Pepeliaev Group advises you about the court practice regarding advertising and marketing expenses which a taxpayer that is a manufacturer of goods has incurred within intra-group relations. The position of the court regarding this case may apply to other similar disputes.

 

On 22 November 2018, the State Commercial (‘Arbitration’) Court for the Central Circuit passed a Resolution in case A36-4222/2017. In it, the court looked into whether advertising and marketing expenses incurred by a manufacturer of products (Lebedyansky LLC) were lawfully deducted. The Supreme Court, with which the taxpayer filed an appeal against the court decisions on 19 January
2019, is now determining the destiny of the dispute.

 

Tax authorities established that Lebedyansky LLC and its management company (PepsiCo Holdings LLC) entered into an agreement for management services. The services involved support for a marketing function. Besides, a distribution agreement between the same parties also provided for the distributor (PepsiCo Holdings LLC) to determine in its sole discretion all activities concerning trade
marketing and to independently bear all expenses arising out of such activities. Other distribution agreements into which the taxpayer had entered contained similar provisions.

 

Courts of all instances concluded that the performance of advertising and marketing activities was vested in the management company and distributors. The courts also referred to the fact that the products advertised did not belong to the taxpayer. For this reason, the expenses of Lebedyansky LLC for the advertising and marketing of products it manufactures were not justified economically.