CEDH · CASELAW;DECISIONS;ADMISSIBILITY;ENG — 29 janvier 2009

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margin-bottom:6pt; text-indent:14.2pt; text-align:justify } .s2D9C6089 { margin-top:12pt; margin-bottom:12pt; text-indent:14.2pt; text-align:justify; page-break-inside:avoid; page-break-after:avoid } .sE7C30868 { margin-top:12pt; margin-bottom:12pt; text-indent:14.2pt; text-align:justify } .s7714A00D { margin-top:12pt; margin-left:14.2pt; margin-bottom:36pt; text-align:justify } .s69DCC830 { margin-top:36pt; margin-bottom:0pt } .s507451D6 { width:4.53pt; display:inline-block } .s4A0CEAF8 { width:194.77pt; display:inline-block } .s7602FED2 { width:18.21pt; display:inline-block } .sC1AC44A4 { width:228.11pt; display:inline-block } FIRST SECTION DECISION AS TO THE ADMISSIBILITY OF Application no. 14902/04 by OAO NEFTYANAYA KOMPANIYA YUKOS against Russia The European Court of Human Rights (First Section), sitting on 29   January 2009 as a Chamber composed of:   Christos Rozakis, President,   Nina Vajić,   Khanlar Hajiyev,   Dean Spielmann,   Sverre Erik Jebens,   Giorgio Malinverni, judges,   Valeriy Musin, ad hoc judge, and Søren Nielsen, Section Registrar , Having regard to the above application lodged on 23 April 2004, Having regard to the decision to grant priority to the above application under Rule 41 of the Rules of Court. Having regard to the observations submitted by the respondent Government and the observations in reply submitted by the applicant company, Having deliberated, decides as follows: THE FACTS 1.     The applicant, OAO Neftyanaya kompaniya YUKOS, was a publicly-traded private open joint-stock company incorporated under the laws of Russia. It was registered in Nefteyugansk, Tyumen Region, and at the relevant time was managed by its subsidiary, OOO “YUKOS” Moskva, registered in Moscow. It was represented before the Court by Mr   J.P.   Gardner, a lawyer practising in London. 2.     The Russian Government (“the Government”) were represented by Mr P. Laptev and Mrs V. Milinchuk, former Representatives of the Russian Federation at the European Court of Human Rights. A.     The circumstances of the case 3.     The facts of the case, as submitted by the parties, may be summarised as follows. 4.     The applicant was a holding company established by the Russian Government in 1993 to own and control a number of stand-alone entities specialised in oil production. The company remained fully State-owned until 1995-1996 when, through a series of tenders and auctions, it was privatised. 1.     Proceedings in respect of the applicant company's tax liability for the year 2000 (a)     Tax assessment 2000 (i)     Original tax inspection 5.     Between 13 November 2002 and 4 March 2003 the Tax Inspectorate of the town of Nefteyugansk (“the Tax Office”) conducted a tax inspection of the applicant company. 6.     As a result of the inspection, on 28 April 2003 the Tax Office drew up a report indicating a number of relatively minor errors in the company's tax returns and served it on the company. 7.     Following the company's objections, on 9 June 2003 the Tax Office adopted a decision in which it found the company liable for having filed incomplete returns in respect of certain taxes. 8.     The decision of the Tax Office was accepted and complied with by the company on 7 July 2003. (ii)     Additional tax inspection 9.     On 8 December 2003 the Tax Ministry (“the Ministry”), acting as a reviewing body within the meaning of Section 87 (3) of the Tax Code, carried out an additional tax inspection of the applicant company. 10.     On 29 December 2003 the Ministry issued a report indicating that the applicant company had a large tax liability for the year 2000. The report was detailed and came to over 70 pages. It also had 284 supporting documents in annex. The date of the notification of the report is unclear. 11.     The Ministry established that in 2000 the applicant company had carried out its activities through a network of 22 trading companies registered in low-tax areas of Russia (the Republic of Mordoviya, the town of Sarov in the Nizhniy Novgorod Region, the Republic of Kalmykiya, the town of Trekhgornyy in the Chelyabinsk Region, the town of Lesnoy in the Sverdlovsk Region and the Evenk Autonomous District). For all legal purposes, these entities were set up as entirely independent from the applicant, though their sole activity consisted of commissioning the applicant company to buy crude oil on their behalf from the company's own oil-producing subsidiaries and either putting it up for sale on the domestic market or abroad, or first handing it over to the company's own oil-processing plants and then selling it. There were no real cash transactions between the applicant company, its oil-processing and oil-producing subsidiaries and the trading entities, and the company's own promissory notes and mutual offsetting were used instead. All the money thus accumulated from the sales was then transferred unilaterally to the “Fund for Financial Support of the Production Development of OAO Neftyanaya kompaniya YUKOS”, a commercial entity founded, owned and run by the applicant company. Since at all relevant times the applicant company took part in all the transactions of the trading companies, but acted as the companies' agent and never as an owner of the goods produced and processed by its own subsidiaries and the reward for its services paid by the trading entities was negligible, the company's real turnover was never reflected in any tax documents and, consequently, on its tax returns. In addition, the trading companies were in fact sham entities, as they were neither present nor operated at the place of their registration. In addition, they had no assets and no employees of their own. 12.     