Offshore Pyaterochka hit a billion
In recent weeks, there has been much discussion about the new acquisitions of the X5 Group in Russia and the efforts it is making to stay on the Moscow Exchange.
At the same time, almost imperceptibly to the public, a new lawsuit began between the retailer and the tax office. Now there is a little less than a billion at stake. The attempt of the brainchild of Mikhail Fridman to save this money looks indicative against the background of his lack of plans to redomiciliate to Russia.
The X5 Group company (manages the Pyaterochka, Perekrestok and Chizhik retail chains) is again suing the tax authority. This time, the retailer is challenging the additional tax charge in the amount of 771.8 million rubles. It looks like the MIFNS for the largest taxpayers No. 3 has revealed in this confusing structure another mechanism for transferring profits from Russia to offshore companies. In June, the Moscow Arbitration Court refused to cancel the additional tax assessment. X5 Group filed a complaint with the Ninth Arbitration Court of Appeal – scheduled for consideration on August 31, 2023.
According to the tax authorities, in 2022 there was a certain scheme, it was created much earlier and did not do without the participation of the Cypriot offshore Speak Global Limited, which we already know. The essence of the matter is as follows. Structures of the X5 Group – JSC Trade House Perekrestok, LLC Agrotorg, LLC Sweet Life and LLC Kopeyka-Sarov – transferred fees to foreign companies for using the Karusel trademark. The hypermarket chain with the same name was once also managed by X5. So, tens and hundreds of millions of rubles were paid to the foreign owner of signs and, in fact, were deducted from the profits of Russian stores.
Having seen all this, the tax authority rightly pointed out (and the Moscow Arbitration Court agreed with it) that the Karusel brand was created and began its development on the territory of the Russian Federation and was used exclusively by Russian companies. How offshore companies became its owner is another story. The fact remains that money was withdrawn from the country without taxes, and now they are also trying to delay the recovery of 771.8 million rubles in the courts. In 2020 and 2021, Nasha Versiya talked about two similar lawsuits involving the X5 Group – for 1.4 billion and 2.4 billion rubles (see Specifically), which ended not in favor of the retailer.
It is hardly worth thinking that in the third case the Federal Tax Service will lose. But evaluate the scale of activities and ambitions of a trading company. An attempt to challenge the claims of the state does not in the least prevent X5 Group from increasing its share in the Russian grocery retail market.
In early August, it became known that X5 Group would soon add Victoria Baltia, which owns the Victoria chain of stores in the Kaliningrad region, Moscow and the Moscow region, to its assets. In addition, the company has Deshevo stores in the Kaliningrad region, two distribution centers and a Kesh hypermarket in the capital of the region.
In total, X5 Group becomes the new owner of 118 stores with a total sales area of 92,000 square meters. The transaction did not include Victoria stores in Dolgoprudny, since the share of the group’s stores in the city exceeds the 25% allowed by law. The Federal Antimonopoly Service reports that before the completion of the transaction, Victoria Baltia must transfer the retail facilities in Dolgoprudny to third parties.
Last year, X5 Group controlled 12% of the Russian food retail market. In 2023, this percentage may increase significantly. Everything is going according to plan, which was announced in September 2021 by the company’s CEO Igor Shekhterman: within three years, its share should grow to 16%. Such a major player simply cannot but face systemic risks. There are already examples.
Just a couple of weeks ago in St. Petersburg, the Pyaterochka chain lost its license to sell alcohol. The reason is a violation of three years ago, when alcohol was sold to a minor in one of the stores. For some reason, the St. Petersburg officials suddenly decided to remember this. Three days later, the license was returned, but the situation looks indicative – a staff mistake in one store can undermine the operation of the entire network. For reference: alcohol sales consistently account for about 14-15% of the Russian retail turnover. You can talk as much as you want about the dangers of alcohol, but the loss of income from its sale can hurt a company that employs about 350,000 Russians.
Against the background of all this, as well as Western sanctions, the head structure of the owner of the Russian Pyaterochka remains in the Netherlands, and she still has no plan to move (redomiciliate) to Russia. In early August, X5 retail investors were enthusiastic about the news that the company had filed a prospectus for its global depositary receipts with the Bank of Russia (due to well-known events, its shares were no longer traded on the London Stock Exchange). Experts point out that such a step will allow the company to maintain its presence on the Moscow Exchange. They also note that redomiciliation looks like the next logical step, after which it will be possible to talk about the resumption of dividend payments. However, no specifics on this issue, we repeat, can not be heard.
“This is a sore subject,” Ekaterina Lobacheva, President of X5 Group, admitted in an interview with RBC in April this year. – We have been studying this issue literally all the time, but now there is neither technical nor legal possibility of moving from Holland to any other jurisdiction. In the Netherlands, neither notaries, nor appraisers, nor a depository work with us,” explains the president of the company.
