judgment was
adopted on 3 November 2004 and upheld on appeal on 11 January 2005.
2. Tax
evasion schemes involving sham rent agreements and letter-box entities
registered in the domestic offshore town of
(a) Case
no. A41 K1-13539/02 (the Tax Ministry v. OAO Ufimskiy NPZ and ZAO Bort-M)
438. OAO Ufimskiy NPZ, the main
production unit of one of the biggest Russian oil companies, OAO Bashneft,
physically located in the town of
439. On 1 February 2001 the
respondents OAO Ufimskiy NPZ and ZAO Bort-M, a letter-box entity registered in
Baykonur, entered into a rent agreement whereby the entirety of OAO Ufimskiy
NPZ’s production facilities were rented by ZAO Bort-M in exchange for nominal
compensation. Since ZAO Bort-M was registered in Baykonur, the activity of OAO
Ufimskiy NPZ enjoyed lower rates in respect of excise duties. The tax
authorities discovered “the scheme” and contested it in court as sham and
therefore null and void.
440. On 8 October 2002 the
first-instance court had regard to the substance of the transaction and, having
established that, despite the contractual arrangement, OAO Ufimskiy NPZ had
continued to operate the facilities in question, that furthermore the
letter-box entity was never properly registered and licensed as the operator of
oil processing and oil storage facilities in accordance with the relevant law,
and that the letter-box entity could not operate the facility because it had
rented only one part of the production cycle (which, in technological terms,
could not be split in two), that the sole aim and effect of the arrangement was
tax evasion and that OAO Ufimskiy NPZ and ZAO Bort-M had “malicious intent” to
evade taxes, upheld the tax authorities’ claim.
441. The first-instance judgment was
upheld on appeal and in cassation on 17 December 2002 and 19 March 2003
respectively.
(b) Cases
nos. A41 K1-13244/02 (the Tax Ministry v. OAO Novo-ufimskiy NPZ and ZAO
Bort-M), A41 K1-11474/02 (the Tax Ministry v. OAO Novo-ufimskiy NPZ and OOO
Korus-Baykonur), A41 K1-137828/02 (the Tax Ministry v. OAO Ufimskiy NPZ and OOO
Korus-Baykonur)
442. These cases are essentially follow-ups
to the previous case: OAO Novo-Ufimskiy NPZ is the second main production unit
of OAO Bashneft and was involved in exactly the same tax-evasion scheme, using
the sham offshore entities ZAO Bort-M and OOO Korus-Baykonur. The domestic
courts examined all three cases at three instances and granted the Ministry’s
claims. The decisions in the first set of proceedings were taken on
9 October, 16 December 2002 and 13 March 2003. The decisions in the second
set of proceedings were taken on 19 September 2002, 5 December 2002 and 28
February 2003. The decisions in the third set of proceedings were taken on
18 December 2002, 20 February 2003 and 26 May 2003.
(c) Case
no. A41 K1-9254/03 (the Tax Ministry v. OOO Orbitalnye sistemy and OAO MNPZ)
443. This case concerns exactly the same
tax-evasion scheme as in the previous cases, but involves OAO MNPZ, a major
oil-processing facility located in
444. The decisions in the case were
taken on 29 October and 27 December 2004.
(d) Case
no. KA-A41/6270-03 (the Tax Ministry v. OOO Ekologiya)
445. This case also concerns the tax-evasion
scheme described in the previous cases. The Ministry assessed the company,
apparently a sham entity belonging to an oil producer, and found that it owed
additional taxes, surcharges and penalties. The entity prevailed at first
instance on 15 May 2003. On 10 October 2003 the cassation court quashed
the first-instance judgment, as the lower court had failed to take into account
the relevance of the entity’s activity for the economy of the town of
3. Sham
rent agreements and letter-box entities registered in the domestic offshore
town of
(a) Case
no. A55-1942/04-24 (the Tax Ministry v. OAO Novokuybyshevskiy NPZ and
446. The case concerns the same
tax-evasion scheme as in the previous cases (involving the sham renting
agreement), but the offshore territory at issue is the town of Ozersk and the
taxpayer is OAO Novokuybyshevskiy NPZ, one of the applicant company’s
subsidiary oil-processing units.
447. The scheme operated from January
1999 and was prosecuted in 2004. The first-instance judgment in favour of the Ministry
was taken on 13 August 2004. The court applied the same ‘substance over
form’ approach as in the previous cases and, having assessed the defendants’
conduct, the character of their relations and statements by the officials of
the entities, granted the Ministry’s claims and also ordered OAO
Novokuybyshevskiy NPZ to pay RUB 120,688,860 in reassessed taxes.
(b) Case
no. A55-5015/2004-33 (the Tax Ministry v. OAO Novokuybyshevskiy NPZ and
448. This is a follow-up to the previous
case: in the first-instance judgment the court declared the defendants’
contractual arrangement to be sham and unlawful and ordered OAO
Novokuybyshevskiy NPZ to pay RUB 252,963,364 in reassessed taxes.
449. The first-instance judgment in the
case, dated 19 October 2004, was upheld on appeal on 19 October 2004.
(c) Case
no. A55-1941/2004-40 (the Tax Ministry v. OAO Syzranskiy NPZ and
450. This is a follow-up to the previous
cases and involved OAO Syzranskiy NPZ, a production unit belonging to the
applicant company. The rent agreement between the letter-box entity and the
applicant company’s production unit was declared sham and annulled. OAO
Syzranskiy NPZ was ordered to pay RUB 30,309,119 in reassessed taxes.
451. The first-instance judgment of 18
August 2004 was upheld on appeal on 4 November 2004.
4. Sham
arrangements and VAT fraud
(a) Case
no. 367/96 (the Tax Ministry v. Russian-Austrian Joint Stock
452. The respondent legal entity is a
privately-owned enterprise specialised in importing and assembling computer
equipment. In 1995 the respondent disguised a portion of its sales as loan
agreements with its clients in order to avoid payment of VAT. The
first-instance judgment and the appeal decision in the case were taken on 31
August and 11 October 1995. On 17 September 1996 the Presidium of the
Supreme Commercial Court of Russia reviewed the lower courts’ decisions and
quashed them, ordering the lower courts to investigate the exact circumstances
of the case, including everything relating to “the sales disguised as loans”
arrangements.
(b) Case no. A57-11990/01-5 (the Tax Ministry v. FGUP
Nizhnevolzhskgeologiya)
453. The respondent legal entity is a
State-owned enterprise specialising in geological exploration and
identification of oil fields. In 2000 it entered into a series of deliberately
unprofitable oil trading transactions with a third party, OOO Roza-Mira
Processing. Since the transactions preceded the actual export of oil, the two
taxpayers, acting in concert, intended to obtain an artificially increased VAT
refund. Having regard to the substance of the transaction and the relevant
circumstances of the case, such as the terms of actual payment and execution,
the courts decided that the transactions were sham, declared them null and void
and refused the respondent’s request for a VAT refund. In addition, the courts
recovered the unpaid VAT with penalties.
454. The domestic courts reached their
respective decisions on 22 November 2001, 29 April and 8 July 2002.
(c) Case
no. 7543/02-16 (the Tax Ministry v. OAO Saratovneftegaz)
455. The respondent legal entity is the
main production unit of OAO NK Russneft, a large Russian private oil company,
which was involved in a dispute with the Ministry over VAT refunds in respect
of its export operations. The courts established that in 2001 the respondent
entered into a series of transactions with a number of third parties, aimed at
deceiving the Ministry and claiming an artificially increased VAT refund. The
courts took account of the overall economic effect of the transactions in their
entirety, numerous discrepancies and contradictions between the contractual
arrangements, the actual movement of oil, the documents certifying the customs
clearance of the goods in question, etc., and refused to recognise them as
valid for the purposes of reimbursement of VAT. The courts concluded that the
Ministry had been acting lawfully by refusing the respondent company’s request
for a refund of export VAT.
456. The domestic courts reached their
respective decisions on 30 June 2003, 31 May and 16 September
2004.
(d) Case
no. A28-7017/02-301/21 (the Tax Ministry v. OAO Kirovskiy Shinnyy Zavod)
457. This is essentially a follow-up to
the previous cases. The courts reached similar conclusions in respect of the
respondent company and recovered RUB 5,000,000 in overpaid VAT in favour
of the Ministry.
458. The decisions in the case during
the first round of proceedings were taken on 19 December 2002, 19 March 2003
and 27 June 2003.
459. The second round of proceedings
resulted in the first-instance judgment of 19 December 2002, the appeal
decision of 19 March 2003 and the supervisory review decision of 23 December
2003.
(e) Case
no. A09-846/03-28 (the Tax Ministry v. ZAO Melkruk, OOO Antareks-Unit, OOO
Starlayt-N)
460. The first respondent legal entity
is a big producer of grains, cereals and related processed products. It was
involved in a dispute with the Ministry over VAT refunds in respect of export
operations, whereby it had commissioned the second respondent to sell certain
equipment abroad. The equipment was bought by the third respondent and resold
“at an economic loss” to an entity registered in a foreign offshore location.
Having regard to various circumstances, including the conduct of the entities
involved and the fact that no actual hard cash had been paid for the equipment
in question, the Ministry applied to court, asking it to invalidate the transactions
in question as sham. The first-instance court dismissed the claim but the
appeal and cassation review courts subsequently reversed that judgment,
essentially upholding the Ministry’s approach.
461. The domestic courts took their
respective decisions on 14 April 2003, 4 August 2003 and 10 December
2003.
462. The first respondent legal entity
was involved in a dispute with the Ministry over VAT refunds in respect of
export operations, whereby it had entered in complex relations with the other
two respondents to sell certain goods abroad. Having regard to various
circumstances, including the conduct of the entities involved and the fact that
no actual hard cash had been paid for the goods in question, the Ministry
applied to court, asking it to invalidate the transactions in question as sham
and therefore null and void. The courts at three instances upheld the
Ministry’s approach.
463. The domestic courts took their
respective decisions on 28 December 2002, 10 April 2003 and 1 July 2003.
(g) Case
no. F09-1071/03-AK (the Tax Ministry v. OOO Khudozhestvennaya masterskaya “Tvorchestvo”)
464. The respondent entity was involved
in a dispute with the Ministry over the latter’s refusal to refund the VAT in
respect of the entity’s export operations. The Ministry uncovered an
arrangement whereby there had been no hard cash transactions between the
parties to the export operation, the respondent had “traded at a loss” and the
allegedly exported produce had had nothing to do with the respondent’s usual
business activity. Having regard to various circumstances, including the
conduct of the entities involved, the courts at three instances upheld the
Ministry’s approach.
465. The domestic courts took their
respective decisions on 29 October 2002, 6 February 2003 and 17 April 2003.
5. Case-law
of the domestic courts concerning the invalidity of sham transactions
466. By a decision
dated 15 May 1997 in the case of the Tax Ministry against Commercial Bank
Mechel-Bank and OAO Mechel (no. F09-162/97-AK), the Federal Commercial Court of
the Ural Circuit quashed the decisions of lower courts in which they had upheld
the lawfulness of a “kickback” contract which had been concluded between the
respondent bank and the respondent company. The Circuit Court ruled that the
lower courts had failed to study and to take account of all of the
circumstances relevant to the case at issue. In particular, the court noted the
finding that the contract had been concluded specifically to avoid the payment
of taxes. Accordingly, it reversed and invalidated the contract as unlawful,
contrary to the legal order and morality, and ordered that the proceeds
(RUB 1.5 bn) derived by the parties from the contract be seized in favour
of the State.
467. In a decision of 9 December 1997 in
case no. 5246/97, the Presidium of the Supreme Commercial Court of Russia
invalidated a loan secured by a promissory note and a related pay-off agreement
as imaginary and sham respectively. The court had regard to the terms of
contracts concluded between the parties and the manner of their execution, in
particular the fact that the loan had never been used by the borrower; it
concluded that the transactions in question covered the sale of a promissory
note and invalidated them as sham.
468. In a decision of 6 October 1998 in
case no. 6202/97 the Presidium of the Supreme Commercial Court of Russia
invalidated two contracts for the sale of securities and a related loan
agreement as sham, having regard to the terms of contracts in question, the
manner of their execution and the contractual prices. The court established
that the sales contracts in fact covered the loan agreement secured by the
pledge of securities and remitted the case for re-trial.
N. Enforcement proceedings in respect of a
presumably solvent debtor
469. The Enforcement Proceedings Act
(Law no. 119-FZ) of 21 July 1997 (as in force at the relevant time) establishes
the procedure by which a creditor may enforce a court award against a
presumably solvent legal entity debtor. According to Article 46 § 6 of the Act,
execution was to be levied against the debtor’s property “in such amount and
such scope as is required to ensure the satisfaction of claims set out in the enforcement
document”.
470. Russian legislation provides for a
set of special procedures in respect of presumably insolvent legal entity
debtors (see section O below).
2. Term
for voluntary compliance with the execution writ
471. Under section 9 (3) of the Enforcement
Proceedings Act, on an application by the creditor, the bailiff institutes
enforcement proceedings, fixes the time-limit for enforcement of the execution
writ - which may not exceed five days from the date of institution of
enforcement proceedings - and notifies the debtor accordingly.
3. Various
ways to stay or delay enforcement proceedings
472. Article 324 of the Commercial
Procedure Code sets out a procedure whereby a court may alter the method and
order of enforcement of a final court decision. Among other thing, it provides
as follows:
“1. If there are circumstances which make
it difficult to enforce the judicial act, the commercial court which issued a
writ may, upon an application by the creditor, debtor or bailiff, grant respite
in respect of the enforcement or arrange for the payment in instalments, or
otherwise change the method or order of enforcement. ...”
473. At the same time,
Articles 62, 64 (1) and (2) of the Tax Code specify that a respite or
possibility of repaying in instalments concerns only the taxes, and not the
interest surcharges and penalties, and may be granted by a court only for a
period from one to six months from the original deadline for payment, may only
be granted on specific grounds enumerated in the law and cannot be granted if
there are tax proceedings pending against the applicant (Article 62 (1)).
474. The Enforcement Proceedings Act provides
for three possibilities, namely: (a) to postpone enforcement actions for a term
of up to 10[6] days
(section 19); (b) to suspend the enforcement proceedings (section 21); or (c)
to defer the execution of enforcement of a debt or arrange for payment in instalments
(section 18).
475. With regard to (a), the bailiff
takes the decision in the “appropriate circumstances” either on an application
by the debtor or of its own motion.
476. With regard to (b), the decision
may only be taken in seven enumerated cases: if the bailiff applied to the
court with a request to interpret the judicial act; on a request from a debtor
who has been drafted to serve in the army; if the debtor is on a long-term
mission; if the debtor is hospitalised and being treated; if the actions of the
bailiff are being contested in court; if the debtor himself or his property is
being searched for; if the debtor or creditor are on holiday and cannot be
contacted.
477. As regards (c), the debtor, creditor or
bailiff has the right to request the court to defer the execution of
enforcement of a debt or arrange for payment in instalments if there are
“circumstances impeding the enforcement actions”.
4. Seizure
of the debtor’s assets
478. If the debtor does not comply
within the specified time-limit, under section 9 (5) of the Enforcement
Proceedings Act the bailiff, on an application by the creditor, has the right
to make an inventory of the debtor’s property and to seize it.
479. Under section 9 (5) of the Law on
Enforcement Proceedings the bailiff is empowered to seize any of the debtor’s
assets to secure enforcement. In seizing the debtor’s assets the bailiffs are
obliged to follow the order of priority of arrest and sale set out in section
46 (2) of the Law on Enforcement, which provides:
“... execution under enforcement documents shall, in
the first priority, be levied on the debtor’s monetary funds in roubles and in
foreign currency, and on other valuables, including those kept in banks and
other credit institutions”.
At the same time, the
“... the freezing of cash ... may not be imposed on
the respondent’s account and on amounts that will enter this account in the
future ...”.
In its Resolution no. 11 of 9
December 2002 the
“... arrest on cash owned by the debtor shall be imposed
not on its account in credit institutions but on cash that is on the accounts,
within the limits of the monetary claims ...”
480. Section 46 (5) of the Enforcement
Proceedings Act provides that, if a debtor lacks sufficient cash funds to
satisfy the creditor’s claims, the debt may be levied from the other forms of
the debtor’s property, unless the federal law states otherwise. The debtor has
the right to indicate his preferred order of priority, but the final order is
determined by the bailiff.
481. Section 51 of the Enforcement
Proceedings Act establishes a one-month time-limit for the seizure of the
debtor’s property from the date on which the ruling on the institution of
enforcement proceedings is served. The seizure is intended, inter alia, to secure the safety of the
debtor’s property and the creditor’s claims, which shall be subject to a
subsequent transfer to the creditor or to a subsequent sale. The seizure of
securities is carried out in conformity with the procedure defined by the
Government of the
482. Section 59 of the Enforcement
Proceedings Act establishes the order of priority in the seizure and forced
sale of a debtor’s property in three stages. Firstly, the bailiff sells
property which is not immediately involved in the debtor’s production cycle
(securities, cash on the debtor’s deposit and other accounts, currency valuables,
cars, office equipment, etc.); secondly, finished products (goods) and other
material values not immediately involved in production and not intended to play
an immediate part in it; and, thirdly, real-estate objects, as well as raw and
other materials, machine-tools and equipment and other fixed assets, intended
for immediate involvement in production.
483. In Ruling no. 4 “On certain
questions arising out of seizure and enforcement actions in respect of
corporate shares”, dated 3 March 1999, the Plenum of the Supreme Commercial
Court decided that in respect of companies which had been privatised by the
State as parts of bigger holding groups through the transfer of controlling
blocks of shares, the production cycle of the respective production unit should
be preserved as much as possible.
484. Section 81 of the Enforcement
Proceedings Act penalises a debtor’s failure to comply voluntarily with a writ
of execution with a 7% enforcement fee. Under Section 77 of the Act the fee is
a priority payment which should be made by the debtor even before it begins
repaying the principal debt.
485. In ruling no. 13-P of 30 July 2001
the Constitutional Court of Russia described the enforcement fee as an
administrative penal sanction having a fixed monetary expression, exacted by
compulsion, formalised by the decision of an authorised official and levied in
favour of the State. The
486. The Government referred to over a
dozen cases from across Russia which, they claimed, confirmed that that the 7%
enforcement fee was levied by bailiffs as a matter of standard practice in the
event of the debtor’s failure to pay, routinely and without exceptions, even if
the debtor was a State-owned entity or indeed a State body. Here are some
examples: enforcement proceedings dated 19 January 2001 no. 6-26/2001, in
respect of RUB 304,078,000, owed by a State-owned private-law entity
GUP Tatvodokanal; enforcement proceedings dated 18 November 2005 no.
3068/62/2/2006 in respect of RUB 108,083,008.64, owed by the Ministry of
Education of the town of Kazan; enforcement proceedings dated 18 December 2002
no. 2-12/2002 in respect of RUB 19,0311,000, owed by OAO Tatavtodor;
enforcement proceedings dated 25 February 2004 no. 7-18/04 in respect of
RUB 445,336,550.84, owed by OAO Vertolety-MI; enforcement proceedings dated 13
November 2001 no. 5-17/2001 in respect of RUB 917,787,000, owed by
FKP Kazanskiy zavod tochnogo mashinostroeniya imeni M. I. Kalinina.
6. Forced
sale of arrested assets
(a) Rules
concerning valuation of frozen property
487. Section 53 of the Enforcement
Proceedings Act requires the bailiff to evaluate the arrested property on the
basis of market prices on the date of execution of the enforcement writ. Should
valuation be problematic for technical or any other reasons, the bailiff is to
appoint a specialist to carry out the valuation.
488. According to a Decree of the
Ministry of Justice dated 27 October 1998, the bailiff is obliged to appoint
a specialist to conduct the valuation if the seized property is shares or other
securities (ценные бумаги). Under the same Decree the bailiff is to
inform the debtor and creditor of the resulting valuation.
(b) General
rules concerning the sale of frozen property
489. Section 54 of the Enforcement
Proceedings Act requires the bailiff to sell the arrested property in
satisfaction of the debt within two months of the date of seizure. The sale is
carried out by a specialised institution on the basis of a commission contract
with the bailiff.
490. According to Government Decree no.
418 “On the Russian Fund of Federal Property” of 29 November 2001 and
Government Decree no. 260 “On the Sale of Seized, Confiscated and Other
Property ...” of 19 April 2002, the Fund is entrusted with the task, inter alia, of auctioning property
seized in satisfaction of the debts owed to Russia.
7. Distribution
of levied sums and order of priority in the event of multiple claimants
491. Section 77 of the Enforcement
Proceedings Act provides that, in respect of the sums levied from the debtor,
including the proceeds from the forced sale of the debtor’s property, the
bailiffs first recover enforcement fees and all related payments and the
remainder is used in satisfaction of the creditors’ claims.
492. If the proceeds from the forced
sale(s) are insufficient to satisfy all creditors, the following order of
priority applies (section 78 of the Enforcement Proceedings Act): tort claims,
employment and labour-related claims, claims made on behalf of the Pension Fund
and the Social Security Fund of Russia, claims made on behalf of the budgets of
various territorial levels and finally all other claims.
8. Court
appeals against bailiffs’ decisions
493. Under section 90 of the Enforcement
Proceedings Act, all actions by the bailiff in the course of enforcement
proceedings can be appealed against within ten days from the date of proper
notification of the action in question.
494. Any damage inflicted on the debtor
as a result of the bailiff’s omission is compensated in accordance with the
applicable legislation.
O. Enforcement
proceedings in respect of an insolvent debtor legal entity
495. The enforcement of court awards and
more generally debt claims against insolvent or presumably insolvent debtor
legal entities are regulated by the Insolvency (Bankruptcy) Act of 26 October
2002 (Law no. 127-FZ).
1. Definition
of the state of insolvency (bankruptcy)
496. Section 3 of the Insolvency
(Bankruptcy) Act defines the state of bankruptcy of a legal entity as follows:
“A legal entity is regarded as being unable to satisfy
the claims of creditors in respect of pecuniary obligations and (or) to fulfil
its obligations in respect of mandatory payments if the respective obligations
and (or) obligation are not complied with within three months of the date on
which compliance should have occurred.”
497. In accordance with section 4 of the
Act, the obligations are, as a general rule, defined/recognised by the court on
the date of examination of the bankruptcy petition.
498. Bankruptcy proceedings in respect
of a legal entity may only be instituted by a court if the overall amount of
debt claims exceeds RUB 100,000 (section 6 of the Act).