The Ministry found it established, among other things, that: (a)     the actual movement of the traded oil was from the company's production sites to its own processing or storage facilities; (b)     the applicant company acted as an exporter of goods for the purpose of customs clearance, even though the goods had formally been owned and sold by sham companies; (c)     the applicant company through the use of various techniques indirectly established and, at all relevant times de facto, controlled and owned the sham entities; (d)     the entirety of the accounting of the companies was carried out by the same two entities, OOO “YUKOS” FBC and OOO “YUKOS” Invest, both dependant on or belonging to the applicant company; (e)     the network of sham companies was officially managed by OOO “YUKOS” RM, all official correspondence, including tax documents, being sent from the postal address of OOO “YUKOS” Moskva, the applicant company's managing subsidiary; (f)     the sham companies and the applicant subsidiaries' companies entered into transactions with lowered prices for the purpose of reducing the taxable base of their operations; (g)     all revenues perceived by the sham companies were thereafter unilaterally transferred to the applicant company; (h)     the statements by the owners and directors of the sham entities, who confessed that they had signed the documents they had been required to sign by the officials of the applicant company, had never conducted any independent activity on behalf of their companies; (i)     and, lastly, that the sham companies received tax benefits unlawfully. 13.     Having regard to all this, the Ministry decided that the activities of the sham companies served the purpose of screening the real business activity of the applicant company, that the transactions of these companies were sham and that it had been the applicant company, and not the sham entities, which conducted the transactions and became the owner of the traded goods. In view of the above, and also since neither the sham entities nor the applicant company qualified for the tax exemptions, the report concluded that the company, having acted in bad faith, failed properly to reflect these operations in its tax declarations thus avoiding the payment of value-added tax, motorway tax, corporate property tax, housing and socio-cultural tax, tax in respect of sales of fuels and lubricants and profit tax. 14.     The report referred, inter alia , to Articles 7 (3), 38, 39 (1) and 41 of the Tax Code, section 3 of Law No. 1992-1 of the Russian Federation (RF) of 6 December 1991 “On Value Added Tax”, sections 4 and 5 (2) of RF Law No. 1759-1 of 18 October 1991 “On motorway funds in the Russian Federation”, section 21 (“Ch”) of RF Law No. 2118-1 of 27 December 1991 “On the basics of the tax system”, Article 209 (1-2) of the Civil Code, section 2 of RF Law No. 2030-1 of 13 December 1991 “On corporate property tax”, section 2 (1-2) of RF Law No. 2116-1 of 27 December 1991 “On corporate profit tax”, Decision No. 138-O of the Constitutional Court of Russia of 25 July 2001 and Article 56 of the Tax Code. 15 .     On 12 January 2004 the applicant company filed its detailed thirty-page objections to the report. The company admitted that for a very short period of time it had partly owned three out of twenty two organisations mentioned in the report, but denied its involvement in the ownership and management of the remaining nineteen companies. They maintained the position about the lack of their involvement in the companies in question throughout the proceedings. 16.     During a meeting between the representatives of the Ministry and the company on 27 January 2004, the applicant's counsel were given an opportunity to state orally their arguments against the report. 17 .     Having considered the company's objections, on 14 April 2004 the Ministry adopted a decision establishing that the applicant had a large outstanding tax liability for the year 2000. As the applicant had failed properly to declare the above-mentioned operations in its tax declarations and to pay corresponding taxes, in accordance with Article 122 (3) of the Tax Code the Ministry found that the company had underreported its tax liability for 2000 and ordered it to pay 47,989,241,953 Russian roubles (RUB) (approximately 1,394,748,234 euros, (EUR) ) in tax arrears, RUB   32,190,599,501.40 (approximately EUR 935,580,142) in default interest and RUB 19,195,696,780 as a 40 percent penalty (approximately EUR   557,899,293), totalling RUB 99,375,538,234.40 (approximately EUR   2,888,227,669). The arguments contained in the decision were identical to those of the report of 29 December 2003. In addition, the decision responded in detail to each of the counter-arguments advanced by the company in its objections of 12 January 2004. 18.     The decision was served on the applicant company on 15 April 2004. 19.     The company was given until 16 April 2004 to pay voluntarily the amounts due. 20.     The applicant company alleged that it had requested the Ministry to clarify the report of 29 December 2003 and that the Ministry had failed to respond to this request. (iii)     Institution of proceedings by the Ministry 21.     