Tax disputes are generally characterized by high complexity and require high costs on the part of the taxpayer, including financial ones.

In addition, in recent years, court practice has been largely in favor of businesses. Therefore, to increase their chances of a positive outcome, organizations enlist the support of professional consultants.

Suppose that representatives have succeeded in obtaining in court the invalidation of a decision of a tax authority. Is it possible in that case to recover the expenses incurred from the opponent, which in this case is the tax authority?

Disputes involving the tax authorities are subject to the general rule that the losing party shall reimburse court costs to the other party. Court costs include state duty and other costs, in particular, payment for the services of a representative and payments to other persons (e.g., experts, interpreters). [1]

At the same time, partial satisfaction of claims implies proportional reimbursement of court costs to the amount of satisfied claims.

However, in the case of recovery of costs from state authorities, including tax authorities, judicial practice is formed in a special way, which largely determines the ineffectiveness of this method of defense.

The main trend in the judicial practice on this issue is the reduction of the amount of costs recovered by the courts to the minimum limits.

Since the law does not establish clear criteria for the recovery of court costs, judges proceed from evaluative categories - the principles of reasonableness and proportionality.

Prudence equals frugality?

The language of the term "reasonable limit on court costs" does not suggest "an economical amount of court costs," but rather implies that the court assesses the following : [2]

• the scope of the claims and the price of the claim;
• the very scope of the services for which the costs were incurred, the complexity of the case, and relates those services to the requirements of necessity and sufficiency;
• the qualifications, experience and reputation of particular representatives;
• the cost of similar services in a particular region;
• other circumstances.

At the same time, it should be taken into account that the factual circumstances of each dispute are always unique, so the criterion of "comparable circumstances of the case" cannot be the main one.

A taxpayer claiming reimbursement of expenses for a representative must prove their amount and the fact of their payment, while a tax authority has the right to refer to their excessiveness. The court may also reduce the amount recovered at its discretion, including when it is clearly unreasonable or even when the other party does not consider it excessive. [3]

Often courts deny recovery or significantly reduce the costs that do not require special knowledge and qualifications of representatives [4], including transportation, accommodation and other costs [5]. Also the court may recalculate expenses: instead of a cab - public transportation, instead of 2 nights in a hotel - one. [6]

For an approximate calculation it is possible to use the norms reflected in the acts of the Government, which, among other things, establish the amount of remuneration to lawyers on appointment (at the rate of no more than 1200 for one working day). [7]

In practice, there are also successful cases where the court collects all or virtually all of the amount of expenses claimed by the taxpayer, despite the objections of the tax authority. [8]

Moreover, even if the trial court indicates that the amounts charged are disproportionate, chances are that the appellate court will find that the amount in question meets the principles of reasonableness, fairness, the level of complexity of the case, and the amount of work performed by the representative. [9]

Is it worth the gamble?

Arguments in support of the need to recover court costs may be made either in the form of a motion within the framework of the main tax dispute or separately as an independent claim for the recovery of losses.

However, in addition to the extensive practice of substantially reducing the amount of costs recovered, another obstacle is that the consideration of such claims may be protracted over several hearings and involves the submission of a great deal of evidence to substantiate the causal link between the court case and the costs incurred, their amount and other circumstances.

Other risks must be kept in mind as well.

The resolution of tax disputes is shifted to the pre-trial and even pre-audit stage, so justification of non-disclosure of relevant evidence (non-presentation of documents) to the tax authorities in the course of an audit may be required to substantiate court expenses in case of submission of a significant amount of documents during the trial.

Otherwise, court costs, despite winning the litigation, may be charged to the taxpayer in whole or in part. [10]

Thus, the court refused to recover the state duty from the tax authority, because the company submitted voluminous registers, registers and other primary documentation only during the court proceedings [11]. The court may consider such behavior of the taxpayer as an abuse of the right, in case of failure to submit documents to the auditors without valid reasons, and sending them immediately to the court, because the relevant evidence can affect the assessment and removal of most of the additional charges. [12]

The mere submission of new evidence to the court does not in itself indicate an abuse of right on the part of the taxpayer and does not prevent the recovery of court costs from the inspectorate subject to the general rules for their distribution (i.e. in proportion to the amount of claims satisfied). However, the submission of a significant amount of new documents without a valid reason only in court proceedings may be regarded as a deliberate concealment from the inspection of evidence affecting the outcome of the case, and most likely, this situation will play against the company. [13]

Success achieved, what about the fee?

It is not uncommon for parties to contractually provide for the payment of a substantial portion of the cost of services rendered as a "success fee", i.e., a reward for a favorable outcome for the taxpayer.

Since these amounts are additional remuneration for already paid representative's services, a kind of bonus, they are not to be included in court costs [14] and cannot be recovered from the defendant, including the tax authority.

It should be concluded that the court's recognition of a tax authority's decision as invalid does not guarantee a taxpayer unproblematic recovery of court costs from the tax authority.

In the vast majority of cases, the amount of satisfied in this part of the requirements is not able to cover even the costs of legal support of the recovery procedure itself, so many taxpayers refuse to exercise their right.

On the other hand, recovery of court costs from the state body that adopted an illegal act is in many respects a "matter of honor" for businessmen and an additional way to protect the business reputation of the organization.

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[1] Articles 101, 106, 110 of the APC RF.

[2] Part 2 of Article 110 of the APC RF, paragraph 13 of the Resolution of the Plenum of the Supreme Court of the Russian Federation from 21.01.2016 № 1 "On some issues of application of the legislation on reimbursement of costs associated with the consideration of the case".

[3] Ч. 1 Art. 65 of the APC RF; para. 3 of the Information Letter of the Supreme Arbitration Court from 05.12.2007 № 121 "Review of judicial practice on issues related to the distribution between the parties of court expenses for payment of lawyers and other persons acting as representatives in arbitration courts".

[4] Ruling of the Moscow District Court of Arbitration of 29.05.2014 in case No. A40-60531/12.

[5] Ruling of the Arbitration Court of the Volga District of 02.11.2017 in case No. A65-16916/2016

[6] Ruling of the AC of the North Caucasus District of 30.06.2021 in case No. А53-1880/2020.

[7] Regulations on the reimbursement of procedural costs associated with the proceedings in a criminal case, costs in connection with the consideration of a case by an arbitration court, civil case, administrative case, as well as costs in connection with the fulfillment of the requirements of the Constitutional Court of the Russian Federation, approved by Resolution of the Government of the Russian Federation of 01.12.2012 No. 1240.

[8] Decision of the AC of the North Caucasus District from 07.12.2020 in case No. A63-19345/2018, Decision of the Ninth Arbitration Appeal Court from 31.05.2023 in case No. A40-132841/2021.

[9] Ruling of the Ninth Arbitration Court of Appeal of 16.02.2023 in case No. A40-102666/2020

[10] P. 78 of the Resolution of the Supreme Arbitration Court of 30.07.2013 № 57 "On some issues arising in the application by arbitration courts of Part One of the Tax Code of the Russian Federation".

[11] Resolution of the Arbitration Court of the Central District of 04.08.2020 in case No. А54-9878/2018.

[12] Decision of the Nineteenth Arbitration Court of Appeal of 20.08.2021 № 19AP-398/2021 in case № A48-229/2020

[13] Decision of the Supreme Court of the Russian Federation of 17.12.2021 No. 306-ES21-18519; Decisions of the AC UO of 25.06.2020 No. F09-3385/20 in case No. A34-9885/2019

[14] For example, the Definition of the Supreme Court of the Russian Federation of 17.11.2022 in case No. A40-21242/2021.