UNCITRAL Awards on Merits
Date of Awards 18 July 2014
Claimants Hulley Enterprises Limited (Cyprus); Yukos Universal Limited (Isle of Man); Veteran Petroleum Limited (Cyprus).
Respondent Russian Federation
Facts
Yukos conducted its sales through a network of companies registered in a number of low-tax regions in Russia. Following tax investigation, Russian authorities found it had underpaid taxes and held it liable for unpaid taxes, fines, and penalties of USD 24.18 billion. The tax investigations were accompanied by criminal proceedings against and the subsequent imprisonment of some of Yukos's senior management. Following Yukos's unsuccessful attempts to settle its tax debt, the Russian tax authorities sold its core production facility, YNG, in order to satisfy their tax payment demands. YNG was eventually acquired by the state-owned Rosneft. Yukos then went into bankruptcy, with the Russian State owning 97.67 per cent of the claims against it and receiving 99.71 per cent of the bankruptcy proceeds.
Main Findings
Articles 10(1) and 13(1) of the Energy Charter Treaty (ECT)
The tribunal held that Russia expropriated Yukos's assets in breach of Article 13(1) of the ECT.Footnote 2 The total amount of compensation Russia was ordered to pay is USD 50,020,867,798 plus interest.Footnote 3 Russia's tax enforcement against Yukos was disproportionate and the real purpose of Russia's actions was not to collect taxes but instead to bankrupt Yukos and to appropriate its valuable assets.Footnote 4 The following actions of the Russian Federation taken together were found to constitute the elements of expropriation:
• attribution to Yukos of the VAT liability of its trading companies while denying it the right to the VAT refunds filed by those companies;Footnote 5
• groundless imposition on Yukos of the ‘wilful offender’ and ‘repeated offender’ tax fines, which significantly increased Yukos's liabilities;Footnote 6
• a total failure of the Russian tax authorities to engage with any of Yukos's settlement proposals;Footnote 7
• launch of a campaign of harassment and intimidation against Yukos's executives, employees, and lawyers that consisted of searches, seizures of important documentation, interrogations, and imprisonment of its managers;Footnote 8
• acquisition of YNG by the state-owned Rosneft for less than a fair market price;Footnote 9
• a significant role of the Russian state in the instigation of Yukos bankruptcy and serious violations of Yukos's rights during the conduct of bankruptcy proceedings.Footnote 10
Evidence was also found that Yukos avoided paying taxes in some of the low-tax regions and abused the double-taxation treaty between Russia and Cyprus.Footnote 11 On this basis, the tribunal decided to discount the amount of damages Yukos was entitled to by 25 per cent.Footnote 12 Having found breach of Article 13(1) of the ECT, the Tribunal refused to consider whether Russia's actions were also in breach of Article 10(1) of the ECT.Footnote 13
Findings on Preliminary Objections to Jurisdiction
Preliminary Objection to Jurisdiction I: ‘Unclean Hands'
Russia argued that due to Yukos's and its shareholders’ illegal and bad faith conduct, Yukos came before the tribunal with ‘unclean hands’ and therefore is not entitled to benefit from ECT. The objection was not upheld.Footnote 14 The tribunal refused to examine the legality of the events surrounding the privatization of Yukos, these events being too remote from the case in hand and not involving the claimants.Footnote 15 Since no illegal acts were committed by the claimants at the time they made the investment, their claims were not barred by the legality requirement.Footnote 16 The illegalities committed by an investor after making an investment did not deprive such an investor of access to an arbitral tribunal on the basis of ECT provisions.Footnote 17
Preliminary Objection to Jurisdiction II: The Article 21 of the ECT Taxation Carve-Out
The tribunal held that the taxation exemption of Article 21 applies only to the measures genuinely aimed at tax enforcement and found that the actions of the Russian state could not be regarded as such.Footnote 18 Furthermore, the tribunal found that it in any event would have jurisdiction to consider Yukos’ complaints because Article 21(5) of the ECT does not exempt taxes from the obligations imposed by Article 13 of the ECT (expropriation).Footnote 19 The special referral mechanism prescribed by Article 21 for expropriatory taxation, whereby Yukos's shareholders’ complaints had to be first considered by the relevant tax authorities, would have been futile.Footnote 20