Under a rule which made it unnecessary to wait until the end of the grace period if there was evidence that the dispute between the tax authority and the taxpayer was insolvable, the Ministry did not wait until 16   April 2004. 22 .     On 14 April 2004 it applied to the Moscow City Commercial Court (“the City Court”) and requested the court to seize the applicant company's assets as a security for the claim. 23.     By decision of 15 April 2004 the City Court initiated proceedings and prohibited the applicant company from disposing of its assets pending the outcome of litigation. The injunction did not concern goods produced by the company and related cash transactions. 24 .     By the same decision the court fixed the date of the preliminary hearing for 7 May 2004 and invited the applicant company to respond to the Ministry's claims. 25.     On 23 April 2004 the applicant company filed a motion in which it argued that the City Court had no territorial jurisdiction over the company's legal seat and requested that the case be referred a court in Nefteyugansk, where it was registered. 26.     On 6 May 2004 the Ministry filed a motion inviting the court to call the applicant company's managing subsidiary OOO “YUKOS” Moskva as a co-defendant in the case. (iv)     Hearing of 7 May 2004 27 .     At the hearing the City Court examined and rejected the applicant company's motion of 23 April 2004. Having regard to the fact that the applicant company was operated by its own subsidiary OOO “YUKOS” Moskva, registered and located in Moscow, the court established that the applicant company's real headquarters were in Moscow and not in Nefteyugansk. In view of the above, the court concluded that it was competent to deal with the case. 28 .     On 17 May 2004 the applicant company appealed against this decision. The appeal was examined and rejected by the Appeals Division of the Moscow City Commercial Court (“the Appeal Court”) on 3 June 2004. 29.     The City Court also examined and granted the Ministry's motion of 6   May 2004. The court ordered OOO “YUKOS” Moskva to join the proceedings as a co-defendant and adjourned the hearing until 14 May 2004. 30 .     At the hearing of 7 May 2004 the applicant company lodged with the City Court a separate action against the tax assessment of 14 April 2004, seeking to have the assessment decision declared unlawful. The applicant company's brief came to 42 pages and had 22 supporting documents in annex. This action was examined separately and rejected as unsubstantiated by the City Court on 27 August 2004. The judgment of 27 August 2004 was upheld on appeal on 23 November 2004. On 30 December 2005 the Circuit Court upheld the decisions of the lower courts. (v)     Hearing of 14 May 2004 31.     In the meantime the tax assessment case continued. On 14 May 2004 the City Court rejected the applicant company's request to adjourn the proceedings, having found that the applicant's counterclaim did not require such adjournment of the proceedings concerning the Ministry's action. 32.     OOO “YUKOS” Moskva also requested that the hearing be adjourned as it was allegedly not ready to participate in the proceedings. 33.     This request was rejected by the court as unfounded on the same date. 34.     At the hearing the respondent companies also requested the City Court to vary their procedural status to that of interested parties. 35.     The court rejected this request and, on the applicant company's motion, ordered the Ministry to disclose its evidence. 36.     The court then decided that the merits of the case would be heard on 21 May 2004. 37.     On 17 May 2004 the Ministry invited the applicant company to examine the evidence in the case file at its premises. A team of at least five lawyers representing the applicant company made use of this invitation on 18,   19 and 20 May 2004. 38.     According to the applicant company, the supporting material underlying the case was first provided to the company on 17 May 2004, when the Ministry filed approximately 24,000 pages of documents. Allegedly, on 18   May 2004 the Ministry disclosed approximately 45,000 further pages, and a further 2,000 pages on the eve of the hearing before the City Court, i.e. on 20 May 2004. (vi)     First-instance judgment 39.     The hearings on the merits of the case commenced on 21 May and lasted until 26 May 2004. 40 .     On 26 May 2004, at the end of the hearings, the City Court gave its judgment in which, for the most part, it reached the same findings and came to the same conclusions as in the Ministry's decision of 14 April 2004. Having confirmed the factual findings of the decision of 14 April 2004 in respect of the relations and transactions between the sham companies and the applicant company, the court then reasoned as follows: “... Under section 3 of RF Law N. 1992-1 of 6 December 1991 'On value-added tax', part 2 of Section 5 and section 4 of RF Law No. 1759-1 of 18 October 1991 'On motorway funds in the Russian Federation', subpart 'ch' of section 21 of RF Law No. 2118-1 of 27   December 1991 'On the basics of the tax system', the sale of goods (works and services) give rise to an obligation to pay value-added tax, motorway users' tax, tax on the sale of oil and oil products, tax on maintenance of the housing fund and objects of socio-cultural sphere. Under part 1 of Article 38 of the Tax Code, the objects of taxation may be the sale of goods (works and