2. Bringing
of a bankruptcy petition
499. Under section 7 of the Act the
debtor, the debtor’s creditors in respect of pecuniary claims and State bodies
competent to take part in bankruptcy proceedings in which the State is a
creditor in respect of mandatory payments are entitled to bring a bankruptcy
petition.
500. Whilst the executive body of the
debtor has the right to file for bankruptcy in circumstances where it is
obvious that the debtor would be unable to fulfil its obligation in due time
(section 8 of the Act), it has a legal duty to do so if the forced seizure of
the debtor’s property in satisfaction of a claim would make the debtor’s
economic activity extremely difficult or impossible (section 9 of the Act). In
this latter respect, the petition should be brought within one month from the
date on which the respective relevant circumstances occurred.
501. Failure to abide by the above rules
exposes the offender to civil liability action by virtue of section 10 of the
Act and may also make the offender vicariously liable for any resulting damage.
3. Examination
of a bankruptcy petition
502. The admissibility of the bankruptcy
petition is examined by a single-judge bench (section 48 of the Act). Having
declared the petition well-founded (admissible), the judge is to impose a
supervision order in respect of the debtor (see below).
503. The merits of the bankruptcy
petition should be examined by a court within seven months of the date of its
filing (section 51 of the Act).
504. Having examined the merits of the
bankruptcy petition, the court takes one of the following decisions (section 52
of the Act): (a) it declares the debtor bankrupt and applies the liquidation
procedure in respect of the debtor; (b) it rejects the request to declare the
debtor bankrupt; (c) it introduces a “financial improvement order” in respect
of the debtor; (d) it applies the procedure of external management; (e) it
discontinues the bankruptcy proceedings; (f) it disallows the bankruptcy
petition; (g) it approves the friendly settlement of the case.
4. Various
solutions available to a court in resolving a bankruptcy case
505. The following five procedures may
be applicable in respect of the debtor in a bankruptcy case (section 27 of the
Act): (a) supervision order; (b) financial improvement order; (c) external
management; (d) liquidation; (e) friendly settlement.
506. A supervision order is defined as
the first procedure applied to the debtor (see above). It consists of securing
the debtor’s property, analysing its financial condition, composing the list of
creditors and carrying out the first assembly of creditors (section 2 of the
Act). The decision to impose a supervision order is taken by a judge in
accordance with section 9 of the Act. It can be appealed against to a higher
court. In the decision, the judge should also appoint an interim receiver.
507. A financial improvement order is a
bankruptcy procedure intended to re-establish the debtor’s solvency and
consisting in repayment of the debts in accordance with a debt repayment
schedule (section 2 of the Act).
508. External management is a bankruptcy
procedure intended to re-establish the debtor’s solvency (section 2 of the
Act).
509. Liquidation is a bankruptcy
procedure applied in respect of a debtor who has been declared bankrupt. It is
essentially the sale of the debtor’s property by a court-appointed trustee in
proportionate satisfaction of the creditors’ claims (section 2 of the Act).
510. Friendly settlement is a bankruptcy
procedure applicable at any stage of bankruptcy proceedings whereby the
creditors and the debtor reach an agreement in respect of the debtor’s
liability (section 2 of the Act).
5. Supervision
order and its consequences
511. The automatic consequences of the
decision to adopt a supervision order in respect of the debtor legal entity
(section 63 of the Act) are, in particular, the following: all debts due after
the date of the decision are recoverable only pursuant to a special procedure;
enforcement of execution writs already issued, including any pecuniary claims
(with the exception of those relating to payment of salaries and tort claims)
against the debtor, is halted, and the seizure in respect of the debtor’s
property is lifted.
512. The law also introduces some
restrictions in respect of operations with the debtor’s shares and the actions
of the debtor itself (section 64 of the Act). However, the debtor’s management
team remains in place, subject to limitations restricting their ability to dispose
of the debtor’s property above a certain value (more than 5% of the book costs
of the debtor’s property) or to indebt the debtor further by contracting loans,
issuing guaranties or sureties, transferring debts to third parties or
transferring the debtor’s property for external management by a third party.
513. An interim receiver is appointed by
a court in accordance with sections 45 and 65 of the Act. At this stage of
proceedings, he or she has no management functions and is essentially
responsible for securing the debtor’s property, watching over the activities of
the debtor’s management, analysing the debtor’s financial condition and
identifying the debtor’s creditors. The interim receiver is accountable to a
court and is in charge of organising the first meeting of creditors.
514. For a period of thirty days from
the date of publication of the supervision order notice, the creditors have the
right to file their claims against the debtor (section 71 of the Act). The
claims may be included in the list of creditors on the basis of the court’s
decision.
515. At least ten days prior to the date
of termination of the supervision order, the interim receiver must organise the
first meeting of creditors (section 72 of the Act). At the meeting, the
creditors are competent, among other things, to decide either: (a) to introduce
a financial supervision order and lodge the relevant request with the court;
(b) to introduce an external management order and lodge the respective request
with the court; or (c) to request the court to declare the debtor bankrupt and
impose a liquidation order (section 73 of the Act).
THE LAW
I. COMPLIANCE WITH
ARTICLE 35 § 2 (b) OF THE CONVENTION
516. The Court reiterates that it
declared this application admissible on 29 January 2009 (see OAO Neftyanaya Kompaniya Yukos v.
A. The parties’ submissions
517. The Government submitted that in
February 2005 the applicant company’s former majority shareholders Hulley
Enterprises Ltd, Yukos Universal Ltd and Veteran Petroleum Ltd, which had
jointly owned over 60% of shares in the applicant company, brought arbitration
proceedings against the
518. The applicant company denied any
participation in and any knowledge of any other international proceedings that
may be of relevance. At the same time, it invited the Court to rule that the
parties in the proceedings before this Court (the applicant company) and in
B. The Court’s assessment
519. The Court will examine this issue
under Article 35 § 2 (b) of the Convention, which reads as follows:
“... 2. The Court shall not deal with any
application submitted under Article 34 that ...
(b) is substantially the same as a matter
that has already been examined by the Court or has already been submitted to
another procedure of international investigation or settlement and contains no
relevant new information. ...”
520. At the outset, the Court would
reiterate that Article 35 § 2 (b) of the Convention is intended to avoid the
situation where several international bodies would be simultaneously dealing
with applications which are substantially the same. A situation of this type
would be incompatible with the spirit and the letter of the Convention, which
seeks to avoid a plurality of international proceedings relating to the same
cases (see, among others, Smirnova v.
521. The assessment of similarity of the
cases would usually involve the comparison of the parties in the respective
proceedings, the relevant legal provisions relied on by them, the scope of
their claims and the types of the redress sought (see Vesa Peltonen v.
522. As regards the analysis of the
character of parallel proceedings, the Court’s examination would not be limited
to a formal verification but would extend, where appropriate, to ascertaining
whether the nature of the supervisory body, the procedure it follows and the
effect of its decisions are such that the Court’s jurisdiction is excluded by
Article 35 § 2 (b) (see Lukanov v.
523. Turning to the case at hand, the
Court finds that there is no need for it to examine whether the proceedings in
the Hague brought by the company’s majority shareholders or the proceedings
brought under the bilateral investment treaties brought by various groups of
the company’s minority shareholders may be seen as “another procedure of
international investigation of settlement” as it is clear that the cases are
not “substantially the same” within the meaning of Article 35 § 2 (b) of the
Convention for the following reasons.
524. The Court observes that it was
Hulley Enterprises Ltd and Veteran Petroleum Ltd (both registered in Cyprus)
and Yukos Universal Ltd (registered in the Isle of Man), which in February 2005
initiated arbitration proceedings against the Russian Federation before the
Permanent Court of Arbitration in the Hague, referring, among other things, to
the same events and proceedings as those complained of by the applicant company
in the present application before the Court and alleging numerous violations of
their rights as investors under the Energy Charter Treaty. Some of the
company’s foreign minority shareholders also initiated similar proceedings
under bilateral investment treaties. The Court notes, however, that despite
certain similarities in the subject-matters of the present case and of the
arbitration proceedings, the claimants in those arbitration proceedings are the
applicant company’s shareholders acting as investors, and not the applicant
company itself, which at that moment in time was still an independent legal
entity.
525. The Court further notes that the
present case has been introduced and maintained by the applicant company in its
own name. Although the above-mentioned entities could arguably be seen as
having been affected by the events leading to the applicant company’s
liquidation, they have never taken part, either directly or indirectly, in the
526. In these circumstances, the Court
finds that the parties in the above-mentioned arbitration proceedings and in
the present case are different and therefore the two matters are not
“substantially the same” within the meaning of Article 35 § 2 (b) of the
Convention. It follows that the Court is not barred, pursuant to this
provision, from examining the merits of this case.
II. ALLEGED VIOLATIONS OF ARTICLE 6 OF THE
CONVENTION
527. The Court notes that in the
admissibility decision in this case it has established that Article 6 applied
under its criminal head to the 2000 Tax Assessment proceedings and has declared
admissible the company’s grievances that:
(1) the Ministry had
brought the action in these proceedings within the grace period;
(2) the time to prepare
for trial had been too short;
(3) its lawyers could not
obtain from the Ministry answers to all the questions they wished to ask in the
hearings before the first-instance court and the first-instance court
pronounced its judgment without having studied all the evidence;
(4) the statutory
time-limit for appeal had been unjustifiably abridged;
(5) and that the appeal
court had delayed the delivery of the reasons for its judgment thereby
preventing the applicant company from lodging a cassation appeal.
528. The Court will examine these
grievances under Article 6 of the Convention, which, in its relevant parts,
provides as follows:
“1. In the determination of his civil
rights and obligations or of any criminal charge against him, everyone is
entitled to a fair and public hearing within a reasonable time by an
independent and impartial tribunal established by law.
...
3. Everyone charged with a criminal offence
has the following minimum rights:
(b) to have adequate time and facilities
for the preparation of his defence; ...”
A. The parties’ submissions
1. The applicant company’s
submissions
529. As regards the first instance
proceedings, at the admissibility stage of proceedings before this Court the
applicant company argued that the supporting material underlying the Tax
Assessment for 2000 had first been provided to it as a result of the City
Court’s decision of 14 May 2004. It alleged that the disclosure did not occur
until 17 May 2004, when the Ministry filed 24,000 pages of documents, and
continued on 18 May 2004 with approximately 45,000 further pages and a further
2,000 pages late on 20 May 2004, i.e. on the eve of the first-instance hearing.
The company conceded that its representatives had indeed been given access to
all these materials, both prior to the hearings and during the trial, but
submitted that the manner and time for such access had been so unsatisfactory
that it was of no practical use. It also argued that it had been unable
effectively to access the court’s filed documents during the first-instance
hearings except during the lunch breaks. Overall, the company insisted that it
had had insufficient time to prepare its defence and familiarise itself with
the evidence before the court and that it had not had an opportunity to take
cognisance of and comment on all of the evidence adduced or observations filed,
nor to express its views on every document in the file, contrary to Article 6.
It referred to the Ruiz-Mateos v. Spain
and Krčmář v. Czech Republic cases. In their post-admissibility observations
the company submitted that the Ministry had had sufficient time to disclose the
evidence, as the relevant documents had been in the possession of the Ministry
and that the Ministry could have disclosed them at any point from
8 December 2003 (some six months before the beginning of the hearing). It
further noted that the documents filed by the Ministry had been in complete
disorder and had been stored in nineteen plastic crates (ten of them containing
six thousand pages each and nine more containing some four thousand pages each)
and simply could not be studied properly over such a short period. The
documents were kept in a room measuring three to four square metres and
containing two chairs, a desk and one window. A request for additional space had
been turned down. The above-mentioned conditions were reflected in a record
dated 18 May 2004, drawn up by the applicant company’s counsel. The Ministry’s
representative had refused to sign it and stated that he disagreed with its
contents. More generally, the applicant company criticised the Ministry for
bringing an action against it before the expiry of the grace period and argued
that the first instance proceedings had been unfair because its lawyers could
not obtain from the Ministry answers to all the questions they wished to ask in
the hearings and that it was under the impression that the first-instance court
had pronounced judgment without having studied all the evidence.
530. As regards the appeal proceedings, the
applicant company also insisted on the breach of Article 6. It submitted that
the domestic courts had failed to address the question of whether the
abridgement of time had affected its substantive right to a fair hearing and
that, equally, it did not rely on Article 267 of the Code of Commercial Courts
Procedure, referred to by the respondent Government. Also, the rule in Article
267 requiring an appeal to be determined within one month is not respected in
practice by the Russian courts; failure to comply with this requirement, even
for a whole year, has no consequences for the proceedings. There was, according
to the applicant company, no evidence of any particular urgency in listing or
resolving the appeal: neither the Ministry, nor the co-appellant, OOO ‘YUKOS’
Moscow, sought expedition when their appeals were lodged and the co-appellant
did not oppose the applicant company’s applications to adjourn the appeal
hearing. In response to the Government’s criticism suggesting that the
company’s appeal was misaddressed by the omission of part of the postal code
from the envelope, the applicant stated that no evidence had been provided of
any mistake in this respect and that, after all, the appeal had been received
by the court and the tax authorities. In any event, the court had made no
criticism of the company in relation to the exercise of this appeal. Overall,
the abridgement of the appeal period was a serious interference with the
company’s right to prepare for the appeal hearings, which failed to cure but
rather accentuated the unfairness of the first-instance proceedings, and no
substantive reason has been offered as to why this acceleration was lawful,
necessary or consistent with the requirements of a fair trial.
531. The applicant company submitted in
respect of the complaint about the delay in the delivery of the appeal judgment
that the delay meant that the decision had been immediately enforced against
the company, rendering any further cassation appeal nugatory. Only an application
for a stay of enforcement pending an appeal in cassation, coupled with a valid
appeal in cassation, could have been effective against the enforcement. In the
company’s view, such a valid appeal was strictly dependent on filing of the
reasons by the appeal court. The appeal decision had become subject to
immediate forcible execution, the company had become liable for an additional
surcharge of 7% of the total liability and the opportunity to exercise an
effective appeal against these measures had been circumvented.
2. The Government’s submissions
532. As regards the argument that the
company had insufficient time for preparation of the defence, the Government
referred in their admissibility observations to the domestic legislation, which
established a two-month time-limit for the examination of the case at first
instance (Article 134 of the Code of Commercial Courts Procedure). The
applicant company had at least 37 days to prepare its defence from the date of
the filing of the suit, which, in view of the above time-limit, had not been
unreasonable. Furthermore, the applicant company first became aware of the
Ministry’s arguments on 29 December 2003, when the Ministry issued the report
indicating the applicant company’s large tax liability and by 12 January 2004
the company had also filed its objections to the report under
Article 100 (5) of the Tax Code. Moreover, the principal arguments
contained in these objections remained unchanged throughout the proceedings. It
could not be said therefore that the applicant company was unprepared to state
its case, since it was well aware of the Ministry’s arguments five months prior
to the beginning of the court proceedings. In addition, the Government pointed
out that the applicant company’s lawyers were given an opportunity to study the
evidence both in court and at the Ministry’s premises throughout May, June and
July 2004. According to the documents submitted by the Government, counsel for
the applicant company availed themselves of this opportunity at least on two
occasions, on 18 and 19 May 2004 respectively. Lastly, the Government argued
that the applicant company’s arguments about insufficient time for the
preparation of the case had been carefully examined and eventually dismissed by
the domestic courts as unfounded. In their post-admissibility observations the
Government also submitted that the proceedings before commercial courts in
533. As regards the appeal proceedings,
in the Government’s view they too were in compliance with Article 6. The applicant
company had brought appeal proceedings against the first-instance judgment of
26 May 2004: the possibility of review on both points of fact and law had been
expressly provided for by Russian law (Article 268 of the Code of Commercial
Courts Procedure) and the company had used it. Under Article 267 of the Code of
Commercial Courts Procedure, which requires an appeal court to examine the
appeals by the parties within a month of the date on which they were filed, the
Appeal Court had to examine the case within a month of 1 June 2004, which was
the date on which one party to the case, OOO ‘YUKOS’ Moskva, first lodged an
appeal brief, notwithstanding the fact that the applicant company lodged its
appeal on 17 June 2004. The appeal hearings, which represented a full re-trial
of the case within the meaning of Article 268 of the Code of Commercial Courts
Procedure, started on 18 June and lasted eight days, that is, until 29 June
2004, which was in line with the above rule. In addition, the applicant company
deliberately delayed the examination of the case by dispatching the appeal
brief to an erroneous address. Lastly, the Government underlined that the
appeal decision had not been final and had been appealed against by the
applicant company both in cassation instance and by way of supervisory review. The
Government submitted that the fact that the reasoned copy of the Appeal Court
decision of 29 June 2004 had been produced on 9 July 2004 did not affect the
fairness of the proceedings as, in any event, it was open to the applicant
company to lodge its cassation appeal within a two-month time-limit from the
date of delivery of the appeal decision on 29 June 2004, even in the absence of
the reasoned copy of the decision. The applicant company had lodged its cassation
appeal on 6 July 2004 in the absence of the reasoned copy of the appeal
decision. The cassation appeal was accepted for consideration and on 17
September 2004 its full version was examined and dismissed by the Circuit
Court.
B. The Court’s assessment
534. The Court would reiterate that
while Article 6 of the Convention guarantees the right to a fair hearing, it is
not the Court’s function to deal with errors of fact or of law allegedly
committed by a national court and the question which must be answered is rather
whether the proceedings as a whole were fair (see, for example, Öcalan
v.
1. The complaint about the bringing
of the action by the Ministry
535. Turning to the applicant company’s
complaint that in the proceedings before the Moscow City Court the action in
respect of the Tax Assessment 2000 and the request to attach the company’s
assets as a security for the claim was brought by the Ministry within the grace
period (see paragraphs 25 and 26), the Court observes that this
argument was examined by the Circuit Court, which dismissed it as unfounded and
recognised the Ministry’s action as lawful in this respect (see paragraph 72). The Court recalls the the
Ministry’s action was lodged under the rule which made it unnecessary to wait
until the end of the grace period if there was evidence that the dispute was
insoluble and, regard being had to the circumstances of the case, finds no
indication of arbitrariness or unfairness within the meaning of Article 6 of
the Convention in this connection.
2. The complaint about the allegedly
insufficient time for preparation of the defence at first instance
536. The Court notes that it is common
ground between the parties that during the first-instance proceedings the
applicant company did not have access to the documents in the court file, other
than the report of 29 December 2003, the decision of 14 April 2004 and
their annexes, until 17 May 2004 when the Ministry invited the company’s
lawyers to study the documents at its premises (see paragraphs 41-45). It is also undisputed that the
hearings in the case commenced on 21 May 2004, which is four working days
later, and the evidence at issue amounted to at least 43,000 pages (see
paragraphs 44 and 46). It is also not in dispute that on a
few occasions the applicant company requested to adjourn the hearings referring
to, among other things, their wish to study the evidence in the case, and that
these requests were turned down by the trial court as unfounded (see
paragraph 46).
537. The Court further notes that
according to the applicant company this period was manifestly short, whilst the
Government argued with reference to the sequence of the events in the
proceedings and the applicant company’s conduct that it had no real need to
study these documents since the documents came from the company itself and it
was entirely familiar with them. The Government also argued that the appeal
hearing constituted a de novo
examination of the case and that by then the applicant company had had a
perfectly adequate opportunity to familiarise itself with the evidence at
issue.
538. The Court reiterates that the
principle of equality of arms is one feature of the wider concept of a fair
trial, which also includes the fundamental right that criminal proceedings
should be adversarial. The right to an adversarial trial means, in a criminal
case, that both prosecution and defence must be given the opportunity to have
knowledge of and comment on the observations filed and the evidence adduced by
the other party. Various ways are conceivable in which national law may meet
this requirement. However, whatever method is chosen, it should ensure that the
other party will be aware that observations have been filed and will get a real
opportunity to comment on them (see Brandstetter v. Austria,
28 August 1991, §§ 66 and 67, Series A no. 211; Ruiz-Mateos
v. Spain,
23 June 1993, § 67, Series A no. 262; mutatis mutandis, Milatová and Others v. the
Czech Republic, no. 61811/00, § 65, ECHR 2005‑V and, a
fortiori, Krčmář and Others v. the
539. Turning to the case at hand, the
Court observes that the Ministry’s claims to the applicant company in respect
of the year 2000 were based on the audit report of 29 December 2003, which
became available to the applicant company on the same date and was later used
in the decision of 14 April 2004, served on the applicant on 15 April
2004. It is true that these two documents were very detailed, and contained the
attachments to substantiate the Ministry’s position, and that the applicant
company had on a few occasions opportunity to contest them. The fact remains,
however, that the object of the trial court’s examination during the hearings
of 21 to 26 May 2004 was neither the audit report of 29 December 2003 and the
decision of 14 April 2004 as such, nor the copies of the documents allegedly
already in possession of the applicant company, but rather the Ministry’s court
claims based on the above-mentioned two documents and the additional body of
evidence filed by the Ministry and comprising at least 43,000 pages. It is
clear to the Court that in order to provide the applicant company with an
adversarial trial and “adequate time and facilities for the preparation of
[its] defence” the applicant company should have been given an adequate
opportunity to study the entirety of these documents and, more generally, to
prepare for the hearings of the merits of the case on reasonable terms.
540. Having regard to the parties’
arguments and the circumstances of the case, the Court is of the view that the
trial court failed to reach this objective, as the mere four days during which
the applicant company could have access to the case materials were insufficient
for the applicant company to prepare properly, no matter the number of lawyers
in its defence team or the amount of other resources which the applicant
company would have been able to commit during its preparations. As regards the
Government’s reference to the applicant company’s conduct during the
proceedings and its argument that the company had no real need to study that
evidence, the Court finds that it was incumbent on the trial court in the
situation at hand to ensure that the applicant company had a sufficiently long
period of time during which it could study such a voluminous case file and
prepare for the trial hearings and it was up to the applicant company to use
this time as it wished. As regards the Government’s argument that the trial
court was simply doing its best to comply with the two-month time-limit set out
in Article 215 of the Code of Commercial Court Procedure for examination of
cases of this category, the Court is of the view that even though it is no
doubt important to conduct proceedings at good speed, this should not be done
at the expense of the procedural rights of one of the parties, especially given
the relatively short overall duration of the proceedings for a case of such
magnitude and complexity.
541. Overall, the Court is of the view
that the applicant company did not have sufficient time to study the case file
before the first instance hearings.
