The ECHR's opinion on the YUKOS Affair

The ECHR's opinion on the YUKOS Affair

On 20 September 2011, the European Court of Human Rights (ECHR) finally pronounced judgment on the application lodged by YUKOS back on 23 April 2004. Apart from the obvious enormous political significance of the 'YUKOS Affair', its legal significance (especially for the development of the concept of a 'bad-faith taxpayer' in Russia) should also not be underestimated. Therefore, the ECHR's legal analysis of the case merits particular attention.


It may be recalled that the concept of a 'bad-faith taxpayer' was first set out in Ruling 138-O of the RF Constitutional Court, clarifying Decision 24-P of 12 October 1998 (on the payment of taxes through 'problem banks'). Following the YUKOS Affair, however, the term came to be widely applied by tax authorities and courts to all kinds of tax violation issues. Eventually, this necessitated restricting the limits of discretion for tax authorities and courts, through Ruling 53 of the RF Supreme Court of Arbitration, of 12 October 2006, "On the Assessment by Courts of Arbitration of the Justification for a Taxpayer to Obtain a Tax Benefit".


In its application, YUKOS ('the Company') claimed that the Russian government had violated the following provisions of the Convention for the Protection of Human Rights and Fundamental Freedoms of 4 November 1950 ('the Convention'):

  • Article 6 ('Right to a fair trial')
  • Article 1 of Protocol No. 1 to the Convention ('Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties')
  • Article 14 ('Prohibition of discrimination')
  • Article 18 ('The restrictions permitted under this Convention to the said rights and freedoms shall not be applied for any purpose other than those for which they have been prescribed')
  • Article 7 ('No one shall be held guilty of any criminal offence on account of any act or omission which did not constitute a criminal offence under national or international law at the time when it was committed')
  • Article 13 ('Everyone whose rights and freedoms as set forth in this Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity').


Having examined the case, the ECHR has reached the following conclusions:

  • Article 6 of the Convention was violated because the Company was given just 4 days to study more than 43,000 pages of evidence supporting the tax authority's decision to impose additional taxes, and because the Company's request for appeal hearing in the case to be adjourned to give it time to study the case was rejected
  • Article 1 of Protocol No. 1 to the Convention was violated because fines for the non-payment of taxes had been imposed despite the expiry of the three-year statutory time-limit on prosecution set by Article 113 of the RF Tax Code as it stood at the time (it will be recalled that in a decision of 14 July 2005 the RF Constitutional Court ruled that if a taxpayer impeded the inspections by the tax authorities, the running of the time-limit could be suspended, and that this ruling was subsequently made part of the article)
  • Article 1 of Protocol No. 1 to the Convention was not violated, contrary to the Company's claim that the decisions of the tax authorities had not been based on a reasonable and foreseeable interpretation of tax law. The ECHR found unanimously that the Russian courts' conclusions that the Company's actions were unlawful were not 'manifestly unreasonable', and that 'the tax authorities had broad powers in verifying the character of the parties’ conduct and contesting the legal characterisation of such arrangements.' In its response to the Company's complaint that the 'bad faith' doctrine had been too vague, the ECHR noted that 'in any system of law... there is an inevitable element of judicial interpretation and there will always be a need for elucidation of doubtful points and for adaptation to changing circumstances.' The Court noted that '…it would be impossible to expect from a statutory provision to describe in detail all possible ways in which a given taxpayer could abuse a legal system and defraud the tax authorities. At the same time, the applicable legal norms made it quite clear that, if uncovered, a taxpayer faced the risk of tax reassessment of its actual economic activity in the light of the relevant findings of the competent authorities. And this is precisely what happened to the applicant company in the case at hand'
  • Article 1 of Protocol No. 1 to the Convention was violated because the seizure of shares in OAO Yuganskneftegaz had been carried out prematurely, and the Company's offer of other assets (20% of shares in OAO Sibneft) had been refused
  • Article 14 of the Convention was not violated. The Court rejected the Company's argument that Sibneft and TNK had used similar tax optimisation schemes, because '… the applicant company failed to demonstrate that any other companies were in a relevantly similar position. The Court notes that the applicant company was found to have employed a tax arrangement of considerable complexity, involving, among other things, the fraudulent use of trading companies registered in domestic tax havens. This was not simply the use of domestic tax havens, which, depending on the exact details of an arrangement, may have been legal or may have had some other legal consequences for the companies allegedly using them. The Court notes that the applicant company had failed to submit any specific and reliable evidence concerning such details'
  • Article 18 of the Convention was not violated; the ECHR proceeded on the assumption that the company’s debt in the enforcement proceedings resulted from legitimate actions by the respondent Government to counter the company’s tax evasion
  • Article 7 of the Convention was not violated
  • Article 13 of the Convention was not violated.

The issue of the amount of compensation for the violations of the Company's rights was set aside indefinitely.

Thus, the ECHR has confirmed that the concept of a 'bad-faith taxpayer', despite the absence in Russian legislation of direct references to it, does not in itself contradict international law. However, it should be said that at present this concept is being superseded by the concept of an 'unjustified tax benefit', set out in Ruling 53 of the Plenary Session of the Supreme Court of Arbitration of 12 October 2006. This states, in particular, that if a company can achieve the same economic result but with a lower tax benefit through carrying out other operations provided for or not prohibited by law, this does not mean that the tax benefit should be regarded as unjustified, and that if tax benefit is found to be unjustified this should not affect the taxpayer's other rights under the legislation on taxes and duties.

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