services), assets, profit, value of the sold goods (works and services) or other objects having value, quantity or physical characteristics on the presence of which the tax legislation bases the obligation to pay tax. Under part 1 of Article 39 of the Tax Code, sales are defined as the transfer of property rights in respect of goods. Under subpart 1 and 2 of Article 209 of the Civil Code (taking into account Article 11 of the Tax Code) the owner of goods in the person who has the rights of ownership, use and disposal of his property, that is, the one who has the right to carry out at his own discretion in respect of this property any actions which are not against the law and other legal acts and do not breach the rights and protected interests of other persons ... The court established that the owner of the oil sold under contracts concluded with organisations registered in low-tax territories had been OAO Yukos. The respondents' arguments about the unlawfulness of the use of the notion of de facto owner ( фактический собственник ) on the basis that, according to Article 10 (3) and Article 8 (1) part 3 of the Civil Code ... there existed a presumption of good faith on the part of parties involved in civil-law transactions and that therefore the persons indicated as owners in the respective contracts should be regarded as the owners, are baseless, because the above-mentioned organisations never acquired any property rights in respect of oil and oil products ( поскольку прав владения, пользования и распоряжения нефтью и нефтепродуктами у данных организаций не возникало ). OAO NK Yukos was therefore under an obligation to pay [the taxes], which has not been complied with in good time. Article 41 of the Tax Code establishes that profit is an economic gain in monetary form or in kind, which is taken into account if it is possible to evaluate it and in so far as it can be assessed. Under subparts 1 and 2 of section 2 of RF Law No. 2116-1 of 27   December 1991 'On profit tax of enterprises and organisations' which was then in force, the object of taxation is the gross profit of the enterprise, decreased (or increased) in accordance with the provisions of the present section. The gross profit is the total of revenues (receipts) from the sale of products (works and services), main assets (including land parcels), other property of the enterprise and the profit derived from operations other than sales, decreased by the sum of expenses in respect of these operations. Since it follows from the case file that the economic profit from the sale of oil and oil products was perceived by OAO NK Yukos, it was incumbent on [the applicant company] to comply with the obligation to pay profit tax. Section 2 of RF Law No. 2030-1 of 13 December 1991 'On corporate property tax' taxes the main assets, non-material assets, reserves and receipts which are indicated on the taxpayer's balance sheet. It follows that the obligation to pay property tax was incumbent on the person who was legally responsible for reflecting the main assets, non-material assets, reserves and receipts on its balance sheet. Since it follows from the materials of the case that OAO NK Yukos was under such an obligation, this taxpayer was also under an obligation to pay property tax. The court does not accept the respondent's arguments that the tax authorities lacked the power to levy taxes from OAO NK Yukos in respect of the sums ... perceived by other organisations. The power of the tax authorities to bring proceedings in courts to ensure the payment of taxes to the budget in cases of bad faith taxpayers is confirmed by decision No. 138-O of the Constitutional Court of the Russian Federation, dated 25   July 2001. At the same time the bad faith of taxpayer OAO NK Yukos and the fact that the proceeds from operations with oil and oil products is confirmed by the materials of the case file. The court has also established that the use of tax benefits by organisations which were dependent from OAO NK Yukos and participated in the tax evasion scheme set up by that company was unlawful. Pursuant to Article 56 of the Tax Code, tax benefits are recognised as preferences provided for in the tax legislation for certain groups of taxpayers, in comparison to other taxpayers, including the possibility of not paying a tax or of paying it at a lower rate. The court believes that tax payers must use their right to such benefits in good faith. Meanwhile, it follows from the materials of the case that the taxpayers [concerned] used their right in bad faith. The entities registered on the territory of the Republic of Mordoviya (OOO Yu-Mordoviya ..., ZAO Yukos-M ..., OAO Alta-Treyd ..., OOO Ratmir ..., OOO Mars XXII ...) applied benefits governed by Law of the Republic of Mordoviya No. 9-Z of 9   March 1999 'On conditions for the efficient use of the socio-economic potential of the Republic of Mordoviya', which set out a special taxation procedure for entities with the purpose of creating beneficial conditions for attracting capital to the territory of the Republic of Mordoviya, developing the securities market and creating additional jobs. Under section 2 of that law, the special taxation procedure applies in respect of entities (including foreign entities, operating through permanent representative offices established in the territory of the Republic of Mordoviya), established after the entry into force of the law (with the exception of entities conducting leasing business, banks and other