International Arbitration Practice Newsletter (Issue 1, 2015)

Avtotor “corporate veil” pierced in Kaliningrad SEZ tax case

In a dispute between the Avtotor holding company and the Federal Tax Service (FTS) of Russia, the Arbitration Court of the St. Petersburg and Leningrad district looked behind the "corporate veil" of the auto group and traced a complex chain in order to identify the actual beneficial owners who are subject to taxation. The court refused to overturn the decision of the Federal Tax Service (FTS) to charge a Kaliningrad SEZ resident an additional RUB 600 million as income tax (case number A56-55281 / 2014).

The recipient of the income at issue was the Dutch company Doan BV, which is Avtovor’s main shareholder. This determination was initially established by the FTS in accordance with the 1996 agreement between Russia and the Kingdom of the Netherlands On Avoidance of Double Taxation and Prevention of Fiscal Evasion Regarding Taxes on Income and Property.

However, at the request of the Russian side, the Dutch authorities conducted an investigation that indicated that, according to the witness testimony of Robert Luke (Luc Robert) of Doan BV, the ultimate beneficiary of the Dutch company is Vladimir Shcherbakov, the chairman of the board of Avtotor. The tax authorities also analyzed public information on the official portal of the Government of the Russian Federation and that of the Government of the Kaliningrad region, as well as information in newspapers and other public sources. They also noted that Mr. Shcherbakov gave all the interviews and public comments related to the production of cars by all the of Avtotor enterprises in the Kaliningrad. He represents himself as the Chairman of the Board of the Avtotor group, is the founder of the automobile production project in the Kaliningrad region, and represents the production operations of Avtotor automotive plants at the meetings with top officials of the country.

Russian arbitration court upholds a shareholders’ agreement put option

The Arbitration Court of the Stavropol Territory, in case number A63-9751 / 2014, confirmed the validity and enforceability of the put option in a shareholders' agreement.

The share repurchase provisions of the agreement were contested on the grounds of the absence of its approval as a major transaction, signs of "malicious conspiracy against the interests of one of the parties and the lack of economic feasibility of the contract."

Assessing the "optional" clause, the court pointed out that the deal was one of a series of related transactions; and the performance of all obligations of these transactions would result in economic benefits for parties. In addition, there was no evidence that the transaction was initiated for the purpose of bringing about its failure or improper performance.

As a result, the court recognized the claim and obliged the defendant to buy shares for RUB 329 million and pay a fine of RUB 3 million for each week of non-compliance.

Cyprus court seizes US$ 250 million in assets of Suleiman Kerimov

The District Court of Nicosia (Cyprus) has imposed provisional measures to seize assets of Suleiman Kerimov, a member of the Federation Council of the People's Assembly of the Republic of Dagestan. Security measures have been taken to pursue the decision of the London Court of International Arbitration (LCIA), under which Kerimov must pay former State Duma deputy Ashot Egiazaryan US$ 250 million. That is the amount that Mr. Egizaryan invested in the construction of the hotel "Moscow" (now named the Four Seasons Hotel Moscow), which should have been repaid by Mr. Kerimov to Mr. Egiazaryan, who had withdrawn from the construction project. According to the court’s decision, the first part of the debt was due in November 2014.

Representatives of Mr. Kerimov have appealed against the interim measures.

Media sources report that, in addition to Mr. Kerimov’s private property, his other assets that are subject to arrest include: the Anji football club; the company's stakes in Polyus Gold; and the companies that own the building in Butikovskiy lane and the shares in the Four Seasons Hotel Moscow.

Mr. Egiazaryan has not yet applied to the courts of the Russian Federation for the enforcement of decisions of the London arbitration.