542. The Court takes note of the
Government’s argument that any possible defects in the fairness of the
proceedings at first instance have been remedied on appeal or in the cassation
instance. Since this argument is too closely related to the applicant company’s
complaint about the early beginning of the appeal hearings in the 2000 Tax
Assessment case, the Court will examine them together below.
3. The complaints about the trial
hearings and the allegedly bad quality of the first instance judgment
543. As regards the applicant company’s
allegations that its lawyers could not obtain answers from the Ministry to all
the questions they wished to ask in the hearings before the court and that the
trial court abruptly interrupted the pleadings of the applicant company’s
lawyer, the Court finds that these complaints are vague and unspecific and
there is nothing in the company’s arguments to suggest that the conduct
restrictions imposed by the first-instance or appeal court on the company’s
counsel during the hearings were arbitrary or adversely affected the fairness
of the proceedings as a whole. The Court also finds unsubstantiated the
applicant company’s allegation that the Moscow City Court had given its
judgment without having studied the evidence.
4. The complaints about the early
beginning of the appeal hearings
544. The Court observes that under
Articles 257 and 259 of the Code of Commercial Court Procedure a party has thirty
days to file its appeal (see paragraph 422 above). It further notes that the
full text of the first-instance judgment of 26 May 2004 became available to the
parties on 28 May 2004 and that, despite the applicant company’s requests for
adjournment, the appeal hearing in the case commenced on 18 and lasted until
29 June 2004 (see paragraphs 51, 57 and 58).
545. The Court finds that the beginning
of the appeal proceedings on 18 June 2004, that is, twenty-one days after
the full text of the first-instance judgment on 28 May 2004 had become
available, restricted the applicant company’s ability to advance its arguments
and, more generally, to prepare for the appeal hearings by shortening the
statutory time-limit by nine days. Given the number of the participants, the
complexity and magnitude of the case as well as the previous restrictions on
the applicant company’s ability to study the case at first instance, the Court
finds that the applicant company did not have “adequate time and facilities for
the preparation of [its] defence” within the meaning of Article 6 § 3 (b) on
account of the restricted time for preparation of the appeal hearing. It also
finds that the appeal court failed to acknowledge, let alone to remedy the
shortcomings committed by the first-instance court as regards the applicant
company’s restricted access to the case file.
546. In so far as the Government relied
on Article 267 of the Code of Commercial Court Procedure to justify the
promptness in question, the Court would again reiterate that the legitimate
goal of conducting proceedings at good speed should not have been achieved at
the expense of the procedural rights of one of the parties, especially given
the lack of any indication of unjustified delays in the proceedings which
lasted at the first two instances for only 3 months and 15 days. In any event,
the Court is not persuaded by the interpretation of the text of the provision
in question suggested by the Government. It would take note of the fact that
recently the domestic authorities themselves have found it necessary to modify
and explain the provision in question by amending it (see paragraphs 422 and 423).
In its present day version the time-limit in question lasts two months rather
than one, and starts running only after the expiry of the time-limit for
bringing appeals, and not simultaneously to it, as suggested by the Government
in its submissions. In addition, the appeal court now has the discretion to
increase the term up to six months, depending on the number of the participants
and the complexity of the case.
547. Lastly, in so far as the respondent
Government argued that the subsequent examination of the case at the cassation
instance had remedied these shortcomings, the Court observes that the cassation
hearing took place on 17 September 2004, four months after the disclosure of
the evidence and about three months after the appeal hearing which took place
between 18 and 29 June 2004. Despite the fact that the company may have
had enough time to prepare for the cassation hearing, the cassation court, as a
review court, had restricted competence in relation to the assessment of
evidence already made by the first-instance and appeal courts (see paragraph 426) and, on the facts, it failed to
recognize any shortcomings in the judgments of the lower courts (see paragraph 71).
548. Overall, the Court finds that the
early beginning of the appeal hearing impeded the applicant company’s ability
to prepare and present properly its case on appeal.
5. The complaint about the alleged
delay in the production of a reasoned version of the appeal judgment
549. In so far as the applicant company also
complained about the alleged delay in providing the reasons for the Appeal
Court’s judgment in the proceedings in respect of the 2000 Tax Assessment, the
Court would note that the applicant company did not complain about the
proceedings in cassation as such but rather claimed that, in its situation,
effective access to the cassation court was impossible without a stay of
enforcement of the appeal decision of 29 June 2004. In this respect, the Court
observes that the immediate enforcement of the appeal decision did not prevent
the company from lodging its cassation appeal and whilst Article 6 provides an
applicant with the right of access to court, it does not guarantee, as such,
the right to an automatic stay of enforcement of an unfavourable court decision.
The Court would underline that the applicant company in the present case had
access to courts of two levels of jurisdiction before any enforcement measures
were taken and that the enforcement of the appeal decision of 29 June 2004
did not make it impossible for the applicant company to exercise its right to
appeal in cassation, or to pursue further proceedings by way of supervisory
review or before the Constitutional Court. The applicant company lodged its
cassation appeal and additional submissions on the basis of the reasoned copy
of the appeal decision of 29 June 2004 on 7 July 2004 (see paragraph 67). The appeal was accepted for
consideration, and on 17 September 2004 its full version was examined and
dismissed by the Circuit Court (see paragraph 70). Not only the cassation appeal, but
also the request to stay the enforcement of the appeal decision of 29 June 2004
were examined by the domestic courts at two instances and eventually dismissed
as unfounded (see paragraphs 127-129).
550. Overall, the Court concludes that
there is no indication of unfairness within the meaning of Article 6 on account
of the alleged restrictions on the applicant company’s access to the cassation
instance.
6. Conclusion
551. Having regard to the above, the
Court finds that the applicant company’s trial did not comply with the
procedural requirements of Article 6 of the Convention for the following
reasons: the applicant company did not have sufficient time to study the case
file at first instance, and the early beginning of the hearings by the appeal
court unjustifiably restricted the company’s ability to present its case on appeal.
The Court finds that the overall effect of these difficulties, taken as a
whole, so restricted the rights of the defence that the principle of a fair
trial, as set out in Article 6, was contravened. There has therefore been a
violation of Article 6 § 1 of the Convention, taken in conjunction with Article
6 § 3 (b).
III. ALLEGED VIOLATIONS OF ARTICLE 1 OF PROTOCOL
No. 1, TAKEN ALONE AND IN CONJUNCTION WITH ARTICLES 1, 7, 13, 14 AND 18 OF
THE CONVENTION
552. Under Article 1 of Protocol No. 1,
taken alone and in conjunction with Articles 1, 7, 13, 14 and 18 of the
Convention, the applicant company complained about the allegedly unlawful,
arbitrary and disproportionate imposition and enforcement of the 2000-2003 Tax
Assessments. The company complained furthermore that the sale of OAO
Yuganskneftegaz had been unlawful, arbitrary and disproportionate.
553. These grievances fall to be
examined principally under Article 1 of Protocol No. 1, regard being had, where
appropriate, to other Convention provisions relied on by the applicant company.
Article 1 of Protocol No. 1
reads:
“Every natural
or legal person is entitled to the peaceful enjoyment of his possessions. No
one shall be deprived of his possessions except in the public interest and
subject to the conditions provided for by law and by the general principles of
international law.
The preceding provisions shall not, however, in any
way impair the right of a State to enforce such laws as it deems necessary to
control the use of property in accordance with the general interest or to
secure the payment of taxes or other contributions or penalties.”
554. The Court reiterates that in accordance
with its constant and well-established case-law Article 1 of Protocol No. 1
comprises three distinct rules. The first rule, which is of a general nature,
enounces the principle of peaceful enjoyment of property; it is set out in the
first sentence of the first paragraph. The second rule covers deprivation of
possessions and subjects it to certain conditions; it appears in the second
sentence of the same paragraph. The third rule recognises that the States are
entitled, amongst other things, to control the use of property in accordance
with the general interest, by enforcing such laws as they deem necessary for
the purpose; it is contained in the second paragraph. The three rules are not,
however, “distinct” in the sense of being unconnected. The second and third
rules are concerned with particular instances of interference with the right to
peaceful enjoyment of property and should therefore be construed in the light
of the general principle enunciated in the first rule (see Sporrong
and Lönnroth v. Sweden,
23 September 1982, § 61, Series A no. 52, and James and Others v. the United Kingdom, 21 February 1986, § 37,
Series A no. 98).
555. The Court notes that between
December 2003 and January 2005 the domestic authorities subjected the applicant
company to a number of measures in connection with its alleged failure to pay
the correct amount of tax for the years 2000-2003. In particular, as a result
of the Tax Assessment proceedings the applicant company was found guilty of repeated
tax fraud and was ordered to pay an overall sum of at least RUB 572
billion (around EUR 16 billion) in outstanding taxes, default interest and
penalties. In the enforcement proceedings, simultaneously conducted, the
applicant company was ordered to pay an additional 7% enforcement fee on the
overall amount of the debt: its assets were attached and seized, whilst 76.79
percent of shares in its main production unit, OAO Yuganskneftegaz, were sold
in satisfaction on the mentioned liability.
556. The Court notes that the parties
did not dispute that these measures, whether taken alone or together,
constituted an interference with the applicant company’s property rights as
guaranteed by Article 1 of Protocol No. 1. The Court further notes that the
company complained about the measures separately and that it also complained
about the Government’s intentions in connection with those measures. In this
latter respect, the applicant company argued that, in bringing the relevant
proceedings, the authorities had sought to destroy the company and expropriate
its assets. The Court has now to satisfy itself that each instance of such
interference met the requirement of lawfulness, pursued a legitimate aim and
was proportionate to the aim pursued.
557. Having regard to the circumstances
of the case and the nature of the applicant company’s complaints, the Court
finds that the complaints concerning the separate decisions and measures in the
context of the proceedings against the applicant company fall to be examined
under the third rule of Article 1 of Protocol No. 1, taken in conjunction,
where appropriate, with other Convention provisions relied on by the applicant
company. The Court will examine the complaints in the following order:
(A) the complaints
about various aspects of the tax assessment proceedings for the years
2000-2003;
(B) the complaints
concerning the measures taken by the domestic authorities to enforce the debt resulting
from the tax assessment proceedings on the applicant company and the
Government’s related plea of non-exhaustion, which in the decision on
admissibility of 29 January 2009 it joined to the merits;
(C) the applicant
company’s allegations concerning the Government’s intentions in these
proceedings, made under Article 18 of the Convention, taken in conjunction with
Article 1 of Protocol No. 1.
A. The complaints about the Tax
Assessments 2000-2003
558. The Court reiterates that it was
not in dispute between the parties that the Tax Assessments 2000-2003
represented an interference with the applicant company’s property rights. It
remains to be determined whether these decisions met the requirement of
lawfulness, pursued a legitimate aim, were proportionate to the aim pursued, as
required by Article 1 of Protocol No. 1, and whether they were not
discriminatory within the meaning of Article 14 of the Convention, taken in
conjunction with Article 1 of Protocol No. 1.
1. Compliance with Article 1 of
Protocol No. 1
(a) Whether the Tax Assessments 2000-2003
complied with the Convention requirement of lawfulness
559. The Court reiterates that the first
and most important requirement of Article 1 of Protocol No. 1 is that any
interference by a public authority with the peaceful enjoyment of possessions
should be lawful: the second paragraph recognises that the States have the
right to control the use of property by enforcing “laws” (see Iatridis
v. Greece [GC],
no. 31107/96, § 58, ECHR 1999‑II). This means that the interference should be in
compliance with the domestic law and that the law itself be of sufficient
quality to enable an applicant to foresee the consequence of his or her
conduct. As regards the compliance with the domestic law, the Court has limited
power in this respect since it is a matter which primarily lies within the
competence of the domestic courts (see Håkansson and
Sturesson v. Sweden,
21 February 1990, § 47, Series A no. 171‑A, and, mutatis mutandis, Tre
Traktörer AB v. Sweden,
7 July 1989, § 58, Series A no. 159).
As regards the quality of the law, the Court’s task is to verify whether the
applicable provisions of domestic law were sufficiently accessible, precise and
foreseeable (see Hentrich v. France,
22 September 1994, § 42, Series A no. 296-A, and Lithgow
and Others v. the United Kingdom,
8 July 1986, § 42, Series A no. 110). In so far as the tax sphere is concerned, the
Court’s well-established position is that States may be afforded some degree of
additional deference and latitude in the exercise of their fiscal functions
under the lawfulness test (see National & Provincial Building Society, Leeds Permanent Building Society
and Yorkshire Building Society v. the United Kingdom, 23 October 1997, §§ 75-83, Reports 1997‑VII) and that, in view of the complexity of the
relevant field of regulation, corporate entities, as opposed to individual
taxpayers, may be required to act with additional caution and diligence by
consulting competent specialists in this sphere (see Špaček, s.r.o., v. the Czech Republic, no. 26449/95, § 59, 9 November
1999).
560. The applicant company argued in
respect of the Tax Assessment 2000 that prosecution for tax evasion had been
time-barred. Furthermore, it also argued that the decisions in question had
been generally unlawful in that they had not been based on any reasonable and
foreseeable interpretation of the domestic law, for which reason there had been
no basis in law to impose taxes, double fines or to deny the repayment of VAT
in respect of the export of oil and oil products. The applicant company also
complained that it had been the first entity ever to have been punished for the
tax optimisation scheme, hitherto generally tolerated.
i. The allegation that the prosecution for
the alleged tax evasion during the year 2000 was time-barred
α. The
applicant company’s submissions
561. The applicant company complained
that in the Tax Assessment proceedings for the year 2000 the domestic courts
had failed to apply the three-year statutory time-bar set out in Article 113 of
the Tax Code. Since the relevant claims by the Ministry had been time-barred by
virtue of Article 113 of the Tax Code, the Tax Assessment 2000 had been
unlawful, unforeseeable and retroactive in the light of the decision of the
Constitutional Court of 14 July 2005. It also noted that this domestic
provision applied to tax assessments proceedings in general and not just to
fines and that the doubling of the fines for the year 2001 had also been
unlawful.
β. The
Government’s submissions
562. The Government disagreed. They
underlined that the issue only concerned the fines for the year 2000, and not reassessed
taxes or surcharges. They argued that the decision of the Constitutional Court
of 14 July 2005 had simply confirmed the proper application of Article 113
of the Tax Code for all taxpayers, that it explained the meaning of this norm,
that this meaning had been in line with international practice and that it had
not been aimed at the applicant individually. The Government also stated that
the decision had concerned the specific situation of a bad-faith tax evasion
where a taxpayer hinders and obstructs tax inspections, and also relied on
examples from foreign jurisdictions, where specific rules apply to taxpayers in
such situations. They quoted certain Russian cases where the courts applied the
Constitutional Court’s ruling in a manner similar to that in the applicant
company’s case and also referred to the Court’s judgment in the case of National & Provincial Building Society, Leeds Permanent Building Society
and Yorkshire Building Society v.
the
γ. The
Court’s assessment
563. The Court finds at the outset that
this grievance concerns the outcome of the Tax Assessment proceedings for the
year 2000 only in the part concerning the imposition of penalties, since
Article 113 of the Tax Code which provided for the time-limit in question, only
applied to the collection of fines (see paragraph 403)
and that no similar Convention issues arise in respect of the collection of
additional taxes and interest payments (see paragraph 404). The Court further notes that Article 113 of the Tax
Code provided for a three year time-limit for holding a taxpayer liable and
that this period ran from the first day after the end of the relevant tax term.
According to the practice directions of the
564. On the facts, such a decision in
connection with the company’s activities in the year 2000 was adopted on 14
April 2004 (see paragraph 21), which was clearly outside the
above-mentioned three year time-limit. In response to the argument raised by
the applicant company during the court proceedings, the lower courts decided
that the rules on a statutory time-bar were inapplicable because the applicant
company had been acting in bad faith (see paragraph 49).
Thereafter the supervisory review instance decided that such an interpretation
of the rules on the statutory time-limits had not been in line with the
existing legislation and case-law (see paragraph 80)
and referred the issue to the Presidium of the Supreme Commercial Court, which,
in turn, referred it to the Constitutional Court (see paragraph 81).
565. Having initially refused to
consider the applicant company’s individual complaint concerning the same issue
(see paragraphs 76 and 77), the Constitutional Court accepted
the reference from the Presidium of the Supreme Commercial Court and on 14 July
2005 gave a decision in which it disagreed with the lower courts (see
paragraphs 82-88), noting that the rules on the
limitation period should apply in any event and that, exceptionally, if a
taxpayer impeded the inspections by the tax authorities, and thereby delayed
the adoption of the relevant decision, the running of the time-limit could be
suspended by the adoption of a tax audit report setting out the circumstances
of the tax offence in question and referring to the relevant articles of the
Tax Code. Thereafter the case was referred back to the Presidium of the
566. In making its assessment the Court will
take into account its previous finding that the 2000 Tax Assessment proceedings
were criminal in character (see OAO
Neftyanaya kompaniya Yukos (dec.), cited above, § 453) and will also
bear in mind that the change in question concerned the collection of fines for
intentional evasion of tax. In this connection, it would again reiterate that
the third rule of this Convention provision explicitly reserves the right of
Contracting States to pass “such laws as they may deem necessary to secure the
payment of taxes” which means that the States are afforded an exceptionally
wide margin of appreciation in this sphere (see Tre Traktörer AB v. Sweden, 7 July 1989, §§ 56-63, Series A no. 159).
567. The Court reiterates the principle,
contained primarily in Article 7 of the Convention but also implicitly in the
notion of the rule of law and the requirement of lawfulness of Article 1 of
Protocol No. 1, that only law can define a crime and prescribe a penalty. While
it prohibits, in particular, extending the scope of existing offences to acts
which previously were not criminal offences, it also lays down the principle
that the criminal law must not be extensively construed to an accused’s
detriment, for instance by analogy. It follows that offences and the relevant
penalties must be clearly defined by law. This requirement is satisfied where
the individual can know from the wording of the relevant provision and, if need
be, with appropriate legal assistance, what acts and omissions will make him
criminally liable (see Coëme and Others v. Belgium, nos. 32492/96, 32547/96, 32548/96,
33209/96 and 33210/96, §§ 145-146, ECHR).
568. Furthermore, the term “law” implies
qualitative requirements, including those of accessibility and foreseeability
(see, among other authorities, Cantoni v.
569. Thus, the requirement of lawfulness
cannot be read as outlawing the gradual clarification of the rules of criminal
liability through judicial interpretation from case to case, “provided that the
resultant development is consistent with the essence of the offence and could
reasonably be foreseen” (see Kafkaris v.
570. The Court previously defined limitation as the statutory right of an offender
not to be prosecuted or tried after the lapse of a certain period of time since
the offence was committed. Limitation periods, which are a common feature of
the domestic legal systems of the Contracting States, serve several purposes,
which include ensuring legal certainty and finality and preventing
infringements of the rights of defendants, which might be impaired if courts
were required to decide on the basis of evidence which might have become
incomplete because of the passage of time (see Stubbings and Others v. the
United Kingdom, 22
October 1996, § 51, Reports 1996‑IV).
571. Turning to the facts of the case,
the Court would note firstly that the rule which, in the present case,
underwent changes as a result of the decision of 14 July 2005, was contained in
Article 113 of Chapter 15 “General provisions concerning the liability for tax
offences” of the Tax Code (see paragraph 403) and thus formed a part of the
domestic substantive law. Even though the rule in itself did not describe the
substantive elements of the offence and the applicable penalty, it nevertheless
constituted a sine qua non condition
with which the authorities had to comply in order to be able to prosecute the
relevant taxpayers in connection with the alleged tax offences. Accordingly,
Article 113 of the Tax Code defined a crime for the purposes of the Court’s analysis
of lawfulness. It
remains to be determined whether in the circumstances the decision of 14 July
2005 could be seen as a gradual clarification of the rules on criminal
liability which “[was]
consistent with the essence of the offence and could reasonably be foreseen”
(see Kafkaris, cited above, § 141).
572. In this connection the Court may
accept that the change in question did not change the substance of the offence.
The
573. It observes that the decision of 14
July 2005 had changed the rules applicable at the relevant time by creating an
exception from a rule which had had no previous exceptions (see paragraphs 86 and 88). The decision represented a reversal
and departure from the well-established practice directions of the Supreme
Commercial Court (see, by contrast, Achour, cited above, § 52) and the Court finds no indication in the cases
submitted by the parties suggesting a divergent practice or any previous difficulty
in connection with the application of Article 113 of the Tax Code at the
domestic level (see paragraphs 407-408). Although the previous jurisprudence
of the
574. Overall, notwithstanding the
State’s margin of appreciation in this sphere, the Court finds that there has
been a violation of Article 1 of Protocol No. 1 on account of the change in
interpretation of the rules on the statutory time-bar resulting from the
Constitutional Court’s decision of 14 July 2005 and the effect of this
decision on the outcome of the Tax Assessment 2000 proceedings.
575. Since the applicant company’s
conviction under Article 122 of the Tax Code in the 2000 Tax Assessment
proceedings laid the basis for finding the applicant company liable for a
repeated offence with a 100% increase in the amount of the penalties due in the
2001 Tax Assessment proceedings, the Court also finds that the 2001 Tax
Assessment in the part ordering the applicant company to pay the double fines
was not in accordance with the law, as required by Article 1 of Protocol No. 1.
ii. The allegation that the Tax Assessments
2000-2003 had not been based on a reasonable and foreseeable interpretation of
the domestic law
α. The
applicant company’s submissions
576. The applicant company disagreed with
the factual conclusions reached by the domestic courts in respect of the
trading companies. In its submission on the admissibility of the case, the
applicant company argued that it had been the wrong defendant in the tax
assessment proceedings, that there had been no links of dependency between the
trading companies and itself, and that there were no grounds for making the
applicant company, a holding company with, at the material time, only two
employees with highly important but small-scale administrative functions,
liable for the trading companies’ tax liabilities and creating a previously
virtually unknown concept of “bad-faith taxpayer”. In its submissions on the
merits of the case, the applicant company argued that “the Yukos Group”,
including the trading companies, had operated as a unit and that the
authorities had been aware of all the details of this unit’s functioning,
including its relations with the trading companies, because all the entities
forming the group made regular tax declarations. The company also submitted
that the Ministry made regular checks of the whole group, involving the mapping
of the entire course of every link in the chain of transactions from the
original purchase of oil by the trading companies until its export, and that
Yukos officials held monthly meetings with the Ministry’s officials to discuss
the company’s functioning and tax returns. Overall, the applicant company
considered that its tax arrangement had never been secret.