credit institutions) and whose business conforms to one of the following conditions: export operations, with the resulting quarterly earnings totalling at least at fifteen percent of the whole of the entity's earnings; wholesale trading of combustibles and lubricants and other kinds of hydrocarbons with the resulting quarterly earning totalling at least at seventy percent of the whole of the entity's earnings; and other conditions enumerated in that law. Pursuant to sections 3 and 4 of the Law, the Government of the Republic of Mordoviya passed resolutions on the application of the special taxation procedure in respect of the mentioned entities and, consequently, on the application of the following tax rates: at the rate of zero percent in respect of profit tax in so far as it is credited to the republican and local budgets of the Republic of Mordoviya; at the rate of zero per cent on motorway users' tax in so far as it is credited to the Territorial Road Fund of the Republic of Mordoviya; and at the rate of zero percent on corporate property tax. Moreover, the above-mentioned entities were exempted from payment of tax on maintenance of the housing fund and socio-cultural facilities by local government resolutions. However, the special taxation procedure is provided for [by this law] for the purposes of creating favourable conditions to attract capital to the territory of the Republic of Mordoviya, develop the securities market and create additional jobs. The entities which used those benefits did not actually carry out their activities on the territory of this subject of the Russian Federation, did not attract capital, did not facilitate the strengthening of the Republic's socio-economic potential, but, on the contrary, inflicted material damage through non-payment of taxes to the budget of the Republic, the local budget and the federal budget. Thus, the use of the tax benefits in respect of these entities was not aimed at improving the economy of the Republic of Mordoviya but pursued the aim of evading taxes on the production, refining and sales operations of in respect of oil and oil products by OAO NK Yukos and is, as a consequence, unlawful. The entity registered on the territory of the Republic of Kalmykiya (OOO Sibirskaya Transportnaya Kompaniya ...) did not pay profit tax, property tax, motorway users' tax, tax on the acquisition of vehicles and other taxes in accordance with Law No.   12 ‑ P-3 of the Republic of Kalmykiya of 12 March 1999 'On tax benefits to enterprises investing in the economy of the Republic of Kalmykiya', which establishes advantages in respect of taxes and duties for the categories of taxpayers that invest into the economy of the Republic of Kalmykiya and are registered as such enterprises with the Ministry of Investment Policy of the Republic of Kalmykiya. Moreover, the entity in question was exempt from payment of local taxes and payment of profit tax to the consolidated budget. At the same time, it follows from the presumption of good faith of taxpayers (Decisions No. 138-O of the Constitutional Court of 25 July 2001, No. 4-O of 10   January 2002 and No. 108-O of 14 May 2002, Rulings of the Presidium of the Supreme Commercial Court no. 9408/00 dated 18 September 2001, no. 7374/01 of 18   June 2002, No. 6294/01 of 5 November 2002 and no. 11259/02 of 17 December 2002 and letter no. С5-5/уп-342 of the Deputy President of the Supreme Commercial Court of 17 April 2002) that, for the application of tax advantages to become lawful, the amount of the advantages provided and the sum of investments made by the entity should be commensurate. Since the amounts of benefits declared for tax purposes by the above-mentioned entities and the sums of investment made are obviously not commensurate, application of the advantages is unlawful. The application of tax advantages by the given entity is not aimed at improving the economy of the Republic of Kalmykiya but pursues the aim of tax evasion by OAO NK Yukos in respect of the operations of production, refining and sales of oil and oil products and, consequently, is unlawful. The entity registered in the closed administrative territorial formation (ZATO) town of Sarov in the Nizhniy Novgorod Region (OOO Yuksar ...) concluded a tax agreement on the provision of tax concessions with the Sarov municipal administration. The granting of additional tax advantages on the territory of the Sarov ZATO (Federal Nuclear Centre) in 2000 was regulated by the norms of Articles 21 and 56 of the Tax Code, section 58 of Law no. 227-FZ of 31 December 1999 'On the federal budget for the year 2000', section 5 of Law No. 3297-1 'On closed administrative territorial formations' of 14 July 1992, Item 2 of Paragraph 30 of Decree No. 222 of the Russian Government of 13 March 2000 'On measures for implementation of the Federal Law 'On the Federal Budget for 2000' and Regulations 'On the investment zone of the town of Sarov', approved by a Resolution of the Sarov Duma on 30 December 1999. According to the tax agreement, the Sarov administration confers advantages in respect of taxes payable into the Sarov budget to the entity in question in the form of a reduction in the share of taxes and other compulsory payments to the budget, to twenty-five percent of the sums due in value-added tax, property tax, tax on the sale of fuel and lubricants, motorway users' tax, tax on vehicle owners, tax on the acquisition of vehicles, profit tax, tax on operations with securities and