Transition of foreign companies from subsidiaries to agents does not save permanent establishment

Transition of foreign companies from subsidiaries to agents does not save permanent establishment

The results of the analysis of current court practice were shared by Ivan Tsvetkov, Senior Tax Consultant at Tax Compliance.

What happened?


On August 09, 2023, the Arbitration Court of St. Petersburg and the Leningrad Region considered the dispute in the case of CREDITEXPRESS FINANCE LLC (Case No.A56-33357/2023) (hereinafter - the Company) concerning the formation of a permanent establishment of a foreign organization in the Russian Federation as a result of the activities of its dependent agent - a Russian organization.


Factual circumstances


The Company carries out activities on collection of overdue debts in extrajudicial and judicial order on the territory of the Russian Federation as an agent of the foreign company SVEA EKONOMI CYPRUS LIMITED (Cyprus).

At the same time, the Company and the said foreign company are part of the SVEA group of companies, the parent company of which is the foreign organization SVEA ECONOMY AB (Sweden) (hereinafter referred to as InCo).

The Interregional Inspectorate of the Federal Tax Service of Russia for Major Taxpayers No. 13 (hereinafter, the Tax Authority), as part of an on-site tax audit, established the fact that InCo regularly carries out business activities in the territory of the Russian Federation through the Company as its agent, which indicates the formation of a permanent establishment of a foreign company in the territory of the Russian Federation.


The Company, disagreeing with the decision of the tax authority, appealed to the court, pointing out the illegality of the decision on the following grounds:

  • the Company had other counterparties than SVEA EKONOMI CYPRUS LIMITED (Cyprus)which indicates that it is impossible to qualify the Company's activities carried out in the interests of InCo as leading to the formation of a permanent establishment of a foreign organization;
  • activities related to the acquisition of portfolios of overdue debts provided by the Company to a foreign organization outside the framework of an agency agreement constitute an independent type of auxiliary activity that does not constitute a permanent establishment for taxation purposes;
  • being a professional market participant, the Company independently rendered the disputed services, relying solely on its knowledge and experience, and also draws attention to the absence of instructions from InCo on the method of fulfillment of obligations assumed by the agent.


Legal proceedings


The court of first instance upheld the position of the tax authority in view of the following:

  • SVEA ECONOMI CYPRUS LIMITED (Cyprus) did not actually benefit from the income credited to its accounts and did not determine its further economic fate, was not the beneficial owner of this income, but was only an intermediate link, whose registration in the territory of the Republic of Cyprus ensured the receipt of tax preferences InCo.
  • The fact of existence between the Company and SVEA ECONOMI CYPRUS LIMITED (Cyprus) of relations not typical for independent agency relations and ordinary activities of the Company has been established;
  • Consequently, the Company's actions went beyond the normal activities of the agent and were outside the sphere of economic interests of the Company as an independent business entity;
  • The entire business process of collection activities in the Russian Federation from the moment of analyzing offers for the sale of financial assets in the receivables market to the final stage - debt collection under the acquired rights was carried out by InCo, a foreign company, through the Company;
  • Despite the presence of other counterparties, the Company, when providing debt collection services, went both beyond the scope of the agency agreement and beyond the scope of its ordinary business activities (beyond independent agency relations);
  • Thus, the activities of InCo carried out through the Company were entrepreneurial, aimed at making profit and were of a regular nature, the place of such activities was the territory of the Russian Federation, which meets the criteria for the establishment of a permanent establishment of a foreign organization in the territory of the Russian Federation.


Trend of increasing risk


This case highlights the increased interest of the tax authorities in taxpayers acting as agents of foreign companies, which may result from changes in the presence of foreign businesses in Russia.

In view of the above, and also assuming in the current situation that the tax authorities' attention to the issue in question increases, it makes sense for a business to pay attention to the increased risks of establishing a permanent establishment, particularly in relations with dependent agents and similar partner structures.