The words of Ekaterina Lobacheva were heard against the background of several successful examples of large business structures moving to the territory of the Russian Federation. For example, the largest Russian producer of turkey meat, Damate Group of Companies, transferred the company from the Cypriot jurisdiction to a special administrative region on the territory of Oktyabrsky Island in the Kaliningrad Region. And in February 2023, the VK board of directors approved the potential re-registration of the company from the British Virgin Islands.
There is an opinion that the situation with the alcohol license in St. Petersburg was something like a reminder for the X5 Group: the company’s business is completely concentrated in Russia, and here it should “register”. Magnit, for example, has already got its bearings and is hastily buying back shares from foreign legal entities, while X5 is not. Under the current conditions, such a sitting on two chairs can hardly last long, especially considering the expansion of the company in the open spaces from Kaliningrad to Vladivostok.
In 2020, Agroaspect LLC (part of the X5 structure) unsuccessfully challenged the decision of the Federal Tax Service to charge it approximately 1.4 billion rubles in taxes for 2014. Violations were revealed during the audit in 2018. The lawsuit allowed us to study the ownership structure of one of the largest retailers in Russia. The Netherlands, Cyprus, Gibraltar, Luxembourg – dividends from the Russian Pyaterochka and Perekrestok passed through a long chain of intermediaries in different jurisdictions. The core of this structure was and remains X5 Retail Group NV (Netherlands).
In 2018, the Russian tax authorities found that Perekrestok Trade House JSC had debts to related foreign companies totaling about 70 billion rubles. The Russian legal entities of X5 Group paid them interest on loans, deducting them from their tax base. From Russia, the money went to Cyprus under the guise of interest, and then went to the accounts of X5 Capital Sarl (Luxembourg), which in its financial statements already posted them as dividends exempt from taxation under local laws. Simply put, taxes on this money were not paid either in Russia or in Europe.
In parallel with this lawsuit, Perekrestok Trading House JSC challenged the additional assessment of taxes and penalties in the amount of 2.4 billion rubles. Perekrestok bought shares in Russian X5 companies from offshore companies, while from the point of view of the parent company X5 Retail Group NV, the position of its Russian assets has not changed in any way. The Federal Tax Service considered that the money paid by Perekrestok as a result of these transactions should be considered as dividends to foreign firms.
In recent weeks, there has been much discussion about the new acquisitions of the X5 Group in Russia and the efforts it is making to stay on the Moscow Exchange.
At the same time, almost imperceptibly to the public, a new lawsuit began between the retailer and the tax office. Now there is a little less than a billion at stake. The attempt of the brainchild of Mikhail Fridman to save this money looks indicative against the background of his lack of plans to redomiciliate to Russia.
The X5 Group company (manages the Pyaterochka, Perekrestok and Chizhik retail chains) is again suing the tax authority. This time, the retailer is challenging the additional tax charge in the amount of 771.8 million rubles. It looks like the MIFNS for the largest taxpayers No. 3 has revealed in this confusing structure another mechanism for transferring profits from Russia to offshore companies. In June, the Moscow Arbitration Court refused to cancel the additional tax assessment. X5 Group filed a complaint with the Ninth Arbitration Court of Appeal – scheduled for consideration on August 31, 2023.
According to the tax authorities, in 2022 there was a certain scheme, it was created much earlier and did not do without the participation of the Cypriot offshore Speak Global Limited, which we already know. The essence of the matter is as follows. Structures of the X5 Group – JSC Trade House Perekrestok, LLC Agrotorg, LLC Sweet Life and LLC Kopeyka-Sarov – transferred fees to foreign companies for using the Karusel trademark. The hypermarket chain with the same name was once also managed by X5. So, tens and hundreds of millions of rubles were paid to the foreign owner of signs and, in fact, were deducted from the profits of Russian stores.
Having seen all this, the tax authority rightly pointed out (and the Moscow Arbitration Court agreed with it) that the Karusel brand was created and began its development on the territory of the Russian Federation and was used exclusively by Russian companies. How offshore companies became its owner is another story. The fact remains that money was withdrawn from the country without taxes, and now they are also trying to delay the recovery of 771.8 million rubles in the courts. In 2020 and 2021, Nasha Versiya talked about two similar lawsuits involving the X5 Group – for 1.4 billion and 2.4 billion rubles (see Specifically), which ended not in favor of the retailer.
It is hardly worth thinking that in the third case the Federal Tax Service will lose. But evaluate the scale of activities and ambitions of a trading company. An attempt to challenge the claims of the state does not in the least prevent X5 Group from increasing its share in the Russian grocery retail market.