577. The applicant company also
submitted that Russian law had contained no legal provision allowing for the
attribution of tax liabilities as had occurred in its case, that the denial of
VAT reductions had been unlawful, that the use of domestic off-shores by the
applicant company had been lawful, that the legal theories used by the
authorities in its case had been without legal precedent, that the way in which
the authorities had assessed taxes had led to double taxation, and that the
payment of interest and fines had been domestically unlawful. As regards the
attribution of tax liabilities, the applicant company considered that Russian
law contained no provisions that permitted piercing of the corporate veil in
order to hold one company liable for the actions of another, whether the latter
was a subsidiary, an affiliate or a separate entity. The company claimed that
the legal theories used by the Ministry in its tax assessment cases had been
unprecedented and it referred to legal remedies that could have been used by
the Ministry in this situation but had not been employed. In particular, the
applicant company argued that the authorities should have applied the
anti-transfer pricing mechanism of Articles 20 and 40 of the Tax Code or that
the courts should have invalidated individual transactions by the trading
companies so as to make either them or the applicant company’s subsidiaries
liable for the allegedly underpaid tax. The applicant company considered that
in any event, under the applicable domestic law, the authorities could not have
held it directly liable for the actions of the trading companies. Furthermore,
the company relied on Article 251 (1) 11 of the Tax Code to justify the
unilateral transfers of cash from the trading companies to the applicant
company’s Fund. It argued that there had been no such notion as “sham entity”
in Russian law and that the “bad faith” doctrine had been too vague a legal
tool to be used to prosecute it. The applicant company also submitted to the
Court an opinion dated 7 September 2003 by the company’s counsel, the law
firm “Pepelyev, Goltsblat i Partnery”, confirming the lawfulness of the
arrangement whereby “a subsidiary company makes a transfer of its profits to
the parent company, which in turn creates a Fund [out of these monies] to return
them to the subsidiary companies for use ... or to pay the dividends” and also
relied on case no A42-6604/00-15-818/01 to demonstrate that its tax arrangement
had been lawful at domestic level. Lastly, the applicant company considered
that the Government’s explanations in this connection and in particular its
reference to Articles 168, 169 and 170 of the Civil Code could not justify the
authorities’ actions in the tax assessment proceedings, since these provisions
had not been relied upon by the domestic courts.
578. The applicant company further
argued that the denial of tax benefits to the trading companies and the failure
to repay VAT in respect of the export of oil and oil products had been unlawful
and unsubstantiated. The applicant argued that the Ministry had known about all
of the trading companies’ transactions because of their monthly VAT returns and
regular requests for tax refunds, and that since all of the traded oil had been
for export and exempt from VAT its use of tax arrangements with the trading
companies had not achieved any savings in this connection. Both in its initial
application to the Court and in further submissions on the admissibility of the
case, the applicant company expressed dissatisfaction with the domestic courts’
refusal to recalculate the amount of the VAT due in the relevant Tax Assessment
proceedings, purportedly as a result of the company’s failure to file for VAT
refunds in its own name. In its final submissions to the Court at the hearing
on 4 March 2010, the company alleged that on 31 August 2004 it had filed the
VAT exemption forms in its own name for each of the years 2000 to 2003. In
addition, with reference to Article 75 (3) of the Tax Code, the applicant company
claimed that it should not have been ordered to pay interest surcharges at all.
β. The
Government’s submissions
579. In their admissibility observations
the Government stated that the tax inspections in respect of the applicant company
had been conducted in accordance with the domestic law and that the company had
been acting in bad faith throughout the proceedings, in blatant breach of tax
legislation, and had merely been mimicking compliance with the law. In respect
of the factual conclusions of the domestic courts, they argued that the
applicant company had committed blatant tax evasion, as confirmed by the
findings of the domestic courts. The evidence to confirm the Ministry’s claims
was abundant and it was clear that the whole setup with trading companies was
organised solely for the purpose of tax evasion. During the proceedings the
applicant company had been unable to explain the economic reasons for the
transactions in question. As an example of the sham nature of the arrangement,
the Government referred to the fact, established by the domestic courts in the
proceedings against the applicant company, that on one occasion a person
managing one of the company’s sham entities signed three contracts
simultaneously in three different locations, namely Samara, Nefteyugansk and
the Tomsk region, situated at great distances from each other. In addition, the
Government referred to an “internal” opinion by the audit company
PriceWaterhouseCoopers, which specifically mentioned various problems with the
applicant company’s “tax optimisation” scheme, including the Fund used by the
company for receiving the money generated by the sham entities, and mentioned
by the
580. As regards the lawfulness of the
company’s use of domestic tax havens, the Government referred to statements by
a senior partner in the law firm “Pepelyaev, Goltsblat i Partnery”, which
advised the applicant company and its majority shareholder, Group Menatep. In
an interview with the Raschyot magazine of 30 January 2001, he stated
that, as time passed, any widely replicated optimisation scheme became known to
the tax authorities and they started fighting it. Penalties were being imposed
with regard to low quality schemes, but the better quality schemes remained
safe. The use of Russian low-tax regions was a crude form: where a company was
registered in, for example, Kalmykiya, while the director, office and bank
account were in
581. In respect of the lawfulness of the
domestic authorities’ actions, the Government submitted that the company’s tax
liability had been established by the domestic courts on the basis of, among
other things, Article 122 of the Tax Code, which penalised the understatement
of revenues and corresponding taxes, RF Law no. 2116-1 of 27 December 1991
“On profit tax of enterprises and organisations”, RF Law no. 1759-I of
18 October 1991 “On road funds in the Russian Federation”, RF Law no.
2118-I of 27 December 1991 “On the basics of the tax system”, RF Law no.
2030-I of 13 December 1991 “On property tax of enterprises”, RF Law no.
1992-I of 6 December 1991 “On valued-added tax” and RF Law no. 3297-I of
14 July 1992 “On closed administrative territorial entities”, which were all
clear and foreseeable at the relevant time.
582. In their post-admissibility
observations, the Government submitted that the company’s tax arrangement,
consisting of the systemic use of dozens of shell entities which were
controlled by the applicant company, organised in special low-tax zones within
Russia, transfers of profits from the shell entities to the applicant company
and multiple layers of trading activities between the company’s production
units and the ultimate customer, had been clearly unlawful and had one and only
one aim – to avoid payment of taxes. The applicant company tried to hide its
involvement in this scheme by renaming the shell entities on a regular basis
and by operating through a complex system of promissory notes’ exchanges aimed
at hiding the transfers of profits from the shell entities to the company. The
whole setup had been managed by the applicant company, although on paper the
shell entities had been owned and managed by third parties.
583. The Government also described
instances where the applicant company had actively resisted the authorities by
failing to present the necessary tax documents following requests by the
Ministry, by attempting to hide its corporate register just prior to its
seizure by the bailiffs, by making multiple offers of payment with shares in
OAO Sibneft (which in reality had not belonged to the applicant company), by
lying about its financial status and by rejecting the Ministry’s tax claims in
respect of years 2001 to 2003 instead of cooperating.
584. As regards the lawfulness of the
manner in which the authorities had assessed the applicant company’s liability
for additional taxes, the Government relied on the Constitutional Court’s
judgment no. 14-P dated 28 October 1999, which had endorsed the
‘substance-over-form’ approach, and to the extensive case-law of the commercial
courts in interpreting and applying it. In all of these cases, exactly the same
method as that used by the authorities in the applicant company’s case had been
used – i.e. the courts had looked behind appearances and taken account of the
substance of the transactions in question. As regards the bad-faith theory, the
Government relied on two decisions of the
585. As regards the VAT repayments, the
Government insisted that the domestic law clearly adopted an approach whereby
the owner of the goods in question should apply for any VAT reductions and
relied on judgment no. 12-P of the
586. The Government also stated that all
of the cases cited in their observations had been available in the legal
database Konsultant-Plus. The authorities could not be accused of having
tolerated the company’s tax optimisation, as they could not have had any prior
knowledge of it on account of its complex and well-masked character. They also
argued that the present case had a moral and social dimension, in the sense
that the applicant company had been one of the biggest taxpayers in Russia,
that many social programmes run by the State had depended on the company’s tax
payments, that the company’s resources had been transferred to it during
privatisation in exchange for their efficient and honest use, and that the
colossal scope of the tax evasion had led to an incorrect redistribution of
wealth and the denial of their social responsibility by a small number of the
company’s core shareholders. The Government also insisted that the Court take
into account the wide margin of appreciation which is mentioned in the
Convention and recognised by the Convention case-law in any assessment of the
company’s complaints. They disagreed with the applicant company’s argument
regarding expropriation, as the Government viewed the events referred to by the
applicant company as a mere enforcement of tax laws. In addition, they drew the
Court’s attention to the fact that the applicant company had consistently
presented incomplete or untrue information in their arguments.
587. Lastly, they again referred to the
statements on tax optimisation techniques made in 2001 by a senior partner in a
law firm advising the applicant company and its controlling shareholder, in
which, in the Government’s opinion, he had openly conceded that the company’s
techniques had been unlawful and that everything depended on whether or not the
given arrangements would be discovered by the authorities. In the Government’s
view, if this adviser knew this, then his clients, the company’s majority
shareholders, could not have failed to be aware of the unlawfulness of the
arrangement and any associated risk.
γ. The
Court’s assessment
588. The Court notes that in this
complaint the applicant company challenged the lawfulness of the Tax
Assessments 2000-2003 only in the part linked to the payment of reassessed
taxes. The examination will therefore be confined to the question of the
lawfulness of the additional tax liability. The Court further notes that the
company did not seem to dispute that the relevant laws made it clear what taxes
were due, at what rate and when. Rather, the company claimed that in 2000,
2001, 2002 and 2003 it used lawful “tax optimisation techniques” which were
only subsequently condemned by the domestic courts in 2004, 2005 and 2006. It
also complained that any existing legal basis for finding the company liable
fell short of the Convention requirements in respect of the quality of the law
and that, in any event, the application of the relevant laws contradicted
established practice. Accordingly, the Court has to determine whether the
relevant tax arrangements were domestically lawful at the time when the
relevant transactions took place and whether the legal basis for finding the
applicant company liable was sufficiently accessible, precise and foreseeable.
589. Turning to the first question, the Court
would note at the outset that the applicant company disputed the findings of
the domestic courts concerning the nature of relations between the applicant
company and its trading entities. In view of its conclusion that the tax
assessment proceedings in respect of the year 2000 did not comply with the
requirements of Article 6 §§ 1 and 3 (b) of the Convention, the Court is
required to decide whether the factual assessments made by the domestic courts
could be used for the purposes of its legal analysis under Article 1 of
Protocol No. 1. In this respect, the Court reiterates that according to its
well-established case-law it is not its task to take the place of the domestic
courts, which are in the best position to assess the evidence before them and
establish the facts. The Court will not,
in principle, intervene, unless the decisions reached by the domestic courts
appear arbitrary or manifestly unreasonable (see, mutatis
mutandis, Ravnsborg v.
590. Having examined the materials of
the case and the parties’ submissions and despite its earlier conclusions under
Article 6 §§ 1 and 3 (b) of the Convention in respect of the 2000 Tax
Assessment (see paragraph 551), the Court has little doubt that
the factual conclusions of the domestic courts in the Tax Assessment
proceedings 2000-2003 were sound. The factual issues in all of these
proceedings were substantially similar and the relevant case files contained
abundant witness statements and documentary evidence to support the connections
between the applicant company and its trading companies and to prove the sham
nature of the latter entities (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213). The applicant company itself did not give any
plausible alternative interpretation of this rather unambiguous evidence, as
examined and accepted by the domestic courts.
591. From the findings of the domestic
courts and the parties’ explanations, the Court notes that the company’s “tax
optimisation techniques” applied with slight variations throughout 2000-2003
consisted of switching the tax burden from the applicant company and its
production and service units to letter-box companies in domestic tax havens in
592. The domestic courts found that such
an arrangement was at face value clearly unlawful domestically, as it involved
the fraudulent registration of trading entities by the applicant company in the
name of third persons and its corresponding failure to declare to the tax
authorities its true relation to these companies (see paragraphs 311, 349-353, 374-380). This being so, the Court cannot
accept the applicant company’s argument that the letter-box entities had been
entitled to the tax exemptions in questions. For the same reason, the Court
dismisses the applicant company’s argument that all the constituent members of
the Yukos group had made regular tax declarations and had applied regularly for
tax refunds and that the authorities were thus aware of the functioning of the
arrangement. The tax authorities may have had access to scattered pieces of
information about the functioning of separate parts of the arrangement, located
across the country, but, given the scale and fraudulent character of the
arrangement, they certainly could not have been aware of the arrangement in its
entirety on the sole basis on the tax declarations and requests for tax refunds
made by the trading companies, the applicant company and its subsidiaries.
593. The arrangement was obviously aimed
at evading the general requirements of the Tax Code, which expected taxpayers
to trade at market prices (see paragraphs 395-399), and by its nature involved certain
operations, such as unilateral gifts between the trading companies and the
applicant company through its subsidiaries, which were incompatible with the
rules governing the relations between independent legal entities (see paragraph
376). In this connection, the Court
finds relevant the warning given by the company’s auditor about the
implications of the use of the company’s special fund during the year 2002 (see
paragraphs 206-209) and is not persuaded by the
applicant company’s reference to case no. A42-6604/00-15-818/01 (see paragraphs
356-357), the expert opinion of its counsel
(see paragraph 577) and its reliance on Article 251 (1)
11 of the Tax Code (see paragraph 376).
594. By contrast to the Tax Assessments
in issue, the respondent entity in case no. A42-6604/00-15-818/01 was not
alleged to have been part of a larger tax fraud and the Ministry failed to
prove that it had been sham. The courts established that the entity had some
assets, employees and a bank account at the place of its registration and
dismissed the Ministry’s claims. As regards the expert opinion and the
company’s reference to Article 251 (1) 11 of the Tax Code, the Court
finds them irrelevant as they refer to the relations of openly associated
companies and not, as was the case at issue, to the use of sham entities
fraudulently registered in the name of certain third parties. Thus, the Court
cannot agree with the applicant company’s allegation that its particular way of
“optimising tax” had been previously examined by the domestic courts and upheld
as valid or that it had used lawful “tax optimisation techniques” which were
only subsequently condemned by the domestic courts. The above considerations are
sufficient for the Court to conclude that the findings of the domestic courts
that applicant company’s tax arrangements were unlawful at the time when the
company had used them, were neither arbitrary nor manifestly unreasonable.
595. The Court will now turn to the
question whether the legal basis for finding the applicant company liable was
sufficiently accessible, precise and foreseeable. In this connection, the Court
notes that in all the Tax Assessments (see paragraphs 14-18, 48, 62-63, 165, 191-193, 212 and 213) the domestic courts essentially reasoned as follows.
The courts established that the trading companies had been sham and had been
entirely controlled by the applicant company and accordingly reclassified the
transactions conducted by the sham entities as transactions conducted in
reality by the applicant company.
596. The courts first decided that the
transactions of the sham entities failed to meet the requirements of Article 39
of the Tax Code defining the notion of a sales operation (see paragraphs 48 and 324) as well as Article 209 of the
Civil Code describing essential characteristics of an owner of goods (see
paragraph 48 and 381). In view of the above and relying
on Article 10 (3) of the Civil Code which established a refutable presumption
of good faith and reasonableness of actions of the parties in commercial
transactions (see paragraph 48 and 382-383), the courts then changed the
characterisation of the sales operations of the sham entities. They decided
that these were in reality conducted by the applicant company and that it had
been incumbent on the latter to fulfil the corresponding obligation to pay
various taxes on these activities. Finally, the courts noted that the setting
up and running of the sham arrangement by the applicant company resulted in an
understating of the taxable base of its operations and, as a consequence, the
intentional non-payment of various taxes, which was punishable as a tax offence
under Article 122 of the Tax Code (see paragraph 400).
597. Having regard to the applicable
domestic law, the Court finds that, contrary to the applicant company’s
assertions, it is clear that under the then rules contractual arrangements made
by the parties in commercial transactions were only valid in so far as the
parties were acting in good faith and that the tax authorities had broad powers
in verifying the character of the parties’ conduct and contesting the legal
characterisation of such arrangements before the courts. This was made clear
not only by Article 10 (3) of the Civil Code relied on by the
domestic courts in the Tax Assessment proceedings, but also by other relevant
and applicable statutory provisions which were available to the applicant
company and other taxpayers at the time. Thus, Article 45 (2) 3 of the Tax Code
explicitly provided the domestic courts with the power to change the legal
characterisation of transactions and also the legal characterisation of the
status and activity of the taxpayer, whilst section 7 of the Law on the Tax
Authorities of the Russian Federation granted the right to contest such
transactions to the tax authorities (see paragraph 393).
In addition, the case-law referred to by the Government indicated that the
power to re-characterise or to cancel bad faith activities of companies existed
and had been used by the domestic courts in diverse contexts and with varying
consequences for the parties concerned since as early as 1997 (see paragraphs 382-393 and paragraphs 428-468). Moreover, in a number of its
rulings, including decision of 25 July 2001 no. 138-0 specifically relied upon
by the domestic courts in the Tax Assessment proceedings against the applicant
company (see paragraphs 384-387), the
598. In so far as the applicant company
complained that the bad faith doctrine had been too vague, the Court would
again reiterate that in any system of law, including criminal law, there is an
inevitable element of judicial interpretation and there will always be a need
for elucidation of doubtful points and for adaptation to changing
circumstances. In order to avoid excessive rigidity, many laws are inevitably
couched in terms which, to a greater or lesser extent, are vague and whose
interpretation and application are questions of practice (see, among other
authorities, Sunday Times, cited
above, § 49 and Kokkinakis, cited
above, § 40). On the facts, it would be impossible to
expect from a statutory provision to describe in detail all possible ways in
which a given taxpayer could abuse a legal system and defraud the tax
authorities. At the same time, the applicable legal norms made it quite clear
that, if uncovered, a taxpayer faced the risk of tax reassessment of its actual
economic activity in the light of the relevant findings of the competent
authorities. And this is precisely what happened to the applicant company in
the case at hand.
599. Overall, having regard to the margin
of appreciation enjoyed by the State in this sphere and the fact that the
applicant company was a large business holding which at the relevant time could
have been expected to have recourse to professional auditors and consultants (see Špaček, s.r.o., cited above, § 59), the Court finds that there existed a
sufficiently clear legal basis for finding the applicant company liable in the
Tax Assessments 2000-2003.
600. Lastly, the Court observes that the
applicant company made a number of additional arguments under this head. In
particular, it also alleged that there was no basis in law to deny the
repayment of VAT in respect of the export of oil and oil products, that the
domestic courts had failed to apply Articles 20 and 40 of the Tax Code, that it
should have been dispensed from payment of interest surcharges under Article 75
(3) of the Tax Code and that in respect of the year 2000 the company had been
subjected to double taxation in respect of the profits of the sham entities.
601. The Court notes that both Section 5
of Law no. 1992-1 of 6 December 1991 “On Value-Added Tax” governing the
relevant sphere until 1 January 2001 as well as Article 165 of the Tax Code applicable
to the subsequent period provided unequivocally that a zero rate of value-added
tax in respect of exported goods and its refund could by no means be applied
automatically, and that the company was required to claim the tax exemptions or
refunds under its own name under the procedure set out initially in Letter no.
B3-8-05/848, 04-03-08 of the State Tax Service of Russia and the Ministry of
Finance and subsequently in Article 176 of the Tax Code to substantiate the
requests in order to obtain the impugned refunds (see paragraphs 326-336). In view of the above, the Court
finds that the relevant rules made the procedure for VAT refunds sufficiently
clear and accessible for the applicant company to able to comply with it.
602. Having examined the case file
materials and the parties’ submissions, including the company’s allegation made
at the hearing on 4 March 2010 that it had filed the VAT exemption forms
for each of the years 2000 to 2003 on 31 August 2004, the Court finds that the
applicant company failed to submit any proof that it had made a properly
substantiated filing in accordance with the established procedure, and not
simply raised it as one of the arguments in the Tax Assessment proceedings, and
that it had then contested any refusal by the tax authorities before the
competent domestic courts (see paragraphs 49 and 171, 196, 196 and 216).
The Court concludes that the applicant company did not receive any adverse
treatment in this respect.
603. As regards the company’s argument
that Articles 20 and 40 of the Tax Code should have been applied by the
domestic courts in their case and that the Ministry’s claims were inconsistent
with the above provisions, the Court notes that the Ministry and the domestic
courts never relied on these provisions and there is nothing in the applicable
domestic law to suggest that they had been under a legal obligation to apply
these provisions to the applicant company’s case. Thus, it cannot be said that
the authorities’ failure to rely on these provisions rendered the Tax
Assessments 2000-2001 unlawful.
604. Finally and in so far as the
company disagreed with the interpretation of Article 75 (3) of the Tax Code by
the domestic courts and also alleged to have been subjected to double taxation,
the Court would again reiterate that it is not its task to take the place of
the domestic courts, which are in the best position to assess the evidence
before them, establish the facts and to interpret the domestic law. On the
facts, the former provision only applied to cases where the taxpayer was unable
to pay the tax debt solely due to the seizure of its assets and cash funds (see
paragraph 402). The domestic courts established
that the company had been unable to pay because of the lack of funds and not
because of the injunctions and refused to apply Article 75 (3) of the Tax Code
in the applicant’s case (see paragraph 216). The Court does not find this
conclusion arbitrary or unreasonable. Likewise, the Court finds nothing in the
parties’ submissions or the case file materials to cast doubt on the findings
of the domestic courts, which specifically established that the Ministry took
account of the sham entities’ profits in calculating their claims so as to
avoid double taxation (see paragraph 49).
605. Overall, the Court finds that, in
so far as the applicant company’s argument about the allegedly unreasonable and
unforeseeable interpretation of the domestic law in the Tax Assessments
2000-2003 is concerned, the Tax Assessments 2000-2003 complied with the
requirement of lawfulness of Article 1 of Protocol No. 1.
(b) Whether the Tax Assessments 2000-2003
pursued a legitimate aim and were proportionate
606. The Court is satisfied that,
subject to its findings in respect of the lawfulness of fines for the years
2000 and 2001 made earlier, each of the Tax Assessments 2000-2003 pursued a
legitimate aim of securing the payment of taxes and constituted a proportionate
measure in pursuance of this aim. The tax rates as such were not particularly
high and given the gravity of the applicant company’s actions there is nothing
in the case file to suggest that the rates of the fines or interest payments
can be viewed as having imposed an individual and disproportionate burden, as
such, on the applicant company (see Dukmedjian
v. France, no. 60495/00, §§ 55-59, 31 January 2006).