excise duties; in exchange, the entity undertakes to participate in investment projects (programmes) implemented in the Sarov investment zone or with its participation, aimed at raising additional budget receipts and solving the problems of Sarov's socioeconomic development by transferring quarterly at least one percent of the sum of the tax advantages. At the same time, according to Paragraph 1 of section 5 of the Federal Law No.   3297-1 'On closed administrative territorial formations' of 17 July 1992, additional benefits on taxes and duties are granted by the appropriate local government authorities to entities registered as taxpayers with the authorities of the closed administrative territorial formations in compliance with the mentioned law. Entities possessing at least ninety percent of capital assets and at least seventy percent of their activities on the territories of the closed administrative territorial formations (including the requirement that persons who permanently reside on the territory of the formation in question must constitute at least seventy percent of the average number of employees on the payroll and at least seventy percent of the labour remuneration fund must be paid to employees who permanently reside on the territory of the formation in question) enjoy the right to obtain the benefits in question. Given that OOO Yuksar did not actually carry out any activity on the territory of Sarov, was not actually present on the territory of Sarov and that there were no assets and production facilities necessary for the procurement and storage of oil on the territory of Sarov, Nizhniy Novgorod Region, the given entity applied the tax advantages unlawfully. Thus, the use of tax advantages by the given entity is not aimed at improving the economy of the Sarov ZATO but pursued the aimed of tax evasion by OAO NK Yukos in respect of its obligation to pay taxes on operations of production, refining and sales of oil and oil products and is, consequently, unlawful. Entities registered in the Trekhgornyy ZATO in the Chelyabinsk Region (OOO Kverkus ..., OOO Muskron ..., OOO Nortex ..., OOO Greis ... and OOO Virtus ...) concluded tax agreements with the administration of the town of Trekhgornyy, according to which entities were granted advantages in respect of profit tax, tax on maintenance of the housing fund and socio-cultural facilities, property tax, land tax, tax on the sale of fuel and lubricants, motorway users' tax, tax on vehicle users, and tax on the acquisition of vehicles, on condition that the entities would remit the sum of five percent from the amount of tax advantages conferred for the implementation of the town's socioeconomic programmes to the Trekhgornyy administration's account. Reasoning from the contents and sense of tax agreements, it follows that their purpose was the implementation of the particularly important socioeconomic task of developing the educational, medical service and housing spheres in the Trekhgornyy ZATO. At the same time, the sums which were transferred to the budget by the taxpayers in question were many times less than the sums of the declared tax advantages (the sum of investments is around 0.006 percent of the sum of the advantages for each taxpayer). Thus, the investments made by the taxpayers did not influence the development of Trekhgornyy's economy. On the contrary, since the above-mentioned organisations did not in fact carry out any activities, were never located on the territory of Trekhgornyy, had no assets and production facilities necessary to buy and store oil on the territory of Trekhgornyy, the application of tax advantages by the above-mentioned organisations is contrary to part 1 of section 5 of RF Law No. 3297-1 of 17 July 1992 'On closed administrative territorial formations'. The organisations registered in the Lesnoy ZATO in the Sverdlovsk Region (OOO Mitra ..., OOO Vald-oyl ..., OOO Bizness-oyl ...) concluded tax agreements on the granting of a targeted tax concession under which organisations were granted the concession in respect of profit tax, land tax, tax on the sales of fuel and lubricants, motorway users' tax, vehicle users' tax, tax on the acquisition of vehicles, tax on maintenance of the housing fund and socio-cultural facilities and property tax, whilst the organisations [in question] were under an obligation to transfer to the account of the Lesnoy municipal administration sums in the amount of five percent of the sums of the granted tax concessions, but no less than 6,000 roubles quarterly, for implementation of the town's socioeconomic programmes. [However], the sums received from the taxpayers are many times less than the sums of the declared tax advantages. Accordingly, the investments made by the taxpayers did not influence the development of the economy of the town of Lesnoy because the above-mentioned organisations never carried out any activities on the territory of Lesnoy, were never in fact located on the territory of Lesnoy and had no assets and production facilities required to sell and store oil on the territory of Lesnoy, the application of the tax advantages in respect of the above-mentioned organisations is contrary to part 1 of section 5 of RF Law No. 3297-1 of 17 July 1992 'On closed administrative territorial formations'. The organisation registered in the Evenk Autonomous District (OOO Petroleum-Treiding) without in fact carrying out any activity on the territory of the district in question and without in fact