Information Note on the Court’s case-law No. 144
August-September 2011
OAO Neftyanaya Kompaniya Yukos v. Russia - 14902/04
Judgment 20.9.2011 [Section I]
Article 1 of Protocol No. 1
Article 1 para. 2 of Protocol No. 1
Control of the use of property
Uncompromising execution of tax debts and disproportionate bailiffs’ fees resulting in major company’s demise: violation
Facts – The applicant was an oil company and one of Russia’s largest and most successful businesses. In late 2002 it became the subject of a series of tax audits and proceedings and was subsequently found guilty of repeated tax fraud, in particular for using an illegal tax-evasion scheme involving the creation of sham companies in the years 2000‑03. In April 2004 proceedings were started against it in respect of the 2000 tax year. The same month the authorities also brought enforcement proceedings, as a result of which its Russian assets were attached, its domestic bank accounts partly frozen and the shares of its Russian subsidiaries seized. In May 2004 it was ordered by a commercial court to pay vast sums in taxes, interest and penalties. Its ordinary and cassation appeals were dismissed in June and July 2004 and it was denied supervisory review following a ruling by the Constitutional Court on 14 July 2005 concerning the starting point for the three-year limitation period in cases where a taxpayer had impeded the tax investigation. The applicant company later received reassessments in respect of the years 2001‑03 with higher penalties as it was deemed to have committed repeat offences. Following a Ministry of Justice announcement in July 2004, almost 80% of the applicant company’s shares in its main (and most valuable) production subsidiary were auctioned off in December 2004 to cover the tax liabilities. It was required to pay all the amounts due within very tight deadlines and its numerous requests for extensions of time to pay were rejected. It was also required to pay the bailiffs a flat-rate enforcement fee of 7% of the total debt. The applicant company was declared insolvent in August 2006 and liquidated in November 2007.
In its application to the European Court, the applicant company complained, inter alia, of the unlawfulness and lack of proportionality of the 2000‑03 tax assessments and their subsequent enforcement.
Law – Article 1 of Protocol No. 1
(a) Prosecution for alleged tax evasion in 2000 – The applicant company had argued that it had wrongly been prevented by the Constitutional Court’s decision of 14 July 2005 from benefiting from the statutory three-year time-bar normally applicable to prosecutions for tax evasion.
Finding that the 2000 tax-assessment proceedings had been criminal in character, the Court reiterated that only law could define a crime and its corresponding penalty and that laws had to be accessible and foreseeable. The Constitutional Court’s decision had changed the rules applicable at the relevant time by creating an exception from a rule to which there had been no previous exceptions. That exception represented a reversal and departure from the well-established practice directions of the Supreme Commercial Court when there had been no indication of any divergent practice or previous difficulty in connection with the application of the relevant provision. Accordingly, notwithstanding the State’s margin of appreciation, there had been a violation of the lawfulness requirement on account of the change in interpretation of the applicable rules. Further, since the applicant company’s conviction in the 2000 tax-assessment proceedings had laid the basis for finding it liable to a 100% increase in the amount of the penalties due in respect of the 2001 tax assessment for a repeat offence, the doubling of the fine in respect of that year was not in accordance with the law either.
Conclusion: violation (four votes to three).
(b) Additional tax liability under the tax assessments 2000‑03 – The applicant company had complained in essence that the “tax optimisation techniques” it had allegedly lawfully used in 2000‑03 had subsequently been condemned by the domestic courts without a satisfactory legal basis and in breach of established practice, with the result that it had been subjected to additional tax liability for those years.
The Court noted that the domestic courts’ findings that the company’s tax arrangements were unlawful at the time the company had used them were neither arbitrary nor manifestly unreasonable. The relevant provisions of the domestic law were also sufficiently accessible, precise and foreseeable as it was clear under the applicable rules that commercial contractual arrangements were only valid in so far as the parties were acting in good faith and that the tax authorities had broad powers to verify the parties’ conduct and contest the legal characterisation of the arrangements made. Regard being had to the State’s margin of appreciation and the fact that the applicant company was a large business holding which could have been expected to have recourse to professional advice, there had existed a sufficiently clear legal basis for the tax assessments. The assessments had pursued a legitimate aim (securing the payment of taxes) and were proportionate, as the rates of tax were not particularly high and there was nothing to suggest, given the gravity of the company’s actions, that the rates of the fines or interest had imposed an individual or disproportionate burden on it.
