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Russia: Foreign Donations to Russian NGOs Are Exempt from Taxation

(Aug. 4, 2011) On July 28, 2011, the Supreme Court of Arbitration of the Russian Federation (the country's highest judicial authority for commercial disputes) ruled that no difference in legal treatment should be accorded to private donations and research grants received by Russian non-government organizations from foreign donors. (Reports on Cases Resolved by the Supreme Court of Arbitration of the Russian Federation [in Russian], Supreme Court of Arbitration official website (last visited Aug. 2, 2011).) According to the Court, such funds will be exempt from taxation, regardless of their designation as domestic or foreign.

This landmark case was initiated in 2009 by the Russian tax authorities, who audited a human rights group in the central Russian town of Kazan as soon as the group received two grants from the U.S. National Endowment for Democracy. Because the description of the grants did not specify their purpose and there were no spending requirements stipulated by the donors, Russian tax authorities alleged that the funds could be spent for the group's own purposes and would therefore be subject to Russia's 24% corporate income tax.

After the group paid the tax and interest in an amount equal to about US$40,000, having lost legal challenges of the tax authorities' action lodged with local and regional courts for commercial disputes, it submitted an appeal to the Supreme Court of Arbitration, on the ground that there was a lack of uniformity in court rulings on the taxation of donations to NGOs. (For general information on the case, see Supreme Court of Arbitration website [in Russian] (last visited Aug. 1, 2011).)

The Court ruled that there is no difference between grants and donations. Also, according to the Court, it makes no difference, for the purposes of taxation, whether the grant and donation comes from a domestic or a foreign donor. Previously, the Supreme Court of Arbitration had rejected hearing appeals on this issue. (Sergei Smirnov & Ekaterina Savina, Human Rights Defenders Will Pay Less Taxes [in Russian], GAZETA.RU (July 28, 2011).)