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Court took the Federal Tax Service’s side in the case regarding the use of the debt push-down scheme in Schlumberger’s Russian transaction

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Court took the Federal Tax Service’s side in the case regarding the use of the debt push-down scheme in Schlumberger’s Russian transaction

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Denis Kazakov, the partner of Nadmitov, Ivanov & Partners Law Firm commented to Interfax agency on the dispute concerning the use of the debt push-down scheme in Schlumberger’s Russian transaction.

Cassation in the case of Radius-Service company put the debt push-down scheme into question (acquisition of a company for loan funds and repayment of the debt at its expense). It was not clear whether such a mechanism would work in Russian tax reality. At first the company managed to challenge additional charge of taxes with the use of this scheme, however, appellate and cassation instances took the Federal Tax Service’s side.

Loan agreement was concluded between Shlumberger Finans B.V and Smith International CIS with the sole purpose to transfer obligations to perform this agreement to Raduis-Service company; Shlumberger holding was compensated for the costs on the purchase of 65% share interest in the authorized capital of Radius-Service at the expense of the latter, the court resolved.

Debt push-down strategy is actively used abroad and implies transfer of the debt connected with funding of the acquiring company to the target company.

Taxpayers should use this scheme carefully and keep account of additional tax risks and costs connected with its application (or immediately and independently pay the total amount of VAT and income tax connected with these transactions), considers the partner of Nadmitov, Ivanov & Partners Law Firm Denis Kazakov.

Nadmitov, Ivanov & Partners Law Firm regularly represents clients on M&A transactions and on issues of funding of such transactions.

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