Russia vs Hyundai Motors, October 2015, Arbitration Court of Moscow, Case No. А40-50654/13

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A Russian subsidiary of the car manufacturer group HYUNDAI had been claiming losses in fiscal years 2008 and 2009.

In the opinion of the tax authority, losses incurred by the Russian distributor were mainly due to non-arm’s length transfer pricing within the group of companies.

Decision of the Russian Arbitration Court

According to the court, the applied transfer pricing method is not applicable in the present case. A comparison with wholesalers in the Russian automotive market cannot be made, it said. The reason for this is the common sales strategy of automotive groups in Russia. Almost all non-Russian manufacturers distribute their automobiles through affiliated wholesale companies, which in turn purchase the vehicles from affiliated companies abroad. The only exceptions in this context are currently companies such as Volkswagen or BMW, which operate their own production facilities in Russia. Therefore, a reliable identification of comparable business transactions with regard to independent Russian importers is not possible.

The second conclusion of the court refers to the negative market development caused by the financial crisis in 2008/2009. Accordingly, the economic development alone does not constitute a sufficient reason for the recognition of losses of a distribution company. With this assessment, the courts followed the opinion of the competent tax authorities in characterizing the local HYUNDAI sales companies as routine companies. A Russian sales company with a low risk level is generally entitled to a stable, positive remuneration. In this respect, the Russian Arbitration Court supported the view of the tax authorities that a local sales company would also not have to bear the losses caused by the financial crisis. In the opinion of the tax authorities as well as the court, the affiliated business partner abroad should have borne the losses instead of the Russian HYUNDAI company.

The Court also stated that agreed contractual clauses that provide for increased costs for advertising and marketing without offering a correspondingly higher added value for the sales companies do not comply with the arm’s length principle.

 

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RUS vs Hyundai 2015 A40-50654-2013_20151014

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