FORMER FIRST SECTION

FORMER FIRST SECTION CASE OF OAO NEFTYANAYA KOMPANIYA YUKOS v. RUSSIA (Application no. 14902/04) JUDGMENT STRASBOURG 20 September 2011 This judgment will become final in the circumstances set out in Article 44
§ 2 of the Convention. It may be subject to editorial revision.
In the case of OAO Neftyanaya Kompaniya Yukos v. Russia,
The European Court of Human Rights (First Section), sitting as a Chamber
composed of:
Christos Rozakis, President,
Nina Vaji?,
Khanlar Hajiyev,
Dean Spielmann,
Sverre Erik Jebens,
Giorgio Malinverni, judges,
Andrey Bushev, ad hoc judge,
and Søren Nielsen, Section Registrar,
Having deliberated in private on 24 June 2011,
Delivers the following judgment, which was adopted on that date:
PROCEDURE
1. The case originated in an application (no. 14902/04) against the
Russian Federation lodged with the Court under Article 34 of the Convention
for the Protection of Human Rights and Fundamental Freedoms ("the
Convention") by OAO Neftyanaya Kompaniya Yukos ("the applicant company"),
on 23 April 2004.
2. The applicant was represented by Mr P. Gardner, a lawyer practising in
London. The Russian Government ("the Government") were initially
represented by Mr P. Laptev and Ms V. Milinchuk, former Representatives of
the Russian Federation at the European Court of Human Rights, and
subsequently by their Representative, Mr G. Matyushkin.
3. By a decision of 29 January 2009, the Court declared the application
partly admissible.
4. The applicant and the Government each filed further written
observations (Rule 59 § 1).
5. A hearing took place in public in the Human Rights Building,
Strasbourg, on 4 March 2010 (Rule 59 § 3).
There appeared before the Court:
(a) for the Government
Mr G. Matyushkin, Agent,
Mr M. Swainston QC,
Mr T. Brennan QC,
Ms M. Lester,
Mr S. Midwinter,
Mr P. Wright,
Mr Kh. Ivanyan,
Mr V. Starzhenetskiy,
Ms N. Elina,
Ms O. Yurchenko,
Ms I. Koganova,
Ms D. Obyskalova,
Mr G. Abatourov,
Ms V. Utkina,
Mr O. Ovchar,
Ms T. Struchkova,
Mr D. Mikhaylov,
Mr V. Torkanovskiy,
Ms E. Filatova, Advisers;
(b) for the applicant
Mr P. Gardner, Counsel.
The Court heard addresses by Mr Gardner, Mr Matyushkin and Mr Swainston QC,
as well as the answers by Mr Gardner and Mr Swainston QC to questions put
to the parties.
THE FACTS
I. THE CIRCUMSTANCES OF THE CASE
6. 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, the Khanty-Mansi Autonomous Region, and at
the relevant time was managed by its subsidiary, OOO "YUKOS" Moskva,
registered in Moscow.
7. 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.
A. Proceedings in respect of the applicant company's tax liability for the
year 2000
1. Tax assessment 2000
(a) Original tax inspection
8. 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.
9. 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.
10. 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.
11. The decision of the Tax Office was accepted and complied with by the
company on 7 July 2003.
(b) Additional tax inspection
12. 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.
13. On 29 December 2003 the Ministry issued a report indicating that the
applicant company had a large tax liability for the year 2000. The detailed
report came to over 70 pages and had 284 supporting documents in annex. The
report was served on the applicant company on the same date.
14. 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, most of these entities were set up as entirely independent from
the applicant, i.e. as belonging and being controlled by third persons,
although 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 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
of 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 since the compensation paid by the trading entities for
its services was negligible, the applicant company's real turnover was
never reflected in any tax documents and, consequently, in its tax returns.
In addition, most of the trading companies were in fact sham entities, as
they were neither present nor operated in the place of their registration.
In addition, they had no assets and no employees of their own.
15. The Ministry found it established, among other things, that:
(a) the actual movement of the traded oil was from the applicant 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) through the use of various techniques, the applicant company
indirectly established and, at all relevant times de facto, controlled and
owned the sham entities;
(d) all accounting operations of the companies were 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 company's subsidiaries 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) statements by the owners and directors of the trading entities, who
confessed that they had signed documents that they had been required to
sign by the officials of the applicant company, and had never conducted any
independent activity on behalf of their companies, were true;
(i) and, lastly, that the sham companies received tax benefits unlawfully.
16. 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 in
question, the report concluded that the company, having acted in bad faith,
had failed properly to reflect these transactions in its tax declarations,
thus avoiding the payment of VAT, motorway tax, corporate property tax, tax
for improvement of the housing stock and socio-cultural facilities, tax in
respect of sales of fuels and lubricants and profit tax.
17. The report also noted specifically that the tax authorities had
requested the applicant company to facilitate reciprocal tax inspections of
several of its important subsidiaries. Five of the eleven subsidiary
companies refused to comply, four failed to answer, whilst two entities
filed incomplete documents. It also specified that during the on-site
inspection the applicant company failed to provide the documents requested
by the Ministry concerning the transportation of oil.
18. 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