Legal issue: The constitutional feasibility of execution of the European Court of Human Rights judgment – to the extent it puts Russia under obligation to pay €1.87 billion to former shareholders of “Yukos” by way of compensation for unlawfully levying tax penalties for the years 2000 and 2001 and execution fees.

Ratio decidendi: The Constitutional Court has deemed the execution of the ECHR decision to be impossible. In the opinion of the Court, the interaction between the Convention legal order and the Russian Constitution may not take place in the form of subordination, since only a dialogue between two different legal systems may serve as a ground for proper balance between them, and the efficiency of the Convention’s rules within the Russian constitutional order depends, to a great extent, on the respect shown by the European Court of Human Rights to the national constitutional identity. While acknowledging the fundamental significance of the European system of the protection of human rights and freedoms, of which the judgments of the ECHR make a part, the Constitutional Court of Russia is ready to search for a lawful compromise for the sake of supporting this system; but the Court reserves the right to decide, to what degree it is ready to accept such compromise, because in this particular question the limits of such compromise are determined by the Constitution of the Russian Federation. As an international treaty signed by the Russian Federation, the Convention enjoys greater legal force in law-application procedures than any federal law, but not equal to or greater than that of the Constitution of the Russian Federation. In the situation when the very substance of a decision of an international body for the protection of human rights and freedoms impinges unlawfully upon the basic principles and rules of the Constitution of the Russian Federation, Russia may deviate, by way of exception, from performing  the obligations placed upon it by such decision, provided that this deviation is the only possible way to avoid the violation of the national Constitution. 

The European Court of Human Rights by its judgment from 31 July 2014 found Russia in violation of the property rights of the company “Yukos”, which caused material damage to the applicant company. However, the fact of principal importance is that the material losses were the consequence of illegal activities of the company itself, whereas the State had to apply the measures of responsibility, including the administrative one, in order to compensate for the property damage borne by the State. The company “Yukos”, as is clear from the court decisions  against it, showed itself to be a persistent tax defaulter and ceased to exist, leaving unpaid outstanding tax obligations. The activities of the company had a law-destroying effect, undermining the stability of constitutional legal regime and public policy.

Furthermore, the Court found that the payment under ECHR decision to former shareholders of the company who engaged in illegal scheming to avoid taxation, as well as to their heirs and legal successors, of such significant sum of monetary compensation from public funds which were systematically deprived by the company of due amounts of tax payments necessary for meeting public obligations to all the citizens and overcoming the financial and economic crisis, contradicts the principles of equality and justness in tax relations.

As for the interpretation of Article 113 of the Tax Code given by the Constitutional Court in its judgment of 14 July 2005 (implying the right of a court to extend statute of limitations if it expired due to a taxpayer’s obstruction of tax control measures), the such interpretation is the only reasonable one and corresponds to the authentic intent of the federal legislator. Accordingly, the application of this rule to tax disputes of “Yukos” relating to years 2000 and 2001 is not a retroactive one and does not constitute an act of arbitrary and unforeseeable law-application.

All the same, the Constitutional Court does not exclude the possibility of Russia’s showing good will with regard to setting the limits of such compromise and means of its achievement as long as it concerns “Yukos” shareholders who suffered losses because of illegal actions of the company and its managers. Therefore, the Government of the Russian Federation is empowered to consider paying out respective amounts in the procedure provided for by Russian and foreign legislation for distribution of newly-found property of a liquidated legal entity; but it may only be implemented only upon finalizing the settlements with creditors and eliciting other property (for instance, the one hidden in offshore accounts). However, such payments may not, in accordance with this judgment, affect receipts and expenditures of public budgets, as well as the property of the Russian Federation.