(c) Conclusion concerning the compliance
with Article 1 of Protocol No. 1 as regards the Tax Assessments 2000-2003
607. Overall, the Court finds that there
has been a violation of Article 1 of Protocol No. 1 on account of the 2000-2001
Tax Assessments in the part relating to the imposition and calculation of
penalties. Furthermore, the Court finds that there has been no violation of
Article 1 of Protocol No. 1 as regards the rest of the 2000-2003 Tax
Assessments.
2. Compliance with Article 14, taken
in conjunction with Article 1 of Protocol No. 1
(a) The applicant company’s submissions
608. The applicant company argued that
the courts’ interpretation of the relevant laws had been selective and unique,
since many other Russian companies such as Sibneft and TNK International Ltd.
had also used domestic tax havens.
609. The company also submitted that the
authorities had tolerated and even endorsed the tax optimisation techniques
used by the applicant company in that they had accepted the applicant company’s
and its trading companies’ tax returns and payments on a regular basis, and the
company’s rate of tax payment had been comparable to or even higher than that
of its competitors. In this connection, the applicant company relied on
statistical data contained in a report by the Centre for Development, a report
of the Financial Research Institute and reports of the Accounts Chamber of
Russia. The company also under this heading argued that the legislative
framework had permitted the company to use such techniques and that the
interpretation of the domestic law in its case had been unique, selective and
unforeseeable.
(b) The Government’s submissions
610. The Government responded that the
allegations that other taxpayers may have used similar schemes could not be
interpreted as justifying the applicant company’s failure to abide by the law.
They further contended that the occurrence of illegal tax schemes at a certain
stage of Russia’s historical development was not due to failures or drawbacks
in the legislation, but rather due to “bad-faith” actions by economic actors
and weakened governmental control over compliance with the Russian tax
legislation on account of objective criteria, such as the 1998 economic crisis
and the difficulties of the transition period.
611. At present, the Government was
constantly combating tax evasion and strengthening its control in this sphere.
They also referred to statistical data by AK&M and some other news agencies
in 2002, which had reported that OAO LUKOIL and OAO Surgutneftegas, two other
large Russian oil producers, had posted sales proceeds of RUB 434.92 billion
and RUB 163.652 billion and paid RUB 21.190 billion and RUB 13.885 billion
in profit tax respectively, whilst the applicant company had posted sales
proceeds of RUB 295.729 billion and paid only RUB 3.193 billion in profit tax.
The Government submitted that at least two Russian oil majors, OAO
Surgutneftegaz and OAO Rosneft, had never engaged in such practices, whilst
some, in particular OAO Lukoil, had ceased using them in 2002.
(c) The Court’s assessment
612. The Court will examine this
grievance under Article 14 of the Convention, taken in conjunction with Article
1 of Protocol No. 1. This former provision reads:
Article 14 of the Convention
“The enjoyment of the rights and freedoms set forth in
[the] Convention shall be secured without discrimination on any ground such as
sex, race, colour, language, religion, political or other opinion, national or
social origin, association with a national minority, property, birth or other
status.”
613. Before considering the complaints made
by the applicant company, the Court would reiterate that Article 14 does not
forbid every difference in treatment in the exercise of the rights and freedoms
recognised by the Convention (see, for example, Lithgow and Others, cited above, § 117). It safeguards persons (including legal
persons) who are “placed in analogous situations” against discriminatory
differences of treatment; and, for the purposes of Article 14, a difference of
treatment is discriminatory if it “has no objective and reasonable justification”,
that is, if it does not pursue a “legitimate aim” or if there is not a
“reasonable relationship of proportionality between the means employed and the
aim sought to be realised” (see, amongst many authorities, Rasmussen
v. Denmark,
28 November 1984, §§ 35 and 38, Series A no. 87). Furthermore, the Contracting States enjoy a certain
margin of appreciation in assessing whether and to what extent differences in
otherwise similar situations justify a different treatment in law; the scope of
this margin will vary according to the circumstances, the subject-matter and
its background (ibid., § 40).
614. The Court would reiterate that
nothing in the case file suggests that the applicant company’s tax arrangements
during the years 2000-2003, taken in their entirety, including the use of
fraudulently registered trading companies, were known to the tax authorities or
the domestic courts and that they had previously upheld them as lawful (see
paragraphs 592-594). It thus cannot be said that the
authorities passively tolerated or actively endorsed them.
615. As regards the applicant company’s allegation
that other domestic taxpayers used or continue to use exactly the same or
similar tax arrangements as the applicant company and that the applicant
company was the only one to have been singled out, the Court finds that the
applicant company failed to demonstrate that any other companies were in a
relevantly similar position. The Court notes that the applicant company was
found to have employed a tax arrangement of considerable complexity, involving,
among other things, the fraudulent use of trading companies registered in
domestic tax havens. This was not simply the use of domestic tax havens, which,
depending on the exact details of an arrangement, may have been legal or may
have had some other legal consequences for the companies allegedly using them.
The Court notes that the applicant company had failed to submit any specific
and reliable evidence concerning such details. It further notes that it cannot
be called upon to speculate on the merits of the tax arrangements of third
parties on the basis of data contained in non-binding research and information
reports and that therefore it cannot be said that the situation of these third
parties was relevantly similar to the situation of the applicant company in
this respect.
616. The Court concludes that, in so far
as the complaint about discriminatory treatment is concerned, there has been no
violation of Article 14 of the Convention, taken in conjunction with Article 1
of Protocol No. 1.
B. The complaints about the enforcement
of the debt resulting from the Tax Assessments 2000-2003
617. The Court now has to determine
whether the manner in which the domestic authorities enforced the debt
resulting from the 2000-2003 Tax Assessment proceedings on the applicant
company complied with the requirements of Article 1 of Protocol No. 1.
618. The Court reiterates that the
enforcement of the debt resulting from the Tax Assessments 2000-2003 involved
the seizure of the company’s assets, the imposition of a 7% enforcement fee on
the overall amount of the debt and the forced sale of the applicant company’s
main production unit OAO Yuganskneftegaz. These measures constituted an
interference with the applicant company’s rights under Article 1 of Protocol
No. 1 and it remains to be decided whether these measures met the requirement
of lawfulness, pursued a legitimate aim and were proportionate to the aim
pursued.
1. The applicant company’s
submissions
619. The applicant company complained
that the enforcement proceedings in its case had been unlawful,
disproportionate and arbitrary. In particular, it argued that the authorities
ought to have allowed the company to settle the debt and that it had been wrong
to sell off its main production unit at auction with such speed. The company
complained that the courts ought to have intervened and corrected the
assessment of this matter by the bailiffs. The authorities should have first
considered and accepted its offers of shares in OAO Sibneft, and/or allowed the
company to make deferred payments over a prolonged period. As regards such
deferred payments, the company submitted that the domestic law and practice
gave priority to such a solution and that OAO Rosneft was able to obtain such a
deferral in respect of the tax debts of OAO Yuganskneftegaz following the
auction of 19 December 2004. The company argued that it could have repaid the
debt, entirely or in part, had it not been for the attachment imposed by the
court. It further criticised the authorities’ failure to act during the
twenty-two months following the auctioning of OAO Yuganskneftegaz, as well as
the imposition of an unlawful and disproportionate enforcement fee.
620. The applicant company contended
that the seizure had been disproportionate in that the authorities had ordered
the applicant company to pay and, at the same time, had frozen the company’s
assets, which were worth considerably more than the company’s then liability.
The authorities refused to use the company’s equity in the Sibneft company or
other realistic means of settling the debt. According to the applicant company,
the domestic authorities should have accepted those other realistic means of
settlement (letter of 5 July 2004, letter of 9 August 2004, letter of
4 November 2004, letter of 23 March 2006) because they were required to do
so by precedent in the practice of the commercial courts. The period of merely
a couple of days granted to the applicant company for payment was absurdly
short.
621. The applicant company was also of
the view that the sale of OAO Yuganskneftegaz had been unlawful,
disproportionate and had resulted in gross undervaluing by means of a clearly
controlled auction with the unlawful participation of a sham bidder, OOO
Baykalfinansgrup. It disagreed with the decision to sell OAO Yuganskneftegaz,
arguing that under the domestic legislation OAO Yuganskneftegaz should have
been the last item to be auctioned, and that the auction had been incapable of
generating a reasonably good price because of the limited number of candidates,
the widespread perception of the need for political support to acquire the item
in question and insufficient time for preparation. The applicant company was
also dissatisfied with the decision to sell only the voting shares of OAO
Yuganskneftegaz, as opposed to all of the shares. The company argued that even
though the authorities put no open obstacles in the path of potential buyers,
there had been practical obstacles, such as the need for the buyers to comply
with internal corporate procedures and to request anti-competition clearance.
622. More generally, the applicant
company viewed the auction as a sham, because OAO Gazprom, OAO Rosneft (both
State-owned companies with considerable involvement of State officials in their
day-to-day management), the organisers of the auction and the bailiffs were
acting in concert. It also relied on interviews by the then President of Russia
and argued that the State banks had financed the acquisition and that the State
had failed to apply anti-monopoly laws in connection with the auction. The
company argued that its actions in the
623. The applicant company argued that
the above circumstances showed that the proceedings against it, taken as a
whole, were abusive in that the State clearly wanted to destroy the company and
to take control of its assets.
624. As regards its alleged failure to
exhaust domestic remedies, the applicant company considered that exhaustion had
been unnecessary in view of the lack of prospects of success. The domestic
courts consistently rejected the company’s attempts to contest the actions of
the bailiffs, so other attempts would have been futile. In any event, the
company had not contested the valuation report in respect of OAO
Yuganskneftegaz, since it was not so materially inaccurate as to be
realistically challenged in litigation. Furthermore, the company submitted that
it did challenge the entire process by which the voting shares in OAO
Yuganskneftegaz were sold to a state-owned company, OAO Rosneft.
2. The Government’s submissions
625. The Government submitted that the enforcement
proceedings in respect of the applicant company had been lawful and
proportionate.
626. It argued that the company had
failed properly to exhaust domestic remedies in respect of this part of the
application. In particular, its complaints about the seizure of property
pending the enforcement proceedings, the alleged failure of the bailiffs to
grant the company access to the case in the enforcement proceedings, the
alleged inaction of the bailiffs in respect of the Sibneft’s shares, the order
to pay a 7% enforcement fee and the circumstances of valuation and sale of OAO
Yuganskneftegaz were inadmissible on account of a failure to exhaust domestic
remedies.
627. The Government pointed out that, in
the course of the enforcement proceedings, there had been no restrictions on
the company’s production cycle or the sale of petroleum and mineral oils and
that the applicant company had remained fully operational. In view of the
State’s wide margin of appreciation in the fiscal sphere and the applicant
company’s abusive conduct, illustrated by its attempts to hinder enforcement
action by hiding the register of the shareholders of its three largest
subsidiary companies, the Government were of the view that the fair balance
between the private and public interests had been struck.
628. The Government further submitted
that the procedure for compulsory recovery of arrears of mandatory tax payments
had been used in respect of the applicant company, that such tax payments were
recovered by way of charging the company’s cash flows on bank accounts, that in
the case of insufficient or non-existent funds, the recovery of tax was carried
out using the taxpayer’s assets and that the whole procedure was described in
detail in the domestic legislation and had been followed by the authorities. In
the circumstances, the measures represented the control of the use of property
and were in full compliance with the Convention.
629. As regards the seizure of property,
the Government referred to the Gasus
Dosier and AGOSI cases and
considered that, having regard to relevant factors, such as the enormous amount
of arrears, the bad-faith conduct of the applicant company and the need for an
expedient and efficient recovery of tax to the State budget, the measure in
question was in compliance with the requirements of Article 1 of Protocol No.
1. The Government submitted that both the seizure and freezing orders were
usual practice, both domestically and internationally, and their use was
especially appropriate in the present case because of the unprecedented amounts
of the tax debts, the unrepentant and defiant attitude of the applicant
company, claims that the authorities’ actions were a “malicious tax racket” and
the applicant company’s history, namely its management and core shareholders
moving corporate assets into new shell entities and sometimes into foreign tax
havens. These measures were merely precautionary in character.
630. In respect of the April injunction,
the Government disagreed with the applicant company’s claim that it could have
repaid the debt but for the seizure of its assets. The injunction did not cover
either cash or cash revenues and the applicant company did subsequently repay a
portion of its debt using the cash in the frozen account. The applicant company
could have had the injunction lifted had it provided adequate counter-security,
which it failed to do, or liquidated some of its foreign assets not covered by
the injunction. The Government maintained that instead of selling its foreign
assets to meet its tax debts the applicant company simply stripped them away,
which in itself proved that the company’s complaint about the injunction was
unsubstantiated. As regards the freezing orders, the Government submitted that
they had been issued by the bailiffs pursuant to court writs dated 30 June
2004, which froze the company’s accounts in Russian banks as of the date of
issue of the respective freezing orders. The company could still dispose of
cash added to its frozen accounts after 30 June 2004 and could use its
non-seized accounts abroad. The funds in these accounts had been far lower than
the company’s then liabilities. The Government further noted that as of 14 July
2004 the applicant company had still to pay 96.5% of its then liability and
that the company’s voluntary payment only commenced on 14 July 2004,
apparently as a response to the seizure of the shares of OAO Yuganskneftegaz.
The very fact that the payments had been made through the frozen accounts
demonstrated that the company’s allegations about the effects of the cash
freezing orders were untrue.
631. As regards the proposals for
respite and payment spread, the applicant company first made such a request on
16 July 2004 by sending a letter to the Ministry of Finance. The Government
pointed out that the Ministry of Finance had not been the proper authority to
grant these measures as only a commercial court could and that the law set out
clear rules regarding the conditions that should have been satisfied so that
the request could be granted, i.e. the request should have been made one to six
months before the original payment deadline and on specific grounds only, such
as the risk of bankruptcy. In addition, the law did not allow for respite and
payment spread if there were pending tax proceedings against the taxpayer at
issue. The applicant not only failed to substantiate its request with reference
to the criteria set out in law, but it was also clear that such a request was
bound to fail because of the pending tax proceedings against the applicant
company.
632. The Government relied on the
applicable domestic law and cases to demonstrate that asking a guilty taxpayer
to pay within one or two days had been standard and lawful practice followed in
all cases. They claimed that this period was sufficient, as taxpayers usually
learned about tax claims - with a specific indication of the sums to be paid -
in the Ministry’s audit reports, which were usually served from several weeks
to a few months in advance. Thus, in the present case the applicant company had
first learned of the Ministry’s claims for the years 2000-2003 109, 66, 19 and
18 days in advance. More generally, in such cases the taxpayer usually knew
well in advance the sums that had been underpaid (typically during tax
evasion), so it cannot claim that it was unprepared. In addition, very similar
practices existed internationally.
633. As to the choice of OAO
Yuganskneftegaz as the first item to be auctioned in satisfaction of the
company’s liabilities, the Government pointed out that the offers made by the
applicant company had been unacceptable. The first three offers, made on 22
April, 2 July and 13-14 July 2004, all involved various portions of shares of
OAO Sibneft, allegedly owned by the applicant company. All three offers were
rejected, not only because the company’s ownership of these shares had been
contested in various unrelated proceedings by third persons, but also because
the offers had been made in violation of injunctions issued by the courts in
the above-mentioned unrelated proceedings. In fact, the sale of shares that did
belong to the applicant company (some 20%) would have been insufficient to
cover the company’s then debt, even in part, let alone satisfy the Ministry’s
upcoming claims for the years 2001-2003. It was a minority stake of uncertain
value and any such value was in any event insufficient to satisfy the company’s
tax arrears. As regards the fourth offer, dated 9 August 2004, it involved
20% of OAO Sibneft and a farrago of shares in fifteen companies (some of them
subsidiaries, some of them minority stakes and all of uncertain liquidity). In
any event, this offer was “too little and too late” for the Government, since
preparation for the auctioning of OAO Yuganskneftegaz had been under way. The
above-mentioned “shopping list” did not offer any guarantee of a “good chance
of fetching a price sufficient to discharge much of [the applicant’s] rapidly
increasing tax liabilities” and in addition involved a high risk of third-party
claims to the property in question in each case.
634. The Government maintained that the
choice of OAO Yuganskneftegaz was lawful under Russian law, aimed at securing
the payment of taxes and had been effected in full compliance with the
provisions of the Federal Enforcement Proceedings Act. Under section 54 (2) of
the Enforcement Proceedings Act, the sale of the applicant company’s property
was made by a specialised organisation pursuant to the terms of commission and
the relevant legislation. On 18 November 2004 the bailiffs decided to sell
43 shares (76.8%) of OAO Yuganskneftegaz at auction. The Government noted that
OAO Yuganskneftegaz was itself the debtor in mandatory payments to the budget
totalling RUB 102.09 billion, so that the above arrears inevitably affected the
price of the auctioned shares, as defined by the valuation institution and the
results of the auction. The date of the auction and invitation to participate
in the open auction were published in the mass media in due time. The auction
itself was open, both with regard to its participants and to the form of
submissions of price bids. Bids were received between 19 November and
18 December 2004. On 19 December 2004 the open auction took place. The
winner of the auction was recognised as OOO Baykalfinancegrup, which offered
RUB 260,753,447,303.18 for the shares in question. The auction itself was
public. The mass media representatives provided extensive media coverage. The
results were published in the mass media and broadcast. With regard to the
proportionality of the sale, the sum of 260.5 billion roubles generated as a result
of the sale did not, however, cover the arrears of OAO Yukos entirely. The
Government also underlined that the subsequent bankruptcy was not caused by the
sale of OAO Yuganskneftegaz, but had been initiated by a consortium of foreign
banks and that the representatives of the applicant company had allegedly
acknowledged that the company had been in good financial condition even despite
the sale of OAO Yuganksneftegaz. In sum, the Government considered that there
had been no breach of the Convention.
3. The Court’s assessment
635. The applicant company submitted a
number of grievances about these proceedings. In particular, the applicant
company complained that the enforcement of the tax liability had been
deliberately orchestrated with a view to preventing the applicant company from
repaying its debts. In this connection the company maintained that the seizure
of its assets pending litigation had prevented it from repaying the debt. It
was furthermore dissatisfied that it had been ordered to pay a 7% enforcement
fee in respect of the entirety of its debt, that the time for voluntary
compliance with the Tax Assessments 2000-2003 had been too short and that the
sale of the company’s main production unit OAO Yuganskneftegaz had been
unlawful, arbitrary and generally disproportionate.
636. Before turning to the substance of
these complaints, the Court reiterates that in its decision on admissibility it
joined to the merits the question of exhaustion of domestic remedies. Thus, the
Court needs to determine whether the applicant complied with the requirement to
exhaust domestic remedies in respect of this part of the application, as
required by Article 35 § 1 of the Convention, which, in its relevant parts, provides:
“1. The Court may only deal with the matter
after all domestic remedies have been exhausted, according to the generally
recognised rules of international law ...”
637. The Court reiterates that the rule of exhaustion of domestic remedies
under Article 35 § 1 of the Convention obliges applicants to use first the
remedies which are available and sufficient in the domestic legal system to
enable them to obtain redress for the breaches alleged. The existence of the
remedies must be sufficiently certain both in theory and in practice, failing
which they will lack the requisite accessibility and effectiveness. Article 35
§ 1 also requires that complaints intended to be brought subsequently before
the Court should have been made to the appropriate domestic body, at least in
substance and in compliance with the formal requirements and time-limits laid
down in domestic law and, further, that any procedural means that might prevent
a breach of the Convention should have been used. However, there is no
obligation to have recourse to remedies which are inadequate or ineffective
(see, for example, Aksoy, 18 December 1996, §§ 51-52, Reports 1996–VI;
Akdivar and Others v. Turkey, 16 September 1996, §§ 65-67, Reports
1996‑IV; and, more recently, Cennet Ayhan and Mehmet Salih Ayhan v.
Turkey, no. 41964/98, § 64, 27 June 2006).
638. The Court has emphasised that the
application of the rule of exhaustion of domestic remedies must make due
allowance for the fact that it is being applied in the context of machinery for
the protection of human rights that the Contracting States have agreed to set
up. Accordingly, it has recognised that Article 35 § 1 must be applied with some
degree of flexibility and without excessive formalism. It has further
recognised that the rule of exhaustion is neither absolute nor capable of being
applied automatically; for the purposes of reviewing whether it has been
observed, it is essential to have regard to the circumstances of the individual
case. This means, in particular, that the Court must take realistic account not
only of the existence of formal remedies in the legal system of the Contracting
State concerned but also of the general context in which they operate, as well
as the particular circumstances of the applicant. It must then examine whether,
in all the circumstances of the case, the applicant did everything that could
reasonably be expected of him or her to exhaust domestic remedies (see Akdivar
and Others, cited above, § 69; Aksoy, cited above, §§ 53-54; and Tanrıkulu
v.
639. The Court reiterates that at the
admissibility stage of the proceedings the Government claimed that the
applicant company had failed to exhaust domestic remedies in respect of the
attachment and seizure of its assets pending the enforcement proceedings, the
alleged failure by the bailiffs to grant the company access to the case in the
enforcement proceedings, the bailiffs’ alleged inaction in respect of the
Sibneft shares, the orders to pay a 7% enforcement fee and the circumstances of
the valuation and sale of OAO Yuganskneftegaz.
640. Having examined the case file and
the parties’ submissions, the Court finds that in the part concerning the
attachment and seizure of the assets the applicant company properly exhausted
the available domestic remedies by raising its grievances before the competent
domestic courts. The attachment order of 15 April 2004 was reviewed and upheld
by the Appeal Court on 2 July 2004 (see paragraph 92)
and was also examined and confirmed by the City Court in its decision of 23
April 2004 in the context of the examination of the company’s request of 22
April 2004 (see paragraphs 96-97), and by the City Court and the
Appeal Court on 23 April and 2 July 2004 respectively in the context of
examination of the company’s request for an injunction against the attachment
(see paragraphs 101 and 102). The seizure order of 1 July 2004
was reviewed at first instance on 17 September 2004 and in cassation on 2
February 2005 (see paragraphs 116-120). The seizure of OAO Yuganskneftegaz
on 14 July 2004 was reviewed by the courts at four instances, on 6, 9 August,
25 October and 17 December 2004 respectively (see paragraphs 137-146). As regards the seizure orders of
14 July 2004 concerning OAO Tomskneft-VNK and OAO Samaraneftegaz, the City
Court upheld them by respective judgments of 13 August and 2 September
2004, whilst the Circuit Court confirmed this conclusion by the respective decisions
of 5 November 2004 and 18 January 2005 (see paragraphs 147-155).