Conclusion: no violation (unanimously).
(c) Enforcement proceedings – The seizure of the applicant company’s assets, the imposition of a 7% enforcement fee and the forced sale of the company’s main production unit had interfered with its rights under Article 1 of Protocol No. 1. The enforcement proceedings, which it was appropriate to analyse in their entirety as one continuous event, fell within the third rule of Article 1 of Protocol No. 1 which allows the member States to control the use of property in accordance with the general interest by enforcing “such laws as [they] deem necessary to secure the payment of taxes or other contributions or penalties”. There was no reason to doubt that throughout the proceedings the actions of the various authorities involved had had a lawful basis and the legal provisions in question were sufficiently precise and clear to meet the Convention standards concerning the quality of law. The only remaining question was whether the enforcement measures were proportionate to the legitimate aim pursued.
Given the paramount importance of those measures to the applicant company’s future and notwithstanding the Government’s wide margin of appreciation in this field, the authorities had had an obligation to take careful and explicit account of all relevant factors in the enforcement process. Such factors included the character and amount of the company’s existing and potential debts; the nature of its business and the relative weight of the company in the domestic economy; the company’s current and probable economic situation and the assessment of its capacity to survive the enforcement proceedings; the economic and social implications of various enforcement options on the company and the various categories of stakeholders; the attitude of the company’s management and owners and the conduct of the company during the enforcement proceedings, including the merits of any offers it may have made in connection with the enforcement.
Although the domestic authorities had examined and made findings in respect of some of these factors, they had not made an explicit assessment in respect of all of them. In particular, they had not considered in any detail possible alternative enforcement measures when it was rather obvious that the decision to make the company’s main production unit the first item to be auctioned was capable of dealing a fatal blow to its ability to survive. While the bailiffs’ obligation to follow the domestic legislation may have limited their options, they had nevertheless retained a decisive freedom of choice that could have made the difference between the company’s staying afloat or its eventual demise. Thus, although the overall amount of the company’s indebtedness meant that the decision to sell off its main production unit was not entirely unreasonable, the authorities should nevertheless have given very serious consideration to other options, especially those that could have mitigated the damage to the company’s structure, before definitively selecting for sale the asset that was its only hope of survival. This was particularly so in view of the fact that all the company’s domestic assets had been attached by previous court orders and were readily available.
The company’s situation had also been seriously affected by the 7% enforcement fee which had added over RUB 43 billion (EUR 1.16 billion) to its debts. The fee could not be suspended or rescheduled and had to be paid even before the company could begin to pay the main debt. The authorities had apparently refused to reduce it. While the Court could accept that there was nothing wrong in principle with requiring a debtor to pay expenses relating to enforcement or to threaten a debtor with a sanction to incite voluntary payment, the flat-rate fee payable in the applicant company’s case had been out of all proportion to the bailiffs’ actual enforcement expenses and, because of its rigid application, had contributed very seriously to the applicant company’s demise.
Lastly, the authorities had been unyieldingly inflexible as to the pace of the enforcement proceedings, acting very swiftly and constantly refusing to concede to the applicant company’s demands for additional time.
In sum, given the pace of the enforcement proceedings, the obligation to pay the full enforcement fee and their failure to take proper account of the consequences of their actions, the domestic authorities had failed to strike a fair balance between the legitimate aims sought and the measures employed.
Conclusion: violation (five votes to two).
The Court also found violations of Article 6 §§ 1 and 3 (b) in respect of the 2000 tax-assessment proceedings on the grounds that the applicant company had not had sufficient time to study the case file at first instance (four days for at least 43,000 pages) or to make submissions and, more generally, to prepare the appeal hearings. It found no violations in respect of the applicant company’s other complaints under Article 6 § 1. It held that there had been no violation of Article 14 in conjunction with Article 1 of Protocol No. 1 as, in view of the considerable complexity of the tax arrangements it had put in place, the applicant company was not in a relevantly similar position to any other company. Lastly, there had been no violation of Article 18 in conjunction with Article 1 of Protocol No. 1, as the applicant company had failed to substantiate its claims that the authorities’ aim had not been to take legitimate action to counter tax evasion, but to destroy it and take control of its assets.
Article 41: Reserved.
© Council of Europe/European Court of Human Rights
This summary by the Registry does not bind the Court.
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