being located on the territory of the Evenk Autonomous District, abused its right granted by Law No. 108 of the Evenk Autonomous District of 24 September 1998 'On specific features of the tax system in the Evenk Autonomous District'. The mentioned organisation was registered in the given district solely for the purpose of acquiring the right to the tax concession that could be granted in the Evenk Autonomous District. The use of the tax benefits by the organisation in question is not aimed at strengthening of economy of the Evenk Autonomous District, but is rather aimed at tax evasion by OAO NK Yukos in respect of operations of extraction, processing and sales of oil and oil products and is thus unlawful. Thus, the use of tax concessions by the above-mentioned organisations is not aimed at strengthening of the economy of the regions in which they were registered but is aimed at evading the taxes due in respect of the operations of extraction, processing and sales of oil and oil products by OAO NK Yukos and is thus unlawful. ...” 41 .     The first-instance judgment also responded to the applicant company's submissions. As regards the argument that the Ministry's calculations were erroneous in that they led to double taxation and the failure to take account of the right to a refund of value-added tax (VAT) for export operations, the court noted that, contrary to the company's allegations, both the revenues and expenses of the sham entities had been taken into account by the Ministry so as to avoid double taxation. In addition, under Law No. 1992-1 of 6   December 1991 “On value-added tax”, in order to claim a refund of the value-added tax paid during export operations a tax payer had to justify the claim in accordance with a special procedure and the applicant company had failed to apply for a refund either in 2000 or at any later date. As to the argument that the Ministry's claim was time-barred, the court refuted it with reference to Article 113 of the Tax Code and Decision No. 138-O of the Constitutional Court of 21 July 2001. The court held that the rules on limitation periods were inapplicable in the case at issue as the applicant had acted in bad faith. In response to the company's argument that the interdependency within the meaning of Article 20 of the Tax Code was only relevant for the purposes of price correction under Article 40 of the Code, the court observed that the interdependency of the sham companies and the applicant company was one of the circumstances on the basis of which the tax authorities had proved the tax offence committed by the applicant company in bad faith. 42.     Accordingly, by the judgment of 26 May 2004 the court upheld the decision of 14 April 2004, albeit slightly reducing the payable amounts by reference to the Ministry's failure to prove the relations of the applicant company with one of the entities mentioned in the decision of 14 April 2004. The court ordered the applicant company to pay RUB 47,989,073,311 (approximately EUR 1,375,080,541) in taxes, RUB 32,190,430,314 (approximately EUR 922,385,687) in default interest and RUB   19,195,606,923 (approximately EUR 550,031,575) in penalties, totalling RUB 99,375,110,548 (approximately EUR 2,847,497,802) and ordered its managing subsidiary OOO “YUKOS” Moskva to comply with this decision. The judgment could be appealed against by the parties within a thirty-day time-limit. 43.     At the hearings of 21 to 26 May 2004 the applicant company and its managing subsidiary were represented by eight counsel. The reasoned copy of the judgment of 26 May 2004 was produced and became available to the parties on 28 May 2004. (vii)     Appeal proceedings 44 .     On 1 June 2004 OOO “YUKOS” Moskva filed an appeal against the judgment of 26 May 2004. 45.     The Ministry appealed against the judgment on 2 June 2004. 46.     On 4 June 2004 the Appeal Court listed the appeals of OOO “YUKOS” Moskva and the Ministry to be heard on 18 June 2004. 47.     On 17 June 2004 the applicant company filed its appeal against the judgment of 26 May 2004. The brief came to 115 pages and contained 41   documents in annex. The company complained, in particular, that the time for filing an appeal had been unlawfully abridged, in breach of its rights to fair and adversarial proceedings, that the first-instance judgment was ungrounded and unlawful, that the evidence in the case was unlawful, that the first instance court had erred in interpretation and application of the domestic law in that it had lacked legal authority to “assign” the tax liabilities of one company to another and that the court's interpretation of legislation on tax concessions had been erroneous. The company also argued that the lower court had wrongly assessed the evidence in the case and had come to wrong factual conclusions in respect of the relationships between the applicant and sham companies, that in any event some of the operations of the sham companies had been unrelated to the alleged tax evasion and that the respective sums should not be “assigned” to the applicant company, and also that the case should have been tried in the town of Nefteyugansk, where the company was registered. 48.     The appeal hearing in the case lasted from 18 until 29 June 2004. 49.     At the beginning of the hearing of 18 June 2004 the applicant company requested the Appeal Court to adjourn the proceedings. The company considered that the hearing had been fixed for too early a date, before the expiry of the statutory time-limit for lodging appeals. 