641. Admittedly, the applicant company
did not complain about the attachment order of 15 April 2004 by way of
cassation and omitted the appeal procedure when contesting the seizure of its
subsidiaries on 1 July 2004 and the seizure order of 14 July 2004 concerning
OAO Tomskneft-VNK and OAO Samaraneftegaz. The Court would note, however, that
given the circumstances of the applicant company’s tax case, its overall
situation at the relevant time, the applicable domestic law and the courts’
responses to the arguments put forward by the applicant company in those
proceedings, it is clear that both the attachment order of 15 April 2004 and
the subsequent seizure orders of 1 and 14 July 2004 have been properly examined
and confirmed by the domestic courts at various levels of jurisdictions and it
does not appear that the applicant company’s complaints in this connection had
any additional prospects of success, had the company not omitted the
above-mentioned judicial instances.
642. As regards the complaints about a
7% enforcement fee, the Court observes that the applicant company was ordered
to pay this fee for the years 2000-2003. The company’s challenge to this fee
was examined and dismissed by the courts at three instances only in respect of
the year 2000 (see paragraphs 130-134), whilst its complaints about the
payment of the fee for the year 2001 were examined only at first instance and
in cassation (see paragraphs 177-187). Also, it is not entirely clear
whether the applicant company brought court proceedings in respect of the
entire amount of the fee for the year 2002 (see paragraphs 200-204) and whether it brought any
proceedings against such an order for the year 2003 (see paragraph 221). The Court again finds that, given
the similarity of the orders for payment of enforcement fees for the years
2000-2003 and in view of other relevant circumstances such as the applicable
domestic law and the courts’ answers to the company’s arguments in respect of
the fee for the year 2000, there is nothing in the Government’s submissions to
suggest that the applicant company’s complaints in this connection would have
had any prospects of success had the applicant company appealed against them.
643. As regards the alleged failure by
the bailiffs to grant the company access to the case in the enforcement
proceedings and the bailiffs’ alleged inaction in respect of the Sibneft
shares, the Court notes that the above-mentioned grievances are entirely
subsumed by the complaint concerning the method of enforcement of the tax debt
and in particular the choice of OAO Yuganskneftegaz as the first asset to be
sold in satisfaction of the tax claims. In this connection, the Court would
note that the applicant company clearly exhausted the available domestic
remedies as regards the seizure and the subsequent measures leading to the
eventual sale of OAO Yuganskneftegaz (see paragraphs 137-146), and it is also clear that the
relevant domestic law specifically disallowed the courts to rearrange or
otherwise postpone the repayment of the debt (see paragraphs 471-477) if there were, as in the case at
hand, pending tax proceedings against the debtor. Thus, the applicant company
could not have been expected to bring separate court proceedings in this
connection. Overall, it is clear to the Court that the applicant company used
all the remedies that it could reasonably be expected to use in connection with
this part of the application.
644. Thus, the Court finds that the
applicant company has complied with the requirement to exhaust domestic remedies
in respect of this part of the application and dismisses the Government’s
preliminary objection accordingly.
645. Turning to the substance of the
applicant company’s complaints, the Court notes that in April 2004,
simultaneously with the Tax Assessment proceedings, the domestic authorities
initiated enforcement proceedings aimed at securing their tax claims and later
recovering the sums awarded by the courts as a result of the examination of
these claims. They attached the company’s assets located in
646. The Court notes that the
authorities used a variety of measures in connection with the enforcement of
the debt, such as the attachment and freezing orders, the seizure orders, the
orders to pay enforcement fees and the compulsory auction procedure. Though
each of these measures could be seen as a separate instance of interference
with the applicant company’s rights under Article 1 of Protocol No. 1, their
common and ultimate goal was to force the company to meet its tax liabilities.
Accordingly, the appropriate way to analyse this part of the application is to
examine the enforcement proceedings in their entirety as one continuous event.
The Court further notes that the enforcement measures in question fall to be
analysed under the third rule of Article 1 of Protocol No. 1, which allows the
member States to control the use of property in accordance with the general
interest, by enforcing “such laws as [they] deem necessary to secure the
payment of taxes or other contributions or penalties”. It follows that the
Court’s task is to determine whether the State authorities complied with the
Convention requirement of lawfulness and, if so, whether they struck a fair
balance between the legitimate state interest in enforcing the tax debt in
question and the protection of the applicant company’s rights set forth in
Article 1 of Protocol No. 1.
647. As regards the lawfulness of the
measures in question, the Court has no reason to doubt that throughout the
proceedings the actions of various authorities had a lawful basis and that the
legal provisions in question were sufficiently precise and clear to meet the
Convention standards concerning the quality of law. The attachment, freezing
and seizure orders were reviewed by the domestic courts and found to have been
lawful. Likewise, the 7% enforcement fee was upheld by the domestic courts and
cannot be said to have been selective, given the domestic case-law cited by the
Government. As regards the decisions leading to the forced sale of OAO
Yuganskneftegaz at auction and the auction process itself, the Court notes that
they too were reviewed and upheld by the domestic courts as lawful (see
paragraphs 263 and 265)
and there is nothing in the case file or the parties’ submissions to cast doubt
on these conclusions. The only question that remains is whether the enforcement
measures were proportionate to the legitimate aim pursued.
648. In this connection the Court would reiterate
that its task is to determine whether a fair balance was struck between the
demands of the general interest of the public and the requirements of the
protection of the individual’s fundamental rights. It finds it natural that in
the tax sphere the Contracting States should enjoy a wide margin of
appreciation in order to implement their policies. Nevertheless, the Court
cannot fail to exercise its power of review and must determine whether the
requisite balance was maintained in a manner consonant with the applicant
company’s right to “the peaceful enjoyment of [its] possessions”, within the
meaning of the first sentence of Article 1 of Protocol No. 1.
649. At the outset the Court notes the
background to this case and, in particular, the fact that the applicant company
was one of the largest taxpayers in Russia and that it had been suspected and
subsequently found guilty of running a tax evasion scheme, committed
consecutively in 2000-2003. From the parties’ submissions and the case file it
seems clear that the applicant company had no cash funds in its domestic
accounts to pay its tax debts immediately, and in view of the nature and scale
of the debt it was unlikely that any third party would agree to assist the
company with a loan or some form of security. Regard being had to the scale of
the tax evasion, the sums involved for the years 2000-2003, the fact under
domestic law that they were payable almost at once after the production of the
respective execution writ (see paragraph 471), and even taking into account the
Court’s previous findings in respect of the fines for the years 2000 and 2001,
it was questionable whether at the time when the authorities decided to seize
and auction OAO Yuganskneftegaz the company was at all solvent within the
meaning of section 3 of the Insolvency (Bankruptcy) Act, which generally
expected the solvent debtor to repay its debts “within three months of the date
on which compliance should have occurred” (see paragraph 496).
650. In view of the above
considerations, the Court finds that the crux of the applicant company’s case
did not lay in the attachment of its assets and cash as such, but rather and
essentially in the speed with which the authorities demanded the company to
pay, in the decision which had chosen the company’s main production unit, OAO
Yuganskneftegaz, as the item to be compulsorily auctioned in the first
instance, and in the speed with which the auction had been carried out.
651. Given the paramount importance of
the measures taken by the authorities to the applicant company’s future, and
notwithstanding the Government’s wide margin of appreciation in this field, the
Court is of the view that the authorities were obliged to take careful and
explicit account of all relevant factors in the enforcement process. Such
factors were to include, among other things, the character and the amount of
the existing debt as well as of the pending and probable claims against the
applicant company, the nature of the company’s business and the relative weight
of the company in the domestic economy, the company’s current and probable
economic situation and the assessment of its capacity to survive the
enforcement proceedings. Furthermore, the economic and social implications of
various enforcement options on the company and the various categories of
stakeholders, the attitude of the company’s management and owners and the
actual conduct of the applicant company during the enforcement proceedings,
including the merits of the offers that the applicant company may have made in
connection with the enforcement were to be properly considered.
652. The Court notes that the
authorities examined and made findings in respect of some of these factors
(see, for instance, the findings in respect of the offers of shares in OAO
Sibneft in paragraph 124 or the findings in respect of
request for payment spread in paragraph 157), but it is clear that at no point
in the enforcement proceedings did they make an explicit assessment in respect
of all of them. In particular, neither the seizure order of 14 July 2004, which
set in motion the process of auctioning OAO Yuganskneftegaz (see paragraph 137), nor any of the subsequent
decisions, including the judicial decisions in the context of the company’s
complaints against the actions of the bailiffs (see paragraphs 137-158), mentioned or discussed in any
detail possible alternative methods of enforcement and the consequences that
they might have on the future of the company.
653. The Court finds this aspect of the
enforcement proceedings of utmost importance when striking a balance between
the interests concerned, given that the sums that were already owed by the
company in July 2004 made it rather obvious that the choice of OAO
Yuganskneftegaz as the first item to be auctioned in satisfaction of the
company’s liability was capable of dealing a fatal blow to its ability to
survive the tax claims and to continue its existence.
654. The Court accepts that the bailiffs
were bound to follow the applicable domestic legislation which might limit the
variety of options in the enforcement procedure. Nonetheless, the Court is of
the view that, notwithstanding these constraints, the bailiffs still had a
decisive freedom of choice, the exercise of which could either keep the company
afloat or eventually lead to its demise. Although the Court, in principle, does
not find the choice of OAO Yuganskneftegaz entirely unreasonable, especially in
view of the overall amount of the tax-related debt and the pending as well as
probable claims against the company, it is of the view that before definitively
selecting for sale the asset that was the company’s only hope of survival, the
authorities should have given very serious consideration to other options,
especially those that could mitigate the damage to the applicant company’s
structure. This was particularly so since all of the company’s domestic assets
had been attached by previous court orders (see paragraph 27), and were readily available, the
company itself did not seem to have objected to their sale (see paragraph 159) and there had been virtually no
risk of the company seriously opposing these actions.
655. The Court further notes one other
factor which seriously affected the company’s situation in the enforcement
proceedings. The applicant company was subjected to a 7% enforcement fee in
connection with the entire amount of its tax-related liability, which
constituted an additional hefty sum of over RUB 43 billion (EUR 1.16 billion),
the payment of which could not be suspended or rescheduled (see paragraphs 484-486). This was a flat-rate fee which the
authorities apparently refused to reduce, and these sums had to be paid even
before the company could begin repaying the main body of the debt (see
paragraph 484). The fee was by its nature
unrelated to the actual amount of the enforcement expenses borne by the
bailiffs. Whilst the Court may accept that there is nothing wrong as a matter
of principle with requiring a debtor to pay for the expenses relating to the
enforcement of a debt or to threaten a debtor with a sanction to incite his or
her voluntary compliance with enforcement writs, in the circumstances of the
case the resulting sum was completely out of proportion to the amount of the
enforcement expenses which could have possibly been expected to be borne or had
actually been borne by the bailiffs. Because of its rigid application, instead
of inciting voluntary compliance, it contributed very seriously to the
applicant company’s demise.
656. Lastly, the Court would again
emphasise that the authorities were unyieldingly inflexible as to the pace of
the enforcement proceedings, acting very swiftly and constantly refusing to
concede to the applicant company’s demands for additional time. Admittedly,
this rigidity may have resulted at least in part from the relevant requirements
of the domestic law (see paragraphs 471, 481 and 489).
Nevertheless, the Court finds that in the circumstances of the case such lack
of flexibility had a negative overall effect on the conduct of the enforcement
proceedings against the applicant company.
657. On the whole, given the pace of the
enforcement proceedings, the obligation to pay the full enforcement fee and the
authorities’ failure to take proper account of the consequences of their actions,
the Court finds that the domestic authorities failed to strike a fair balance
between the legitimate aims sought and the measures employed.
658. To sum up, the Court concludes that
there has been a violation of the applicant company’s rights under Article 1 of
Protocol No. 1 on account of the State’s failure to strike a fair balance
between the aims sought and the measures employed in the enforcement
proceedings against the applicant company.
C. The complaint about the Government’s
intentions in the tax and enforcement proceedings against the applicant company
659. The Court notes that, in addition
to various specific grievances about the tax and enforcement proceedings
already mentioned above, the applicant company also argued that the overall
effect of these proceedings showed that the Government had brought and
conducted the proceedings with the intent to destroy the company and to take
control of its assets.
660. The Court will examine this part of
the application under Article 18 of the Convention, taken in conjunction with
Article 1 of Protocol No. 1.
Article 18 of the Convention
“The restrictions permitted under [the] Convention to
the said rights and freedoms shall not be applied for any purpose other than
those for which they have been prescribed.”
1. The applicant company’s
submissions
661. The applicant company argued that
the circumstances of the tax assessment and enforcement proceedings as well as
the allegedly “political” motivation behind the prosecution of Mr M.
Khodorkovskiy and other owners and senior officials of the applicant company
showed that the proceedings against it, taken as a whole, were abusive in that
the State clearly wanted to destroy the company and to take control of its
assets.
2. The Government’s submissions
662. The Government disagreed, having
maintained that tax assessment and subsequent enforcement proceedings had been lawful
and regular and that the applicant company’s demise was the direct result of
its carrying out over many years a gigantic tax fraud.
3. The Court’s assessment
663. The Court reiterates that Article
18 of the Convention does not have an autonomous role. This provision can only
be applied in conjunction with the Convention provisions protecting substantive
rights. It also follows from the terms of Article 18 that a violation can only
arise where the right or freedom concerned is subject to restrictions permitted
under the Convention (see, for example, Gusinskiy v.
664. The Court would observe that in its
previous analysis under Article 6 of the Convention and Article 1 of
Protocol No. 1 it has already addressed the applicant company’s points about
the nature of its debt to the authorities, and in particular the merits of the
2000-2003 Tax Assessments proceedings. Despite the fact that it found a
violation of Article 6 of the Convention on account of the speed with which the
courts had conducted the proceedings in the 2000 Tax Assessment case and a
violation of Article 1 of Protocol No. 1 on account of the interference by
the Constitutional Court with the outcome of the 2000 Tax Assessment case in
the part relating to penalties, the Court rejected the applicant company’s
claims that the company’s debt had been recognised as a result of an
unforeseeable, unlawful and arbitrary interpretation of the domestic law (see
paragraphs 605 and 616).
The Court also recognised the right of the State to enforce, as such, the court
judgments, but reached conclusions concerning the handling of the enforcement
proceedings by the domestic authorities which lead to the finding of a
violation of Article 1 of Protocol No. 1. In view of these findings, the Court
will proceed on the assumption that the company’s debt in the enforcement
proceedings resulted from legitimate actions by the respondent Government to
counter the company’s tax evasion and the burden of proof would accordingly
rest on the applicant company to substantiate its allegations.
665. Regard being had to the case file
and the parties’ submissions, including the applicant company’s references to
the allegedly political motivation behind the prosecution of the applicant
company and its owners and officials, the Court finds that it is true that the
case attracted massive public attention and that comments of different sorts
were made by various bodies and individuals in this connection. The fact
remains, however, that those statements were made within their respective
context and that as such they are of little evidentiary value for the purposes
of Article 18 of the Convention. Apart from the findings already made earlier,
the Court finds no indication of any further issues or defects in the
proceedings against the applicant company which would enable it conclude that
there has been a breach of Article 18 of the Convention on account of the applicant
company’s claim that the State had misused those proceedings with a view to
destroying the company and taking control of its assets.
666. To sum up, the Court finds that
there has been no violation of Article 18 of the Convention, taken in
conjunction with Article 1 of Protocol No. 1, on account of the alleged
disguised expropriation of the company’s property and the alleged intentional
destruction of the company itself.
D. Alleged violations of Articles 7
and 13 of the Convention
667. Regard being had to the particular
circumstances of the present case and to the reasoning which led it to find a
violation of Article 6 of the Convention and Article 1 of Protocol No. 1 to the
Convention, the Court finds that
there is no cause for a separate examination of the same facts from the
standpoint of Article 7
of the Convention and through the prism of the “effective remedies” requirement
of Article 13.
IV. APPLICATION
OF ARTICLE 41 OF THE CONVENTION
668. Article 41 of the Convention
provides:
“If
the Court finds that there has been a violation of the Convention or the
Protocols thereto, and if the internal law of the High Contracting Party
concerned allows only partial reparation to be made, the Court shall, if
necessary, afford just satisfaction to the injured party.”
669. The applicant company claimed a
lump sum of over 81 billion euros and a daily interest payment of EUR
29,577,848 in respect of pecuniary damage, “no less than 100,000 euros” in
respect of non-pecuniary damage and EUR 171,444.60 in respect of costs and
expenses.
670. The Government disagreed, having
contested both the authority of Mr Gardner to make the Article 41 claims on
behalf of the applicant company as well as the well-foundedness of the
calculations in question.
671. The Court considers that the question of
the application of Article 41 is not ready for decision. Accordingly, it
shall be reserved and the subsequent procedure fixed having regard to any
agreement which might be reached between the applicant company and the
respondent Government (Rule 75 § 1 of the Rules of Court).
FOR THESE REASONS, THE COURT
1. Finds by six votes to one that the Court
is not barred, pursuant to Article 35 § 2 (b) of the Convention, from
examining the merits of the case;
2. Holds by six votes to one that there has
been a violation of Article 6 § 1 and 3 (b) of the Convention as regards the
2000 Tax Assessment proceedings on account of the insufficient time available
to the applicant company for preparation of the case at first instance and on
appeal;
3. Holds by four votes to three that there
has been a violation of Article 1 of Protocol No. 1 on account of the 2000-2001
Tax Assessments in the part relating to the imposition and calculation of
penalties;
4. Holds unanimously that there has been no
violation of Article 1 of Protocol No. 1 as regards the rest of the 2000-2003
Tax Assessments;
5. Holds unanimously that there has been no
violation of Article 14 of the Convention, taken in conjunction with Article 1
of Protocol No. 1;
6. Dismisses by a majority the Government’s
preliminary objection as to the exhaustion of the domestic remedies in respect
of the attachment and seizure of the applicant company’s assets pending the
enforcement proceedings, the alleged failure by the bailiffs to grant the
company access to the case in the enforcement proceedings, the bailiffs’
alleged inaction in respect of the Sibneft shares, the orders to pay a 7%
enforcement fee and the circumstances of the valuation and sale of OAO
Yuganskneftegaz; and
7. Holds by five votes to two that there
has been a violation of the applicant company’s rights under Article 1 of
Protocol No. 1 in the enforcement proceedings against the applicant company in
that the domestic authorities failed to strike a fair balance between the
legitimate aim of these proceedings and the measures employed;
8. Holds unanimously that there has been no
violation of Article 18, taken in conjunction with Article 1 of Protocol No. 1;
9. Holds unanimously that in view of its
previous conclusions under Article 6 of the Convention and Article 1 of
Protocol No. 1 the case requires no separate examination under Articles 7 and
13 of the Convention;
10. Holds unanimously that the question of
the application of Article 41 is not ready for decision;
accordingly,
(a) reserves the said question in whole;
(b) invites the parties to submit, within
three months from the date on which the judgment becomes final in accordance
with Article 44 § 2 of the Convention, their written
observations on the matter and, in particular, to notify the Court of any agreement
that they may reach;
(c) reserves the further procedure and delegates to the President of the
Chamber the power to fix the same if need be.
Done in
English, and notified in writing on 20 September 2011, pursuant to Rule 77 §§ 2
and 3 of the Rules of Court.
Søren Nielsen Christos
Rozakis
Registrar President
In
accordance with Article 45 § 2 of the Convention and Rule 74 § 2 of the Rules
of Court, the following separate opinions are annexed to this judgment:
(a) Partly
dissenting opinion of Judge Jebens;
(b) Partly
dissenting opinion of Judge Hajiyev and Judge Bushev.
C.R.
S.N.
PARTLY DISSENTING OPINION OF JUDGE JEBENS
I respectfully
disagree with the opinion expressed by the majority that there has been a
violation of Article 1 of Protocol No. 1 in this case in respect of the
2000-2001 Tax Assessments with regard to the imposition and calculation of
penalties.
I find it useful
to clarify the legal questions and give an outline of the developments in the
domestic case-law before explaining my opinion in the case.
The legal question before the
Court and the developments in the domestic case-law with respect to the
imposition of penalties for tax evasion
The applicant
company complains that the imposition of tax penalties violated its right to
protection of property, which is secured by Article 1 of Protocol No. 1 to the
Convention. It should be noted that the question before the Court in this
respect is not whether there was a legal basis in domestic law for imposing
penalties on the company for acts of tax evasion, but whether the imposition of
penalties was precluded. The applicant company argues that prosecution for the
alleged tax evasion had become time-barred, in that the decision which
established its outstanding tax liability for the year 2000 and imposed a
requirement to pay tax arrears, default interest and penalties was adopted on
14 April 2004, that is, outside the time-limit set out by the legislation.
The relevant
provision, namely Article 113 of the Tax Code, provided for a three-year
time-limit for holding a taxpayer liable for tax offences. Under the domestic
courts’ practice, that period ran from the first day after expiry of the
relevant tax term and ended when the taxpayer was held liable. However, the
part of their interpretation of the provision which referred to the end of the
period in question was the subject of several subsequent clarifications by the
superior domestic courts.
In its resolution
of 28 February 2001 the Plenum of the Supreme Commercial Court indicated to the
lower commercial courts that “a taxpayer is considered to have been held liable
(within the meaning of Article 113 of the Tax Code) on the date on which the
head of the (relevant) tax body or his deputy takes a decision to hold this person
liable for a tax offence in accordance with (the rules set out in) the Code”
(see paragraph 405 of the judgment). This interpretation was subsequently
applied by the lower commercial courts. However, while it generally secured a
fair balance between the interests of the tax authorities and those of
taxpayers, it would seem to be problematic in situations where the taxpayer
impeded the inspections by the tax authorities and thereby delayed the adoption
of the relevant decision with regard to the time-limit in Article 113.
