Pharmaceutical Industry: It is Time to Check the Structure of Doing Business in Russia 

In the context of COVID-19 pandemic, the field (on-site) tax audits in Russia are currently postponed, but once all restrictions are lifted, the tax authorities can start auditing Russian companies and replenishing the National Budget by redoubling their efforts.

The pharmaceutical industry could be in the focus of the tax authorities and, above all, they could start with auditing of the contractual structures used for organizing clinical trials and promotion of pharmaceutical products.

These structures have already been in focus of the tax audits during previous years. Currently, we are aware of two new court cases, and pre-audit measures taken by the tax authorities against a company, with a similar business structure in Russia.

Below is our consolidated analysis, prepared on the basis of publicly available court cases and claims of the tax authorities.

  • Organization of the clinical trials and provision of services

A Russian subsidiary and non-Russian counterparties (head office and companies of the group) have entered into contracts providing for:

  1. agency services, related to organization of the clinical trials; and
  2. consulting and data processing services.

The subsidiary was both the agent and the contractor, under these contracts.

As a general rule, the agency fees for organizing clinical trials in the territory of the Russian Federation are subject to VAT.

At the same time, the services fees for consulting and data processing are not subject to VAT, if the actual recipient of services is a non-Russian customer, having no physical presence in the territory of the Russian Federation.

  • Tax risks of the contractual structure

The tax authorities found that most of the payments were made by the customers for the consulting and data processing services, while a significantly smaller part was paid for the performance of tasks under the agency contracts.

Based on the results of the tax control measures, the tax inspectors have stated that splitting of the revenue is artificial. It contradicts the true meaning of the contracts and actual circumstances of the case, and is aimed at avoidance of paying VAT.

In particular, the tax inspectors have reached the following conclusions:

  1. both consulting and data processing services are actually activities related to the organization, coordination, control and monitoring of the clinical trials;
  2. these services should be considered as a part of unique, complex process of organization of the clinical trials under the agency contracts, rather than as stand-alone services;
  3. the fees received for the provision of these services are actually agency fees for organization of the clinical trials, which are subject to VAT in Russia.

As a result, the tax authorities have charged the subsidiary with VAT, based on the amount of fees received under the services contracts, as well as penalties and related interest.

Currently, the tax authorities’ position is supported by the courts of all instances, including the Supreme Court of the Russian Federation. It is already clear that tax authorities can start using this approach proactively against the companies with similar contractual structures.

  • Reimbursement of the costs for promotion of the pharmaceutical products

The Russian subsidiaries and non-Russian counterparties (head office and/or companies of the group) have entered into agency contracts.

According to these contracts, the subsidiaries (agents) were obliged to perform certain tasks, assigned by the principals, including organization of scientific and marketing events, assistance with registration of pharmaceutical products, organization of the clinical trials, etc.

The so-called pass-through costs (PTC), incurred by the subsidiaries while performing the principals’ tasks, were subject to reimbursement by the principals: this is a standard business practice.

However, in this case, the subsidiaries also added to the PTC the amounts of (i) remuneration paid both to the payroll and non-payroll employees responsible for the agency contracts and (ii) corresponding social security contributions.

  • Tax risks of the contractual structure

The tax authorities determined this part of the PTC to be the agents' own expenses, which are not subject to reimbursement, assuming that labor expenses cannot be paid at the expense of the third parties, in this case: the principals.

In addition, as it was found in the court cases, the subsidiaries did not have evidence clearly proving that labor expenses were actually related to the performance of the principals’ tasks rather than for the agents' own activities.

The tax inspectors have reached the conclusion that the amount of the reimbursed employees’ remunerations, and payments to the social funds, should be considered as a part of the agency fees, rather than the part of reimbursable expenses.

As a result, the tax authorities have imputed agents with the additional amount of income equal to the reimbursed costs. They charged them with both profits tax and VAT, as well as penalties and related interest.

Currently, the tax authorities’ position is supported by the courts of all instances, including the Supreme Court of the Russian Federation.

We are also aware of a new tax case subject to consideration in the court of first instance. Potentially, this case may demonstrate a fresh view of the tax authorities on the issue of reimbursement of the PTC.

  • Our recommendations

Considering that tax audits are still postponed, it might be reasonable for the pharmaceutical companies to check:

  1. the contractual structures of doing business in Russia;
  2. the wording of contracts, primary accounting documents, and other documents confirming the provision of services;
  3. the revenues and the list of expenses reimbursable by the principals.

This analysis should help with assessment of the tax risks and give an overview whether you need to start preparing a “defense file” and / or reorganization of your contractual structure in Russia.




For up-to-date legislative news and business-related guidance in connection with COVID-19, please visit our dedicated webpage: COVID-19: What you need to know


We hope that the information provided herein will be useful for you. If any of your colleagues would like to receive our newsletters, please send them the link to complete a Subscription Form. If you would also like to learn more about our Tax Practice, please let us know in reply to this email. We will be glad to provide you with our materials.


Note: Please be aware that all information provided in this letter was taken from open sources. Neither ALRUD Law Firm, nor the author of this letter, bear any liability for consequences of any decisions made in reliance upon this information.


WSG Member: Please login to add your comment.