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Supreme Commercial Court rules legal defence of non-profits is public good

Source: (info), 22/09/11

· The Courts · Human Rights Defenders

The Supreme Commercial Court of Russia has ruled that the legal defence of NGOs that have become “the object of prosecution by the government” serves to “defend the constitutional rights of citizens” and “promote the public good.”

Two months after its ruling on the taxation of foreign donations set a precedent for Russian non-profits, the Supreme Commercial Court has published its decision on its official website.

On 22 September the reasoning adopted by the court became know, reports, citing Agora Human Rights Association.

On 28 July 2011 the Presidium of the Supreme Commercial Court of Russia, sitting under the chairmanship of the head of the court, Anton Ivanov, ruled that Russian non-profits should not pay profit tax on donations received from foreign donors. This judgment in a case brought by Agora against the tax inspectorate applies to all analogous situations in Russia, is final, and is not subject to appeal.

“The National Endowment for Democracy donated, gratis, funds to Agora for use for a specific purpose, namely to provide legal assistance to NGOs prosecuted by the government, necessary to enable them to continue their work,” the Court decision reads. “The purpose of the provision of money corresponds with the goals and mission of the Association and with the concept of ‘worthy purposes’, and is oriented towards the defence of the constitutional rights of citizens and the promotion of the public good. Consequently, the money received by the Association from foundations with regard to taxation of profit is income received for a specific purpose in the form of donations.

Moreover the ruling of the Supreme Commercial Court is against the Russian tax authorities on an issue that is of great concern to them, pointing out gross errors in their work and in the decisions of the lower courts: “The absence of the mentioned foundations in the list of foreign and international organizations, confirmed by the Government of the Russian Federation, makes it impossible to consider the money funds in question that came from the foundations, as grants in accordance with Article 251 (Section 1, Subsection 14) of the Tax Code but does not mean in the situation in question that they cannot be considered in line with Article 251 (Section 2, Subsection 1) of the Tax Code as donations made for a specific purpose.”

“The fact that the foreign foundations are not included in the so-called ‘Putin’s list’ of grant-makers does not exclude the possibility that their funds can be recognized as donations and therefore are not liable for profit tax,” said Ramil Akhmetgaliev, a lawyer from Agora Human Rights Association, on the decision of the Supreme Commercial Court. “Of course, this is on the condition that the agreement between the donor and the Russian NGO has all the signs of being an agreement about a donation.”

“In this way the courts, in refusing to satisfy the Association in the given episode, did not take into account provisions contained in Article 251 (Section 2, Subsection 1) of the Tax Code,” the judgment of the Supreme Commercial Court states. “Money given by foundations as a donation should not be subject to profit tax on the basis of the given norm. In the given circumstances the court rulings in question must be quashed since they violate the uniformity of interpretation and application by commercial courts of the legal norms.”

In its conclusion, the Presidium of the Supreme Commercial Court notes: “The commercial court rulings that entered into force in cases with similar factual circumstances based on an interpretation of the legal norms that differs from that contained in the present ruling can be subject to judicial review.” In other words, from now on any legal relations must be interpreted exclusively in the way that the Supreme Commercial Court has set out in its judgment, and all earlier court rulings that contradict the position of the Supreme Commercial Court, even if they have entered into force, can be reviewed.

This issue is one that concerns hundreds of non-profits in Russia that each year receive more than 1bn roubles in foreign donations. Before the decision of the Supreme Commercial Court the tax authorities consistently and as a matter of principle refused to recognize foreign donations given for a specific purpose as donations and held that non-profits were obliged to pay profit tax on funds received in this way. The Presidium of the Supreme Commercial Court has put an end to these contradictions in interpretation of the Tax Code of Russia and finally resolved this issue for all Russian non-profits. The decision of the Supreme Commercial Court is obligatory for implementation by all commercial courts in all subjects of the Federation.

Despite similar decisions by federal commercial courts in the North-West, Urals, Moscow and Volga districts, in July 2010 the Commercial Court of Tatarstan ruled that Agora Human Rights Association should pay profit tax on donations received from foreign foundations. The Eleventh Commercial Appeal Court in Samara and the Federal Commercial Court of the Volga District in Kazan upheld this decision. The human rights defenders then appealed to the Supreme Commercial Court of Russia, which has now issued its final judgment.

Lawyers of Agora Human Rights Association direct attention to the fact that the tax authorities had not contested the facts that the foreign funds had been given to the human rights defenders gratis and for a specific purpose which had been met. All the arguments of the tax authorities amounted in practice to the fact that, since the funds had been received from foreign foundations not included in the so-called ‘Putin’s list’ of grant-makers, consequently they could not be donations. However, according to the Civil Code and the Tax Code, donations can be made by any individual or foundation, irrespective of the country where they are located.

In December 2009 the Inter-regional Inspectorate No. 5 for Tatarstan of the Federal Tax Agency issued a tax assessment to the Agora Association which stated that, in the period 2006-2008, the human rights defenders had allegedly failed to pay almost 700,000 roubles in profit tax and more than 170,000 roubles in other taxes. The tax officials recognized that these sums had been spent to the last penny on the established purposes of the non-profit organization – assistance to the public – but nonetheless insisted that these funds should be considered as profit.