In the present
case several of the applicant company’s subsidiaries had refused to comply at
all, while others had failed to provide the documents on oil transactions which
the tax authorities had requested during the on-site inspection (see paragraph
17 of the judgment). The lower courts held that in such situations the rules on
the statutory time-bar were inapplicable, because the applicant company had
acted in bad faith. This opinion was not upheld by the supervisory review
instance, which pointed out that setting aside the time-limits would be in
clear contradiction of the legislation and the relevant case-law. It therefore
referred the issue to the Presidium of the
In its decision of
14 July 2005 the Constitutional Court clarified, firstly, that the rules on
time limitation for imposing penalties should apply in any event, regardless of
whether the taxpayer had acted in “bad faith”. It went on to note that,
exceptionally, if the taxpayer had impeded the tax authorities’ inspections and
thereby delayed the adoption of the relevant decision, the running of the
time-limit could be suspended by the adoption of a tax-audit report, setting
out the circumstances of the tax offence in question and referring to the
relevant articles of the Tax Code (see paragraph 565).
Whether there has been a
violation of Article 1 of Protocol No. 1
The applicant
company complains about the imposition and calculation of tax penalties, but
they do not claim that the decision to impose tax penalties lacked a
substantive legal basis. There can be no doubt that such a basis existed in the
Russian legislation (see Articles 112 § 2 and 114 § 4 of the Tax Code), and
that the provision in question was sufficiently clear and foreseeable (see
paragraphs 400-402).
Furthermore,
although the clarification provided by the
As regards the
foreseeability of the measure, the matter should be seen in the light of the
applicant’s individual situation as well as the evolution of the Constitutional
Court’s jurisprudence in this sphere. The tax inspection in respect of the
applicant company for the year 2000 was instituted in December 2003, and the
audit report was adopted and served on the company on 29 December 2003; in
other words, both those events occurred within the three-year time-limit
specified in Article 113. Therefore, by that date, the company could already
have reasonably expected that it was likely to face substantial penalties in
connection with tax evasion.
It should also be
noted that the acts in question constituted tax offences at the time when they
were committed and that the penalties requested by the Ministry and eventually
imposed by the courts were not heavier than those applicable at that time
(compare Coëme and Others v. Belgium, cited above, § 150). Finally, it is of
relevance that the decision of 14 April 2004 was based on the same facts and
the same application of the Tax Code as the audit report of 29 December
2003. It remains the fact that the applicant company hoped to avoid liability
for tax evasion by actively impeding the tax inspections and delaying the
adoption of the relevant decision by the tax authorities (paragraph 17).
However, that in itself is, in my view, insufficient to merit protection, given
the circumstances of the case.
In addition, the
concept of “good faith” within the field of tax legislation and practice was
not an entirely novel one. The
Referring to the
circumstances of the case as explained above, the development in the superior
domestic courts’ interpretation of the provisions in question and the State’s
wide margin of appreciation in this sphere, I conclude that the Tax Assessment
for 2000-2001 and the imposition of penalties complied with the requirement of
lawfulness of Article 1 of Protocol No. 1.
PARTLY DISSENTING OPINION OF JUDGE BUSHEV, JOINED IN
PART BY JUDGE HAJIYEV
The present opinion contains
the joint dissenting opinion of Judge Hajiyev and of Judge Bushev with regard to the finding of a violation of Article 1 of
Protocol 1 to the Convention (parts 1 and 2 below), and that of Judge Bushev
with regard to the remainder of the issues (parts 3 and 4 below).
As to the violation of Article
1 of Protocol 1 to the Convention
Unfortunately, we must dissent
from our colleagues’ (hereinafter, the Court) finding that there was a
violation of Article 1 of Protocol 1 to the Convention in the case at hand,
concerning (1) application of the 3-year limitation period, provided by article
113 of the Tax Code of the Russian Federation, in respect of the imposition of
penalties for the years 2000 and 2001, and in respect of (2) certain elements
of the enforcement proceedings with regard to court judgments on the debt
arising from the Tax Assessments 2000-2003 (hereinafter, the enforcement
procedure).
We will now examine each of
the aforementioned findings.
1. With
regard to application of the 3-year limitation period in respect of the
imposition of penalties for the years 2000 and 2001.
1.1. The Court has,
in essence, agreed in full with the conclusions of the Russian courts that OAO
Neftyanaya kompaniya Yukos (hereinafter, Yukos) conducted numerous illicit
transactions for the sole purpose of systematically and intentionally evading
the payment of taxes. In addition, the Court found that the corresponding tax
legislation, in form and in content, and the actions of the authorities in
pursuing the assessment of tax arrears and surcharges, fully met the high
standards of the Convention. Thus, the Russian Government had enough reasonable
grounds for levying taxes and surcharges from the applicant. Equally, the Court
has not challenged the Russian Government’s finding that Yukos actively opposed
tax inspections, thus acting mala fides,
for the purpose of drawing out the time-limits for their performance.
1.2. As to the
levying of penalties for the intentional tax evasion, the Court did not find
the rates applied excessively high or disproportional (see § 606 of the
judgment). However, the Court’s findings with respect to each of the three tax
periods differ, depending on the possibility of applying the 3-year limitation
period set out in Article 113 of the Tax Code, to the imposition of tax
liability.
×
Thus, with
respect to the penalties imposed in April 2004 for the tax violations committed
in the period 2002-2003, the Court has not found any violations of the
Convention, since those periods fall within the 3-year limitation period.
×
In
accordance with the rules of application of the 3-year limitation period
identified by the Court, it found that imposition of the penalties in 2004 for
the tax violations committed in 2000 contradicts the requirements of Article
113 of the Tax Code.
×
With regard
to the third period, concerning the penalties for 2001, the Court, while not
doubting the grounds for their imposition, nonetheless challenged the 80 % rate
of the penalty. The Court was not convinced by the Government’s argument that,
under Article 114 of the Tax Code, the penalty could be increased from 40% to
80% in the event of a repeat conviction. Indeed, following the Court’s logic on
the limitation period applicable to the penalties for 2000, there was no
repetition in 2001, due to the fact that 2001, not 2000, is the first year for
which the limitation period is inapplicable. In other words, the penalties for
2000 could not be treated as the initial instance of imposition of tax
liability, and therefore, the increase in the penalty rate from 40% to 80% in
2001 was inadmissible, given that there was no repetition of the offence, for
which liability could be imposed.
1.3. In examining
the rule on the limitation period set out in Article 113 of the Tax Code, the
Court has taken a literal approach, which has led it to find that neither the
given provision, nor any other provisions of Russian legislation set out a
ground for suspending or amending the limitation period. In the Court’s
opinion, the wording of Article 113 of the Tax Code does not render it possible
to foresee any exceptions from the rule arising from certain circumstances. In
particular, the Court has not supported the Government’s argument that bad
faith on the part of the taxpayer, expressed by actively opposing the
authorities in establishing and classifying all elements of the corresponding
fiscal and legal relationship, is such an exception.
The Court thus considers that
the rule set out in Article 113 of the Tax Code did not render it possible for
a reasonable person with a fair degree of certainty to foresee any
inapplicability of the 3-year limitation period, even where such a person was
actively impeding the tax authorities. Hence, as regards the penalties for 2000,
the Court believes that the “quality” of Article 113 of the Tax Code did
not meet in full the requirement of lawfulness for the Government’s
interference in private property.
1.4. We are not
convinced by the Court’s arguments.
Indeed, the lawfulness criterion
is an indispensable requirement in appraising a Government’s activity in the
light of Article 1 of Protocol 1 to the Convention. For this purpose the notion
of law has a wide meaning and includes not only the acts of the respective
parliament, but also delegated legislation, decrees, court practice, etc. The
law has to meet certain requirements as to its form and substance.
We believe that in the case at
hand the statutory wording (its “quality”), and the specific qualities of the
offender were reasonable enough for it to foresee the probability that the
limitation rules set out in Article 113 of the Tax Code might be inapplicable
in the event of its actively opposing (obstructing) tax inspections. Let us
clarify this thinking.
1.5. “Legal
quality” of Article 113 of the Tax Code.
No legal system enables the
domestic legislation to be descriptive enough to provide for every eventuality.
Setting out a rule of conduct in statute and comprehending the implicit sense
thereof is attained by virtue of various legal techniques, including, in
particular, judicial interpretation, the interpretation of a rule within a
system of other rules, etc. Russian legislation has been codified in the
traditions of a pandectic system of law, which assumes that comprehension of
the implicit sense of a given special rule can be provided often by taking into
consideration a more general rule. A general rule is by default applicable to a
special rule, unless the latter sets out directly (obviously) an exception
(waiver) to the former. In such a codification system the interpretation
principles assume that every special rule contains the provisions of a more
general rule, although the literal text of the said general rule is not
included in the literal text of a special rule for the purposes of legal
techniques.
Moreover, in the pandectic
system a comprehension of the implicit sense of either special or general rules
ought to exist through legal principles, which have a universal and exhaustive
role. The effect of a legal principle is assumed with respect to each rule of
the respective branch of law; every single rule set out in legislation is to be
comprehended and applied within the semantic borders of the legal principle and
unless the former contradicts the latter.
1.6.
Thus, under Article 17 (3) of
the Constitution of the
1.7. With regard to
tax relationships, the
1.8. Apart from
those principles, consideration should be given to a special rule in Russian
legislation which could be used in comprehending the implied sense of Article
113 of the Tax Code. Thus, the Court believes that the high rate of penalties
(40%) applicable in cases of intentional tax violation creates a similarity
between this sanction and measures imposed under the criminal law. Therefore,
the Court argues, where such tax liability is imposed, procedural guarantees
similar to those applicable in cases of criminal liability should be granted.
This conclusion by the Court in respect of the present case is extremely
debatable (see paragraphs 3.2 – 3.4 below). Nonetheless, the key issue lies
elsewhere. If we follow the Court’s logic, the offender, in assessing the risk
of applicability of the limitation period to its case, ought also, in our view,
to have (or, at least, could reasonably have) considered the special rule of
criminal law. According to Article 78 (3) of the 1996 Criminal Code, “expiry of
a limitation period shall be suspended if the person who has committed the
crime impedes the investigation or court trial”.
Besides, the rules on
suspension or amendment of the limitation period as a result of certain
exceptional circumstances are applicable and ultimately similar for all forms
of legal liability.
1.9. Thus, Russian
legislation contained provisions with sufficient legal certainty for the
purpose of foreseeing the consequences of bad faith in opposing tax inspections
and the applicability of a limitation period in this regard.
1.10. The Court in
its judgment points to certain circumstances that prima facie diminish the “quality” of law and decrease the legal
certainty of Article 113 of the Tax Code. Among such circumstances the Court
refers to (i) paragraph 36 of judgment no. 5 of the Supreme Arbitration
(Commercial) Court Plenum of 28 February 2001 ((§ 405), hereinafter – the SAC
judgment of 2001), (ii) the Constitutional Court’s decision of 18 January 2005
((§ 75), hereinafter – CC Decision of 2005), (iii) the Constitutional Court’s
judgment of 14 July 2005 (hereinafter – the CC Judgment of 2005) and, last but
not least, (iv) amendments to Article 113 of the Tax Code adopted in Federal
Law no. 137-FZ of 27 July 2006 ((§ 410), hereinafter – the 2006 Federal Law).
Although all of these circumstances pertain to Article 113 of the Tax Code,
their quantity should not affect the comprehension of the “legal quality” of
the provision at hand.
In fact, the SAC judgment of
2001 eliminated internal inconsistencies and contradictory court practice
regarding the point at which tax liability is imposed (either the point of
drawing up a record of a violation, or the point of adopting a resolution on
the imposition of tax liability). The issue of bad faith in impeding tax
inspections, and the applicability of the limitation period in this regard, was
not addressed in the judgment. Neither was it touched upon in the CC Decision
of 2005, which affirmatively answered a request by Yukos regarding the
relevance of the limitation period’s application per se. The Constitutional Court justified its refusal to examine
Yukos’s claim on the ground that it was inadmissible, as the applicant sought
reassessment of the facts as stated by the arbitration (commercial) court, a
matter that does not fall within the Constitutional Court’s authority
(paragraph 2 of the CC Decision of 2005, paragraph 1.3 of the CC Judgment of
2005).
The CC Judgment of 2005
confirmed the Constitutional Court’s previous finding on the refusal of
protection to bad-faith taxpayers, drawing attention to the fact that the said
universal principle was also to be applied for the purpose of ascertaining the
implicit sense of Article 113 of the Tax Code. Furthermore, the
1.11. The
applicant’s subjective ability to comprehend the implicit sense of the law.
In deciding in any given case
whether there has been a violation of the Convention in respect of the
applicant, the ECHR considers that applicant’s specific situation. Evidently,
applicants’ individual ability to interact with the public authorities, the
degree of their security, so to speak, their ability to have victim status for
the purposes of the Convention, can differ substantially. Nevertheless, in
spite of its case-law, the Court in the case at hand failed to examine and
refused to consider Yukos’ subjective ability to foresee the consequences of
its own conduct in actively impeding tax inspections, and to assess the
explicit and implicit sense of Article 113 of the Tax Code. Such approach by
the Court is not consistent, as on the other issue – assessment of quality of
provisions of the special tax laws, i.e. of an element of the tax law offence –
the Court has taken into consideration the fact that the applicant was a large
holding, capable to consult with experts for risk assessments (see § 599 of the
judgment).
1.12. Yukos was one
of the largest commercial companies in
It is undeniable that the
applicant possessed an extremely high potential to assess its own legal risks;
its consultants (advisors) were able to reasonably foresee all the possible
consequences of application of a legal rule.
1.13. Thus, we
believe that neither the “quality” of the tax legislation (the objective
factor), nor the alleged legal uncertainty with respect to the applicant’s
rights (the subjective factor) constituted a violation of Article 1 of Protocol
1 to the Convention in terms of the existence of lawful grounds for an
insignificant prolongation of the limitation period for the penalties in
respect of 2000.
1.14. Retrospective
effect of the CC Judgment of 2005.
We were also not convinced by
the Court’s evaluation of the significance of the retrospective effect of the
CC Judgment of 2005 with regard to interpretation of Article 113 of the Tax
Code. As was mentioned above, the
The Convention recognizes a
wide margin of appreciation for national governments in regulating taxation and
levying taxes and penalties. The ECHR
respects any decision by the national legislator in this sphere, unless such a
decision obviously has no reasonable ground (see Gasus Dosier- und
Fördertechnik GmbH v. the
It is worth noting that in the
instant case the
1.15. Finally, let
us end with a reference to the judgment of 17 May 2010 in the case of Kononov v. Latvia, delivered by the
Grand Chamber, in which the Court set out certain standards as to the legal
certainty and foreseeability of a legal rule. We would recall that the issue in
question in this case was the legal certainty of a rule which had been
effective in the distant past and which became the legal ground for
imprisonment of the applicant for 6 years in 2000 for “military crimes”
committed, according to the Latvian authorities, in 1944. At the moment when
the events under consideration occurred, Latvian criminal legislation did not
contain any explicit provisions regarding military crimes; moreover, it
stipulated general and special limitation periods for criminal liability. Those
limitation periods had expired long before the beginning of the criminal
proceedings against Kononov. In 1993 the provisions on limitation periods were
abolished by a Latvian legislative act. Nevertheless, the ECHR held that
serviceman Kononov, who, unlike the applicant in the present case, had no real
opportunity to apply to consult legal advisers, relying on a combination of
various international conventions and legal customs (including certain that
were not officially promulgated) could
have foreseen that his conduct might be qualified as a military crime. In this
the ECHR was also not troubled by the fact that the limitation period set out
in national legislation for any type of crime at the time when Kononov
committed the alleged offence (1944) had expired several decades before Kononov
was brought to trial in 2000 (see Kononov v.
The right to liberty is one of
the most protected rights under the Convention; it is at the summit in the
hierarchy of human rights values, and therefore the standard of legal certainty
in respect of it is much higher than in respect of the rules entitling national
governments to control the private property of business organisations in the
form of levying taxes and penalties.
1.16. The ECHR has
repeatedly ruled that the burden of interpretation and enforcement of national
legislation is primarily with the competence of national public authorities,
and particularly state courts (see Winterwerp v. the Netherlands, 24 October 1979, § 60, Series A no. 33 and Iglesias Gil and A.U.I. v.
2. With
regard to the enforcement proceedings.
2.1. In assessing
the Government’s actions to collect tax arrears from Yukos the Court found no
breaches of national law; however, the Court held that the measures taken by
the public authorities against the offending company were disproportionate (see
§ 647 of the judgment). According to the Court, the enforcement procedure was
executed too rapidly, the applicant in fact had been provided no real opportunity
for any alternative ways to pay off its tax debts, the forfeiture of stocks in
OAO Yuganskneftegaz (OAO “YNG”) (the applicant’s primary business asset) by
auction was not justified, etc. (§ 650). At the same time, the Court did
not find every single element of the enforcement proceedings to be
disproportionate, but only in the cumulative effect of such elements. Further,
in the Court’s opinion, the State did not properly take into consideration all
of the factors related to the enforcement proceedings (§ 651), though it
accounted a few of those (§ 652).
2.2. The
width of the State’s margin of appreciation and factors determining its
bounderies.
We would reiterate that the
ECHR’s case-law relies on the necessity of recognising the wide margin of
appreciation enjoyed by national governments in deciding on the exact measures
intended to guarantee observance of human rights. The bounds of such discretion
can vary depending on the scope and the nature of a certain right, as well as
other circumstances developed under the ECHR’s practice (see Buckley
v. the United Kingdom, 25
September 1996, § 74, Reports of
Judgments and Decisions 1996‑IV). For the purposes of levying taxes and penalties a
government’s margin of appreciation is deemed to be particularly wide (see
§ 648 of the judgment).
The ECHR demonstrates even
more tolerance towards the public authorities’ actions in respect of private
persons in cases where (a) an
applicant happens to be a commercial company (see Špaček, s.r.o., v. the
All of these factors,
developed in the ECHR’s case-law and cumulatively denoting a need to recognize
a much wider margin of appreciation for the Government than in other cases, are
present here. However, they have not been taken into consideration properly by
the Court.
2.3. Yukos at that
time was one of the biggest commercial companies, not only in
We would also note that the
impugned events occurred during the international financial crisis at the end
of the 1990s/early 2000s, and the subsequent recovery of the Russian economy,
i.e. when the violations by Yukos were especially harmful to the State budget.
The State experienced a period of a transitional economy, which can be
attributed to restructuring of the political machinery, assembling and
adjustment of legislation, inter alia,
in the taxation sphere, and reorganization of State bodies.
2.4. Naturally,
whatever the wide margin of appreciation granted to a national Government, even
in exceptional circumstances, such a margin cannot be boundless. It is always
hypothetically possible to imagine certain cases in which the Government’s
actions would be disproportionate. The question is – who is best placed to
assess and stipulate the extent of such appreciation? Clearly, a judge of an
international court has less opportunity than a national authority, which is in
the thick of the action, to appraise all the nuances and shades thereof, and to
establish whether or not certain actions by the public authorities in specific
circumstances were reasonable and proportionate. Finally, we must admit that a
decision deemed inaccurate today might be reappraised at a later stage. An
unambiguously correct appraisal, especially in complicated circumstances, is
hardly possible. The multidimensional nature of the various elements involved,
specific national conditions, and other circumstances that demand that a
national government be granted a margin of appreciation do not deprive the ECHR
of its capability to assess the boundaries of such discretion in the light of
the requirements of the Convention.
2.5. The
presumption that the State[8] is
acting in good faith.
The ECHR’s case-law relies not
only upon a margin of appreciation, granted to public authorities, but also
upon the presumption of bona fides on
the part of a State. As with most other presumptions, the above presumption is rebuttable.
However, the standard of proof to overcome the presumption of bona fides of a State Government is
high, and irrefutable evidence must be adduced (see Khodorkovskiy v.
The Government may act bona fides, enjoying a wide margin of
appreciation in selecting various means for protecting the public interest;
however, the reverse must also be true. The main criterion in assessing the
Government’s activity as regards compliance with the Convention, alongside the
criteria of lawfulness in actions for the public interest, is the proportionality
test. Clearly, given the variety and diversity of legal solutions and national
systems, defining common criteria for the concept of proportionality is hardly
possible. Nonetheless, the ECHR has developed some common approaches.
2.6. Proportionality
of the actions employed by the State to secure public interest
A selected remedy might be
acknowledged to be disproportionate in cases when it is obviously unreasonable
(see Gasus Dosier- und Fordertechnik Gmbh (cited above) and other cases). It is worth noting that the above-mentioned
test by the ECHR does not include every form of unreasonableness, but only
explicit, obvious, doubtless forms. Doubts as to reasonableness can arise on
any ground, including the existence of those doubts themselves. We believe that
the wider the margin of appreciation granted to the Government, the more
evident the unreasonableness should be.
2.7. The ECHR’s
case-law also takes account of other factors in assessing proportionality.
Thus, the existence of an effective and accessible system for appealing against
the Government’s acts before the courts is of great importance (see Immobiliare
Saffi v.
2.8. The provision
of compensation is a significant criterion in establishing the proportionality
of specific measures by a Government. The payment of fair compensation by a
State leads, as a general rule, to a finding that the requirement of
proportionality has been met. The ECHR tends to apply different approaches to
the consideration of proportionality in the case of State interference,
depending on whether or not the applicant’s conduct was lawful and whether or
not the latter behaved in good faith.
In the event of lawful conduct
by the applicant, the compensation should, as a general rule, be equal to the
damage suffered for the proportionality test to be met. At the same time, even
in the event of lawful conduct by the applicant, the compensation may be less
than the harm sustained by a private person (see Jahn and Others v.
Where the applicant has
behaved unlawfully and in bad faith the ECHR accepted a much higher scale of
loss, and no compensation at all might be awarded. In respect of tax violations
the Court recognizes and advocates the right of the Contracting States to
inflict high penalties, especially if the applicant behaved mala fides (see Bendenoun
v. France, 24
February 1994, §§ 33, 46, Series A no. 284). Where the applicant’s conduct is criminal in nature,
the ECHR accepts confiscation as an indispensable and effective measure against
committal of a crime, i.e. an interference in private property interests which
implies no payment of compensation at all (see Phillips v. the
This approach is partially
supported by the concept of justifiable defence, recognised by most legal
systems. As a general rule, the damage sustained by the offender may be
slightly higher than the damage prevented. However, in certain exceptional
circumstances, subject to the provisions of both civil and criminal law, the
infliction of damage (harm) on the offender might be held to be lawful, even if
the scope of the damage thus inflicted significantly exceeds the actual damage
that might have been sustained were the offender to have completed his actions.
