Tax board helped convict Estonian citizen’s company in Russia

Owner Andrei Astapenko (57) told Postimees he has done nothing wrong and that the case constitutes an attack on a company that is making money and can therefore contribute to the Russian state budget. He plans to appeal the ruling and more. Astapenko is also planning to sue the Estonian tax authority as he believes the agency’s conduct was illegal.

Extraordinary case

The case was described in Russian media as extraordinary. “It is an example of how a tax administrator can obtain and successfully use information from before Russia joined the convention on mutual administrative assistance,” Viktor Kalgin, KPMG partner in Russia and CIS, told business daily RBK. “It is important news as several offshore destinations popular among Russian businessmen, such as the British Virgin Islands, have joined the convention,” he added.

It is the first known case where a tax administrator has used an international agreement retrospectively to exchange information. Judicial practice has no precedent for this,” Aleksandr Zakharov, partner at Paragon Advice Group, told RBK. He added this means the tax board can get to people who believed the recent convention would be of no use in exposing past transactions.

Cooperation with the Estonian tax board

The roots of the story go back four years. Russia joined the Convention on Mutual Administrative Assistance in Tax Matters on July 1, 2015, with the case at hand its first result. Estonia joined the convention a year earlier, on April 19.

Based on a mutual agreement, information was exchanged concerning a period when Russia had not yet joined the convention. Information from 2014-2016 revealed that ZAO Ekstra had taken the Russian state for a ride for a total of 52.5 million rubles the company was ordered to return this July. Added to the sum were late fees and a fine totaling 22.3 million rubles. A grand total of 74.8 million rubles or €1.04 million.

Russian business newspaper RBK reported that the court concluded that ZAO Ekstra belongs to Estonian citizen Andrei Astapenko. Even though ZAO Ekstra bought newly created offshore company Slanroad Investments Ltd in Cyprus in August 2013, Astapenko was its sole shareholder. The transaction was fictitious, and no money exchanged hands. Next, the Cyprus company was given a loan by Estonian Odirious Grupp where Astapenko is a board member and the owner of which is hidden behind another offshore.

Over three years in 2014-2016, ZAO Ekstra paid dividends to the Cyprus company through the Estonian branch of SEB. Transactions amounted to $9 million and €1.4 million in all. Russian authorities were given the SEB transaction details by the Estonian Tax and Customs Board.

The Russian court concluded that the company in Cyprus is not the true beneficiary. The money was divided between ventures associated with Astapenko. The Cyprus company issued loans with an interest rate of 0.5 percent to three Estonian firms. All three – OGFG OÜ, Odirious Grupp OÜ and Blue Coral OÜ – have ties to Astapenko.

Dividend payments in Russia were the only source of income for the Cyprus company, it had not other assets and its only employee was its manager. Ownership of the company in Cyprus meant that ZAO Ekstra only had to pay 5 percent income tax on dividend, instead of 15 percent, because – unlike with Estonia – Russia has an agreement to avoid double taxation with the island country.

Tax secret revealed

Estonian citizen Astapenko’s ZAO Ekstra built its defense on claiming evidence from 2014 and 2015 was obtained illegally as Russia was not party to the convention at the time. Russian tax authorities explained that countries party to the convention can exchange information going back further based on a mutual agreement.

Aleksandr Zakharov from Paragon Advice Group believes the Estonian tax board could have refused to share information had the inquiry directly concerned an Estonian tax resident. “However, the inquiry concerned a Cyprus offshore company and the Estonian administrator felt there were no limitations involved and released the information going back far enough,” Zakharov said. He added that tax administrators in Switzerland, Austria and Singapore would likely have applied greater scrutiny to the information period.

Astapenko does not deny using the scheme but regards it as legal and unavoidable. “It is entirely legal. Russia has no claims against the Cyprus company. Their claims are against a Russian company for failing to pay all of its taxes. Had they any claims against the firm in Cyprus, they would have turned to the tax authorities in Cyprus and not Estonia,” Astapenko told Postimees. “They were acting the fool and turned to the Tax and Customs Board for information. Estonia failed to concentrate and released the information,” the businessman said.

Astapenko explained that he set up his businesses through Cyprus in 2013 because Russia-Estonia relations were in a poor state at the time. “For example, in 2013, we had to pay double customs on everything that came to our store through Estonia. Even if the items were not made in Estonia,” Astapenko recalled, adding that what he did is entirely legal.

He believes the Russian tax board’s claim that the company in Cyprus is fictitious doesn’t stand up to scrutiny. “The tax official fails to understand doing business. I can run five companies from Estonia. I have an office that’s just 15 meters across, a chair, a desk and sometimes an assistant. You can outsource everything these days,” Astapenko said, adding that the primary activity of ZAO Ekstra took place in Russia.

Astapenko is even more critical of what is happening in Russia. He believes the criminal matter was created just because his company has money that can be confiscated to pay for the regime. “It’s a policy. Companies are shut down, their assets seized and criminal proceedings launched. They never had anything against me personally,” he said.

Astapenko went on to say that the targets are usually law-abiding entrepreneurs. “Those who follow the law lose, while those who don’t win. That’s always how it is,” he said, adding that what he found surprising was Estonia’s decision to release the information. “It was unexpected on Estonia’s part, a country that positions itself as a democratic member of the European Union. We will verify just how democratic it is in court,” he promised.

Estonian side tight-lipped

The Estonian Tax and Customs Board remained laconic in its comment. “Because Estonia does not have a valid court decision concerning these persons, the obligation to keep tax secrets makes it impossible for the board to divulge any information,” the agency told Postimees.

Spokesperson for the board Rainer Laurits explained that administrative assistance in tax matters is shared based on taxation-related conventions. “While providing assistance is not an obligation, it allows us to pursue cooperation with countries outside of the EU and with whom we lack mutual tax agreements,” he said.

Laurits said that Estonia has received assistance from Russian tax administrators in 20 cases, while Estonia has helped administrators in Russia on four occasions. “Mutual administrative assistance concerning taxation with Russia is regulated by the mutual administrative assistance convention that entered into force in Estonia on April 19, 2014. Russia joined the convention on July 1, 2015. This means the countries can request and provide aid and information regarding proceedings launched after both joined the convention.”