Tax Disputes in Arbitration

Tax disputes in the commercial (arbitration) court. What else to consider when taxes are additionally assessed. How to win the case. A recurring theme in tax disputes is whether the trend of tightening fiscal policy towards business truly dominates, and whether courts genuinely favour the tax authorities. Experience shows a more nuanced picture — and, crucially, that taxpayers do win.

The supposed pro-fiscal trend

It is often said that the trend appears in legislative "tightening of the screws" and in an openly pro-fiscal stance of courts in tax disputes. Yet a closer look complicates this. Any entrepreneur who has ever engaged a lawyer to recover a debt from a counterparty knows that winning the case is not even half the battle — the hardest part is then actually recovering real money. Almost all of the state's legislative initiatives concern this second part: how to collect an already-established arrears into the budget (recovery from dependent persons, tougher subsidiary liability, tougher bankruptcy procedures).

By contrast, the state did not legislate to help tax authorities win in court on the merits. No law was passed allowing additional assessments merely because a counterparty's director is nominal, or because the counterparty failed to pay its taxes, or because there is a break in the VAT-control chain. In that respect the rules of the game did not change.

Taxpayers do win — the due-diligence principle

The clearest counterexample is the Supreme Court decision placed in the official Review of case law, which sided with a taxpayer buying goods from a supplier bearing obvious "shell company" features. And it is not the only such case.

Example. In a dispute where the authorities additionally assessed profit tax and VAT on transactions with counterparties showing shell-company signs (nominal directors, mass fictitious addresses, no staff or property), all three instances sided with the taxpayer. The first-instance court reminded the authorities that, in pursuing supplier fictitiousness, they must not ignore documentary evidence — otherwise the application of tax law leads to a distorted assessment of genuine business operations and an "accusatory bias", imposing extra duties on the taxpayer, including proving its own "good faith", without establishing fault (in the form of intent or negligence).

What decides a tax dispute

The decisive factors in defending an additional assessment are typically: the reality of the business operations (that goods were actually supplied or work actually done); the taxpayer's exercise of commercial due diligence in selecting counterparties; proper documentary support; and the absence of intent or scheme. Where these are shown, courts are willing to overturn assessments even where a supplier has shell-company features — because the taxpayer's fault, not the supplier's status alone, is what matters.

What this means for business

For companies operating in Russia — including foreign-owned businesses — the practical takeaways are clear: document the reality of transactions, keep evidence of due diligence on counterparties, and be ready to show that any supplier problems were not known and not part of a scheme. Tax disputes are winnable, but they are won on evidence assembled before and during the audit, not improvised at trial. Early involvement of counsel during a tax audit materially improves the odds.

Related materials

• Tax law and disputes

• Tax residency in Russia