In other words, in the event of unlawful conduct an offender accepts the risk
of possible infliction of damage (harm).
Under this logic, we believe
that the infliction of damage on a bad-faith offender, in respect of the
levying of taxes owed and imposition of penalties by the national government,
does not constitute a violation of the Convention in this regard. In other
words, the offender may suffer certain negative consequences, including, inter alia, those that he might not have
foreseen at the moment of the unlawful conduct and others which are additional
to the impact he intended to avoid or escape (arrears, default interest rate,
penalties and fines, and other adverse consequences that could reasonably be
foreseen under the applicable law). The existence of even highly significant
damage in such a case does not in itself mean that the proportionality test has
not been met.
2.9. Let us look
again at the factual circumstances of this case, this time through the prism of
proportionality.
The Court did not detect any violation
of national legislation in the measures applied by the Government to the
company within the enforcement proceedings. Nevertheless, according to the
Court, the manner in which these measures were applied – so to say,
“excessively harshly” – does not meet the Convention requirement of
proportionality. We believe that the Court, in finding disproportionality,
substantially deviated from the practice developed in the ECHR’s case-law.
Indeed, the judgment states that, in themselves, the measures applied by the
Government were not evidently unreasonable (see, for example, § 654 of the
judgment). Moreover, the overwhelming majority of decisions rendered by the
enforcement bodies were subject to court supervision, on the applicant’s
initiative. In some instances those claims were resolved in favour of the
applicant.
As to the existence of
alternative measures, as was mentioned above, this factor is not decisive.
According to the case-file, and the judgment itself, it is not clear whether
any other effective remedies existed and whether their adoption would have led
to the goal of collecting taxes and penalties, in satisfaction of the public
interest. Thus, after the disposal of OAO YNG stocks the funds raised were
still insufficient to settle the tax and penalties debt owed to the State
budget. The reacquisition (redemption) price was assessed by an independent
international appraiser (Dresdner Kleinwort Wasserstein, the investment branch
of Dresdner Bank AG), and on the basis of the auction itself. As noted by the
Court, before the enforcement proceedings were initiated, the company was
probably in a state of pre-insolvency (§ 649), which is proved, particularly,
by the fact that the company informed the US Bankruptcy Court of its intention
to file a voluntary petition for bankruptcy long before the auction (§ 252). It
appears from the case-file that a certain amount of assets was being rapidly
transferred abroad. In such circumstances it cannot be ruled out that further
procrastination and/or a decision to seize less liquid assets would have
significantly reduced the Government’s chances of obtaining payment of the
taxes and penalties. The only possible alternative, which was offered by the
company itself, was to dispose of OAO Sibneft stocks instead of the stocks in
OAO YNG. However, the ownership of OAO Sibneft stocks was subject to
litigation, and they were consequently regarded as less liquid.
It follows that the decision
to seize the applicant’s primary business asset and the speed of the
enforcement proceedings to collect tax payments do not seem clearly
unreasonable. The measures applied by the enforcement bodies were to a large
extent determined by the company’s actions. The Court recognises the right of
national governments to adopt remedies which might grant the State certain
privileges over the remaining creditors (see Gasus Dosier und Fordertechnik GmbH (cited above)), i.e. the right
to apply exceptional measures.
Let us now turn in more detail
to some of the elements of the enforcement procedure. As mentioned above, each
of such elements does not appear, in the circumstances of the case, entirely
unreasonable, and therefore overall the procedure cannot be said to have been
disproportionate to the legitimate aim pursued.
2.10.
Specific elements of the enforcement procedure/interim measures.
Interim measures intended to ensure enforcement,
including putting a lien on assets, may be adopted in good time, before the
final decision comes into effect (see Janosevic v.
2.11.
Seven-percent enforcement fee.
As regards the seven-percent
enforcement fee, the Court, having recognised that collection of that fee was a
common practice in Russia (see § 647 of the judgment), nonetheless
considered the amount to be disproportionate, as it significantly exceeded the
expenses which could have possibly been expected to be borne by the State for
the enforcement proceedings (§ 655). The Court’s reasoning on the compensatory
nature of that fee is not fully clear. Indeed, the
2.12.
Auctioning of the shares of OAO YNG.
Auctioning of the shares of
OAO YNG, one of the key enforcement measures, was not, as stated by the Court
entirely (evidently) unreasonable (see § 654 of the judgment), and, therefore,
in our view, may not in itself be seen as disproportionate (see paragraph 2.6.
above). In addition, the following events, which took place after the auction
was completed, deserve attention, since they might implicitly provide evidence
of the actual economic meaning of the enforcement proceedings for the company.
More than a year passed
between completion of the enforcement proceedings and the initiation of the
bankruptcy proceedings; the bankruptcy proceedings were initiated by a
consortium (syndicate) of major western banks, seeking debt collection under a
credit agreement awarded by a British court judgment; the management of Yukos
repeatedly announced that the auction had not negatively affected the company’s
commercial viability. It is also worth considering that it was not the business
assets of OAO YNG that were disposed of in the auction in question, but a
controlling block of stocks. Obviously, such a change in the controlling
stockholder might eventually lead to certain changes in the respective
company’s business. Nevertheless, the respective company’s commercial
obligations to third parties, particularly OAO YNG’s obligations to Yukos, are
based on contractual rather than corporate relations (creditors’ rather than
stockholders’ control). Thus, a change in stakeholder (whose opportunity to
exercise control over a respective company is limited by law), or even numerous
changes in stakeholder, do not automatically lead to a weakening of business
commitments. A substitution of the controlling stakeholder is not a legal
ground for amendment or termination of commercial contracts, unless the latter
explicitly provides otherwise. The case-file does not contain any reliable
evidence that OAO YNG breached or failed to perform any of its contractual
obligations to Yukos, and the latter made no claims to that effect.
2.13. As a conclusion, with
due account for the arguments set out above, and for other circumstances (the
applicant’s unlawful and bad-faith conduct, the tremendous extent of damage caused
by the violations, a lack of consensus among Contracting States, etc.), we
believe that the Court, having referred to the concept of a wide margin of
appreciation enjoyed by national governments in tax disputes, in fact failed to
apply this concept to the case at hand, thus disregarding the ECHR’s own
case-law.
As to the violation of Article
6 of the Convention
I cannot support my colleagues
(hereafter, the Court) in their finding of a violation of Article 6 §§ 1 and 3
(b) of the Convention for the following reasons.
3.1. In the present
case dozens of hearings were held in the national courts at various instances
and several hundred procedural actions were taken. Of the numerous
uncompromising procedural struggles conducted with varying success by the
parties, the Court has identified two counts where, in its opinion, the
Government, firstly in the form of the first-instance court, and secondly in
the form of the appellate court, acted too speedily. In both instances the
applicant was allegedly granted insufficient time to prepare for the court
hearings, which had possibly affected the capability of Yukos’s legal advisers
to counter effectively the tax authorities’ lawyers. Both of those episodes
concern only the litigation on the collecting of tax payments for 2000. The
Court did not find any procedural violations in the chains of court proceedings
on collection of tax payments for 2001, 2002 and 2003 or the litigation
regarding the enforcements proceedings.
3.2. My first
counter-argument refers to both of the omissions identified by the Court.
The ECHR’s practice in
evaluating tax disputes in the light of Article 6 of the Convention is
extremely contradictory, in that, under Article 6, tax disputes do not come
under either criminal or civil law (see Ferrazzini v.
3.3. Nonetheless,
in terms of application of Article 6, the present tax case differs
substantially from the case of Jussila,
and from the other precedent which was taken as a basis for the latter, namely Ezeh and Connors v. the United Kingdom ([GC], nos.
39665/98 and 40086/98, ECHR 2003‑X). In both of those cases the judgments were delivered
on the basis of applications from physical persons, not a commercial company.
In both
Under Russian legislation the
liability imposed on legal entities is administrative, but not criminal.
However, this does not exclude the possibility of simultaneously imposing
criminal sanctions on physical persons – including a company’s managers who
personally participated in taking an unlawful decision on behalf of a legal
entity. It is to physical persons that the guarantees concerning criminal
prosecution set out in Article 6 are granted (free assistance of an
interpreter, free access to legal representation by a court-appointed lawyer,
etc.).
3.4. It should be
noted that the judgment in the Jussila
case was delivered in November 2006, that is, two years after the events and
circumstances assessed in the present case. In this respect, given the
contradictions and inconsistency in the ECHR’s previous case-law, the public
authorities hardly had an opportunity to take into account the provisions and
standards developed therein. Given the above, in any event, I consider that the
standard of requirements with regard to Article 6 of the Convention in this
case should have been less harsh.
Let us now examine briefly
each of the violations detected by the Court in respect of the litigation
concerning payments for 2000.
As
regards the lack of time granted to the applicant for familiarization with the
case file prior to the hearing before the first-instance court (see
§§ 536-541 of the judgment)
3.5. The Court
found that the mere four days granted to the applicant for familiarisation with
the case files in the tax authorities’ (“the Ministry’s”) premises could have
adversely affected the capability of Yukos’ numerous legal counsel to prepare
the applicant’s case efficiently (§§ 540, 551). It is to be recalled that the
tax authorities filed the claim with the court on 14 April 2004, and the main
court hearing was held more than a month later – from 21 to 26 May 2004 (§ 46).
Further to the court’s procedural decision of 15 April 2004 the tax
authority provided the applicant with an opportunity to familiarise itself with
the case files from 17 to 20 May 2004, that is, four days. In the Government’s
submission, which was not disputed by the applicant, the filed documents
primarily contained financial and other detailed source documents, which were
formerly in Yukos’s possession and/or with which it ought to have been
familiar.
With regard to the lack of
time granted to the applicant for preparing the case, the Court investigated
only one of the numerous elements in such preparation – the time for
familiarisation with the case files in the tax authorities’ premises. This
method of familiarisation is by no means the only one, and, in the present
case, was probably far from the primary method for acquiring knowledge of the
procedural opponent’s arguments and the relevant evidence. Having found the
four-day term insufficient for familiarisation with the case files in the tax
authorities’ premises, the Court extended this finding to the remaining stages
of preparation of the applicant’s case. The question is therefore whether the
relatively short time (four days) for familiarisation with the case file in the
tax authorities’ premises could have significantly affected the applicant’s
awareness of the case files, and whether the applicant was deprived of other
available instruments for familiarisation with the case files and of an
opportunity to prepare the defence properly? This question must be answered in
the negative.
3.6. The ECHR’s
case-law is based on the presumption that failure to provide documents for
familiarisation does not in itself constitute a violation of Article 6. What is
required is that the content of a document of which the applicant was unaware
at a certain point was material and could therefore have affected the
applicant’s legal argumentation (see Krčmář and Others v. the
For instance, the ECHR did not
find a violation of Article 6 of the Convention in a criminal case in which the
text of a sentence transmitted to the appeal court contained significant
digressions and discrepancies from the text of the sentence served on the
convicted person. All of these differences were held to be insignificant and
not to affect - to an extent inconsistent with the guarantees of Article 6 -
the applicants’ right to defend themselves (see Karyagin, Matveyev and Korolev
v.
3.7. I would
suggest that, in preparing for the hearing before the first-instance court the
applicant was aware, or could have familiarised itself in good time with the
content of the documents; the new data which the applicant was allegedly unable
to discover from the served documents was not material and could not affect the
applicant’s legal argumentation.
Thus, the overwhelming
majority of the documents with which the applicant intended to familiarise
itself initially originated from the applicant itself; the court proceedings
were preceded by a long-term tax inspection; the applicant was capable of
familiarising itself with the documents in question not only in the tax
authorities’ premises, but also at the court, since documents are filed
simultaneously with the court as attachments to the statement of claim; the tax
authorities’ arguments with regard to the numerous documents were set out
systematically in the tax inspection statement of 29 December 2003 and in the
decision (resolution) of 14 April 2004, and remained unchanged throughout the
entire court proceedings; the overall duration of the proceedings in the case
before all three instances exceeded five months (from 14 April to 17 September
2004); it is not clear from the applicant’s subsequent procedural documents how
its statement of defence had significantly changed or might have changed had
the applicant been granted more than four days to familiarise itself with the
files in the tax authorities’ premises at the initial stage of the proceedings.
As
to the commencement of the court proceedings before the appellate court before
expiry of the time-limit for lodging an appeal (see § 544-548 of the judgment)
3.8. On 1 June 2004
one of the respondents – OOO “Yukos-Moskva” (Yukos-Moskva) – lodged an appeal
against the first-instance court’s judgment with a court of appeal, as did the
tax authority on 2 June 2004. Under a ruling (decision) of 4 June 2004 the
hearing was scheduled for 18 June 2004 (see §§ 52-54 of the judgment). On the
eve of the hearing, on 17 June 2004, the second respondent – Yukos – also
lodged its appeal (§ 55). The court hearing lasted several days, from 18 to 29
June 2004, and the applicant (respondent) was represented by 10 attorneys (§§
57, 60).
The cassation petition was
filed by the respondent – Yukos – on 7 July 2004, i.e. less than 10 days after
the appeal court judgment, and long before expiry of the statutory two-month
period for applying to the next court instance. The applicant’s arguments as
set out in the cassation petition were the same as those in its submissions to
the appellate court (§ 67). The
cassation proceedings were held more than two months later, on
17 September 2004 (§ 70).
The court judgments and
decisions at all instances provided a detailed response to the applicant’s
arguments.
Under the legislation in force
at the material time, an appeal had to be judged within a month of being lodged with a court, including the time
required to prepare for the proceedings and render a decision (§ 423). The
judgment on the appeal lodged by Yukos-Moskva on 1 June 2004 was rendered on 29
June 2004, that is, one day before expiry of the statutory one-month term (§
62).
Yukos-Moskva, which was the
first party to submit an appeal, served as a management company for Yukos (§
1). In those circumstances, it would be unreasonable to assume that these two
respondents had not mutually coordinated and adjusted the other’s positions or,
at the least, were not aware of them, and that Yukos’ procedural capacities
were less than those of the company acting as the applicant’s executive body,
namely Yukos-Moskva.
Besides, as noted above, the
overall duration of the proceedings in the case at all three instances exceeded
five months, the case was subject to review at fourth instance, and the overall
duration was nearly fifteen months. It is difficult to accept that the overall
duration of the proceedings before the national courts was unreasonably short,
and that there was therefore a violation of Article 6 § 1 of the Convention in
this respect. I would even suggest that, had the duration of the proceedings
before the appeal court been extended, the applicant would have alleged, so to
speak, the opposite violation of the Convention – namely, that the duration was
unreasonably long (compare, for example, the allegation of a violation of the
Convention with regard to exceeding - by two days - of the time-limit for
preparation of the appeal court’s judgment (decision, § 43, judgment § 527 (5),
and the judges’ unanimous opinion that this allegation was ill-founded (§§ 549,
550)).
As mentioned above, the ECHR
relies upon the necessity of recognising the supremacy of national courts in
ascertaining the facts and circumstances of a given case and interpreting
national legislation. The applicant’s arguments concerning the lack of time for
preparation of its case and the non-observance of the time-limits for examining
the proceedings before the court of appeal were investigated by the Court and
found to be insufficient and unsubstantiated (§§ 71, 72 and others).
As to the admissibility of the
application – Article 35 of the Convention
On 29 January 2009 the Court
issued a decision declaring the application admissible. At the same time, under
Article 35 § 4 of the Convention, the Court must reject any application which
it considers inadmissible due to any deterrent circumstances at any stage of
the proceedings, i.e. also after the decision as to the admissibility of the
application has been issued. Let us consider a few circumstances which were not
fully reflected in the decision as to admissibility, but were in part assessed
by the Court.
The
power of attorney of the applicant’s lawyer Piers Gardner
4.1. The ECHR pays
particular attention to verification of the validity of the authority held by
the applicant’s representative in every case (see, inter alia, Post v. the
The case file contains a
notice by the insolvency administrator appointed in the course of Yukos’s
bankruptcy procedure – a private person entitled by law to act on behalf of the
company – which revokes the authority to act initially granted to Mr Gardner
and empowering him to represent the applicant before the ECHR (see § 299 of the
judgment). It was Mr Gardner who filed the documents on behalf of the
applicant, both prior to and following liquidation of the company, and who,
notwithstanding the cancellation of his authority to act, represented the
applicant in the hearings. The notice of the revocation of Mr Gardner’s
authority was served to the ECHR prior to termination (liquidation) of the
company as a legal entity, at a time when executive decisions could be taken
only by the insolvency administrator. In addition, the authority to act granted
to Mr Gardner by way of delegation, contained numerous legal omissions,
affecting its validity and consequently rendering it null and void,
irrespective of the insolvency administrator’s notice of revocation, and
Professor Valeriy A. Musin, my
predecessor as ad hoc judge in this
case, rightly drew attention to them by dissenting from the majority in the
admissibility decision.
As
to the admissibility of the case before the ECHR before all domestic remedies
have been exhausted – Article 35 § 1 of the Convention
4.2. As was
mentioned above, throughout the enforcement proceedings numerous interim
measures were taken for the purpose of compelling the applicant to pay the
taxes and penalties. Some of these measures were challenged by the applicant in
the domestic courts. However, in respect of many other measures the applicant
failed to use the available domestic remedies first, but submitted the
application in their respect to the ECHR directly (such as the seizure, certain
of the bailiff’s decisions on imposition of the 7% penalty, etc.).
The Court, irrespective of
whether a given measure was assessed by a national court, considered the
interim measures in their totality and found that their joint application had
been disproportionate (see paragraph 2.1. above). As a general rule, the ECHR
may examine any given alleged violation of the Convention only after all
domestic remedies have been exhausted. In the case at hand, application of that
rule on exhaustion would have led to a requirement to dismiss certain interim
measures from the Court’s assessment. The absence of certain interim measures
from the examined “total” would possibly have mitigated the Court’s finding as
to the disproportionality of the totality of the interim measures imposed on
the applicant in the enforcement proceedings: the “totality” in this case would
have been significantly decreased. However, the Court managed to overcome this
possible logical trap by stating that, with regard to the considered measures,
it was highly probable that the domestic courts would have rejected the
applicant’s claims, and that applying to them would therefore have been
pointless. The Court thereby established an exception from the exhaustibility
rule in respect of the examined interim measures (see §§ 636–644 and § 6 of the
operative provisions of the judgment).
Meanwhile, in spite of their
similarities, such cases contain numerous procedural and factual specificities,
which could result in different decisions by the national courts. It is to be
noted that the applicant was frequently successful in its procedural struggles
with the tax authorities on similar measures. For example, the first-instance
court, upholding a motion by Yukos, suspended enforcement of the tax
authority’s decision on payment of 14 April 2004 (§ 105); the same court reversed a bailiff’s
decision on imposing a 7% penalty (§ 132)
and reversed the bailiff’s decision on seizing the shares (§ 41), etc.;
the company repeatedly obtained a reduction in the amounts levied (decision,
§§ 42, 53, 66), etc.
In line with the Court’s
logic, the following - clearly inaccurate - conclusion might be reached. Where
there exists an extensive case-law by the national courts on any given matter,
any applicant may apply to the ECHR directly, since the outcome of his or her
case before the national courts is foreknown with a high, albeit not 100%,
degree of probability. Yet a dispute may contain certain specific factual and
procedural features, which may lead to the opposite conclusion [by the domestic
courts]. Examination and assessment of such specificities is the priority of
the national courts.
In view of the above
considerations, I cannot agree with the Court’s finding as to the exhaustion of
domestic remedies.
It is also difficult to refrain
from a question concerning the exhaustibility of the measures taken to protect
the applicant’s interests. Given the national courts’ numerous findings as to
various violations of the tax legislation, what was to prevent Yukos, its
shareholders and other interested parties from claiming compensation directly
from those physical persons and legal entities who intentionally took decisions
to adopt the abusive tax schemes, resulting in the losses by virtue of their
arrogant activity; from those persons who are likely to have enriched
themselves as a result of their illicit activity, covered by the Yukos
corporate veil.
As
to examination by the ECHR of a case which is substantially the same as a
matter subject to a procedure of international investigation or settlement
4.3. Under Article 35 § 2 of
the Convention the Court shall not deal with any application that is
substantially the same as a matter that has already been examined by the ECHR
or has already been submitted to another procedure of international investigation
or settlement and contains no relevant new information.
In the Court’s opinion, the
matter accepted for judgment by the Permanent Court of Arbitration in
Firstly, a legal entity as a legal institution, that
is, as a product of legal techniques,
a legal fiction, ultimately serves to
represent the interests of certain individuals. The use of distinct legal
entities in those two sets of proceedings does not itself imply that the
judgments in the respective cases will affect the interests of different
(distinct) individuals. Bearing in mind the close affiliation of the companies
in the Yukos Group, it would be reasonable to assume that, most likely,
identical individual persons have a stake in the outcomes in each set of
proceedings.
The Court failed to explain
why it chose not to observe the rule laid down in the case of Cereceda Martin and Others v. Spain (no. 16358/90, Commission decision of 12
October 1992) – the
formal identity of the parties in any given case is insignificant when the
claim, in essence, is submitted by the same complainants or interested parties.
Secondly, I would suggest that Article 35 § 2 (b) of the
Convention, in referring to the substance of the matter, primarily concerns the
merits (the substantial part) of the dispute, i.e. those criteria that the
Court chose not to consider in the case at hand. Were it otherwise, it would be
too simple to overcome the restriction set out in Article 35 § 2 (b) of the
Convention by, for example, assigning rights to an affiliate, or submitting
identical applications in the name of different stakeholders, etc.
In both sets of proceedings
the primary question to be examined by the courts was the same – assessment of
the tax schemes applied by Yukos and of the State’s corresponding response.
[1] Rectified
on 17 January 2012 : the text was “18 May 2008”
[2]
Rectified on 17 January 2012 : the text was: “Article 46 of the Code of
Commercial Court Procedure”
[3]
Rectified on 17 January 2012: the text was: “the judgment of 11 October 2004”
[4]
Rectified on 17 January 2012: the text was: “RUB 40,607,549,520 in penalties
(approximately EUR 1,139,797,051)”
[5]
Rectified on 17 January 2012: “Fund” has been added.
[6]
Rectified on 17 January 2012: the text was: “up to 15 days …”.
[7]
Rectified on 17 January 2012: “Commercial” was added.
[8]
Rectified on 17 January 2012: “good faith” was deleted.