50.     The court refused this request as unfounded. 51 .     At the hearings of 21 and 28 June 2004 the applicant company filed four supplements to its appeal. The company and its managing subsidiary were represented by ten counsel. 52.     Under Article 268 of the Code of Commercial Court Procedure the court fully re-examined the case presented by the Ministry rather than simply reviewing the first-instance judgment. 53.     At the end of the hearing of 29 June 2004 the court delivered its judgment, in which it reached largely similar findings and came to the same conclusions as the first-instance judgment. The court rejected the company's appeals as unfounded and decided to change the first instance judgment in part. In particular, it declared the Ministry's claims in respect of the VAT partly unfounded, reduced the amount of the VAT arrears by RUB   22,939,931 (approximately EUR   649,336) and quashed the corresponding penalty of RUB 10,334,226 (approximately EUR 292,520). 54.     The court judgment, in its relevant parts, read as follows: “... The parties declared under part 5 of Article 268 of the Code of Commercial Courts procedure that there was a need to check the lawfulness and grounds of the first instance judgment and to hold a repeated hearing of the case in full. The Appeal Court has checked the lawfulness and grounds of the first instance judgment pursuant to ... Article 268 ... of the Code of Commercial Courts procedure. ... The Appeal Court does not accept the arguments of the respondents about the erroneous interpretation and application of the norms of the substantive law by the first instance court and about the factual incorrectness of the court's conclusions. [the court went on reviewing and confirming all factual findings made by the Ministry and the first instance court in respect of the tax evasion scheme set up by the applicant company] ... Having in mind the stated circumstances, the Appeal Court established that the de facto owner of the oil was [the applicant]. The acquisition and transfer for processing of the oil and the sales of the oil in reality was carried out by [the applicant] as the owner, which is proved by the control of [the applicant company] over all operations, the actual movement of the oil from the extracting entities to processing entities or oil facilities controlled by [the applicant company], which is proved by the materials of the case. ... The [applicant company's] ownership of the oil is confirmed by the interdependence of the contracting parties, by the control that [the applicant company] had over them, by the registration of the contracting parties on the territories with low-tax regime, by the lack of activities by these entities at their place of registration, by the fact that the accounting of these was carried by OOO Yukos-Invest or OOO Yukos-FBC, companies officially dependant on [the applicant company], by the fact that the accounting of these entities was filed from the addresses of [the applicant company] and OOO Yukos-Moskva, by the fact that the bank accounts were opened in the same banks owned by [the applicant company], by the presence and character of commercial relations between [the applicant company] and the dependent entities, and by the use of promissory notes and mutual offsetting between them. ... Under the legislation then in force, such as section 3 of RF Law N. 1992-1 of 6   December 1991 'On value-added tax', part 2 of Section 5 and section 4 of RF Law No. 1759-1 of 18 October 1991 'On motorway funds in the Russian Federation', subpart 'ch' of section 21 of RF Law No. 2118-1 of 27   December 1991 'On the basics of the tax system', the sale of goods (works and services) give rise to an obligation to pay value-added tax, motorway users' tax, tax on the sale of oil and oil products, tax on maintenance of the housing fund and objects of socio-cultural sphere. Under part 1 of Article 39 of the Tax Code, sales are defined as the transfer of property rights in respect of goods. Under subpart 1 and 2 of Article 209 of the Civil Code (taking into account Article 11 of the Tax Code) the owner of goods in the person who has the rights of ownership, use and disposal of his property, that is, the one who has the right to carry out at his own discretion in respect of this property any actions which are not against the law and other legal acts and do not breach the rights and protected interests of other persons... It follows that the person who in fact had the rights ownership, use and disposal of his property and who, in view of these rights, actually, at his discretion exercises in respect of his property any actions, including transfers of property to other persons ... is the owner of this property. Therefore, OAO NK Yukos, being a de facto owner of the oil, was under an obligation to pay [the taxes], which has not been complied with in good time. As it was established, Article 41 of the Tax Code establishes that profit is an economic gain in monetary form or in kind, which is taken into account if it is possible to evaluate it and in so far as it can be assessed, and determined in accordance with chapters 'Taxes in respect of the profits of natural persons', 'Taxes in respect of the profits of organisations', 'Taxes in respect of the capital profits' of the Tax Code of the Russian Federation. Under subparts 1 and 2 of section 2 of RF Law No. 2116-1 of 27 December 1991 'On profit tax of enterpri