In early August, it became known that X5 Group would soon add Victoria Baltia, which owns the Victoria chain of stores in the Kaliningrad region, Moscow and the Moscow region, to its assets. In addition, the company has Deshevo stores in the Kaliningrad region, two distribution centers and a Kesh hypermarket in the capital of the region.
In total, X5 Group becomes the new owner of 118 stores with a total sales area of 92,000 square meters. The transaction did not include Victoria stores in Dolgoprudny, since the share of the group’s stores in the city exceeds the 25% allowed by law. The Federal Antimonopoly Service reports that before the completion of the transaction, Victoria Baltia must transfer the retail facilities in Dolgoprudny to third parties.
Last year, X5 Group controlled 12% of the Russian food retail market. In 2023, this percentage may increase significantly. Everything is going according to plan, which was announced in September 2021 by the company’s CEO Igor Shekhterman: within three years, its share should grow to 16%. Such a major player simply cannot but face systemic risks. There are already examples.
Just a couple of weeks ago in St. Petersburg, the Pyaterochka chain lost its license to sell alcohol. The reason is a violation of three years ago, when alcohol was sold to a minor in one of the stores. For some reason, the St. Petersburg officials suddenly decided to remember this. Three days later, the license was returned, but the situation looks indicative – a staff mistake in one store can undermine the operation of the entire network. For reference: alcohol sales consistently account for about 14-15% of the Russian retail turnover. You can talk as much as you want about the dangers of alcohol, but the loss of income from its sale can hurt a company that employs about 350,000 Russians.
Against the background of all this, as well as Western sanctions, the head structure of the owner of the Russian Pyaterochka remains in the Netherlands, and she still has no plan to move (redomiciliate) to Russia. In early August, X5 retail investors were enthusiastic about the news that the company had filed a prospectus for its global depository receipts with the Bank of Russia (due to well-known events, its shares were no longer traded on the London Stock Exchange). Experts point out that such a step will allow the company to maintain its presence on the Moscow Exchange. They also note that redomiciliation looks like the next logical step, after which it will be possible to talk about the resumption of dividend payments. However, no specifics on this issue, we repeat, can not be heard.
“This is a sore subject,” Ekaterina Lobacheva, President of X5 Group, admitted in an interview with RBC in April this year. – We have been studying this issue literally all the time, but now there is neither technical nor legal possibility of moving from Holland to any other jurisdiction. In the Netherlands, neither notaries, nor appraisers, nor a depository work with us,” explains the president of the company.
The words of Ekaterina Lobacheva were heard against the background of several successful examples of large business structures moving to the territory of the Russian Federation. For example, the largest Russian producer of turkey meat, Damate Group of Companies, transferred the company from the Cypriot jurisdiction to a special administrative region on the territory of Oktyabrsky Island in the Kaliningrad Region. And in February 2023, the VK board of directors approved the potential re-registration of the company from the British Virgin Islands.
There is an opinion that the situation with the alcohol license in St. Petersburg was something like a reminder for the X5 Group: the company’s business is completely concentrated in Russia, and here it should “register”. Magnit, for example, has already got its bearings and is hastily buying back shares from foreign legal entities, while X5 is not. Under the current conditions, such a sitting on two chairs can hardly last long, especially considering the expansion of the company in the open spaces from Kaliningrad to Vladivostok.
In 2020, Agroaspect LLC (part of the X5 structure) unsuccessfully challenged the decision of the Federal Tax Service to charge it approximately 1.4 billion rubles in taxes for 2014. Violations were revealed during the audit in 2018. The lawsuit allowed us to study the ownership structure of one of the largest retailers in Russia. The Netherlands, Cyprus, Gibraltar, Luxembourg – dividends from the Russian Pyaterochka and Perekrestok passed through a long chain of intermediaries in different jurisdictions. The core of this structure was and remains X5 Retail Group NV (Netherlands).
In 2018, the Russian tax authorities found that Perekrestok Trade House JSC had debts to related foreign companies totaling about 70 billion rubles. The Russian legal entities of X5 Group paid them interest on loans, deducting them from their tax base. From Russia, the money went to Cyprus under the guise of interest, and then went to the accounts of X5 Capital Sarl (Luxembourg), which in its financial statements already posted them as dividends exempt from taxation under local laws. Simply put, taxes on this money were not paid either in Russia or in Europe.
In parallel with this lawsuit, Perekrestok Trading House JSC challenged additional taxes and penalties in the amount of 2.4 billion rubles. Perekrestok bought shares in Russian X5 companies from offshore companies, while from the point of view of the parent company X5 Retail Group NV, the position of its Russian assets has not changed in any way. The Federal Tax Service considered that the money paid by Perekrestok as a result of these transactions should be considered as dividends to foreign firms.