Nikita Zharov, Head of Tax Compliance Practice, commented on the results of the Supreme Court's significant decision in an analytical piece for Kommersant.

In 2023, one of the most interesting categories of tax disputes was the consideration by the courts of the issue of the tax consequences of increasing the charter capital of a Russian organization at the expense of undistributed profits of foreign participants of previous years.

The question of whether in this case a participant of a company has income has always been a controversial issue and has been considered ambiguously by financial authorities and courts. It is noteworthy that the Supreme Arbitration Court of the Russian Federation at different times adhered to both the first and the second position. Thus, if in 2011 the HAC RF was not in favor of taxpayers, in 2013 the legal position of the highest court changed. The HAC RF came to the conclusion that the income caused by the increase in the nominal value of the shares of the company's participants before the moment of realization by them of any of their property rights certified by the corresponding share in the authorized capital stock, the company's participants have no income. The ruling of the Supreme Arbitration Court of the Russian Federation of 2013 put an end to this category of disputes for a long period of time.

It should be noted that in international practice this issue is also debatable. In its turn, the Russian legislator has unambiguously defined an increase in the nominal value of participants' shares as income that is subject to exemption from taxation (for companies with Russian shareholders).

This category of the dispute was followed with special attention after the transfer of the cassation appeal of MIR BUSINESS BANK JSC for consideration in the court session of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation (hereinafter - the "Supreme Court of the Russian Federation").

On March 15, 2024 the Supreme Court of the Russian Federation issued its position on the issue under consideration. In its ruling on the case of JSC "WORLD BUSINESS BANK" the Supreme Court of the Russian Federation did not plunge us into speculation about the presence or absence in this case of income and hidden distribution of dividends, directly stating that here there is a "benefit of the Russian organization - shareholder from the increase in the value of the capital of the joint stock company in the amount corresponding to the increase in the authorized capital at the expense of retained earnings". However, such benefit "is not considered by the legislator as taxable income". 

The Supreme Court of the Russian Federation emphasized the principle of non-discrimination enshrined in international double taxation treaties, stating that "the prohibition of discrimination consists in the inadmissibility of situations where a taxpayer is subjected to more onerous taxation conditions in the Russian Federation only because of his foreign status (discrimination on the basis of the residence of the recipient of income)".

In this case, the Judicial Board did not see any fundamental economic differences in the position of a Russian organization which is the sole shareholder of another Russian organization and of a foreign organization which is the sole shareholder of a Russian organization when a decision is made to allocate retained earnings of previous years to increase the authorized capital in the absence of payments. In this connection, according to the RF Supreme Court, "there are no grounds to subject to more onerous taxation in the considered part a foreign shareholder who has preserved the capitalization of the Russian organization".

This position of the Supreme Court of the Russian Federation is a long-awaited one for all taxpayers with foreign participation. It is designed to once again remind financial authorities and lower courts of such an important principle of international taxation as the principle of non-discrimination. 

At the same time, the question remains open - will this position be applicable to transactions involving shareholders from "unfriendly" countries with which SIDNs have been suspended? Time will tell.