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. Last Updated: 07/27/2016

German Firm Battles State Over Tax Debt

A German firm just recovering from one investment headache in Russia said Wednesday a different investment was now being threatened by corrupt tax police.

Knauf, a building-materials firm that only last March won a two-year battle for control of a Krasnodar factory, said the federal tax police were threatening the survival of a second factory, located in the city of Dzerzhinsk in the Nizhny Novgorod region.

Federal tax police have demanded the Avangard Knauf factory pay back taxes and fines of 52.8 million rubles ($3.34 million), a sum Knauf says it does not owe and cannot pay. Knauf owns more than 90 percent of the factory, which produces plasterboard and other building materials.

Knauf, the second biggest German investor in Russia behind Siemens, owns stakes in 12 Russian factories. It won an investment tender for a controlling stake in the Avangard Knauf factory in 1995, promising to invest 2.8 million Deutsche marks ($1.68 million) in the firm.

The dispute hinges on the use of the 2.8 million marks and an additional 6 million marks the German company said it invested in equipment to upgrade the factory. The tax police say Knauf used the funds instead to increase the company's charter capital to issue and obtain additional shares and that Avangard Knauf must pay taxes on the money.

The money invested in Avangard Knauf is nontaxable "only if it is used for the intended purpose," the tax police said in a statement Wednesday. "If used for a different purpose, it will be subject to taxation according to established procedures."

The penalty is severe: Knauf is being asked to pay the entire 8.8 million marks plus a 100 percent fine, plus a minor collection fee, for a total of nearly 18 million marks.

Knauf attorneys said the tax police were taking advantage of an "accounting mistake" that accidentally registered funds already spent on equipment as additional charter capital.

Knauf officials at a Wednesday news conference called the tax police's attack absurd, saying the company has given inspectors a stack of receipts and invoices proving the funds were spent on equipment and technology. The property fund in the Nizhny Novgorod region had certified the required investment program was completed, Knauf said in a statement.

Future investment and the fate of the factory itself are now in doubt, Knauf said. Avangard Knauf employs 200 people and pays all salaries on time despite the financial crisis.

"What kind of investor will be prepared to invest additional money in an enterprise the tax police are attempting to drive into bankruptcy?" Knauf's general director in Russia, Hainer Hamm, asked.

Knauf officials hinted the tax police were in cahoots with a third party attempting to seize control of the renovated factory.

Soon after it completed renovation of the factory and began producing goods, a third party f which Knauf would not name f approached the factory with a mysterious agreement signed in 1992 stating that Avangard owed it 1 billion marks.

When the factory refused to make the first 284 million-mark payment, it began receiving letters from the third party warning of tax police interference, attorney Gerd Lenga said Wednesday.

Tax police spokesman Yury Tretyakov said Wednesday that a check into the Knauf accusations had shown that no "third party" exists.

The factory has lost two cases protesting the tax police fine in a Nizhny Novgorod arbitration court. On Sept. 28 it also lost an appeal in the Arbitration Court of the city of Moscow. Judges took only eight minutes to review 1,000 pages of documents and render the decision, which Knauf is again appealing in the same court.

Hamm said the outcome was important for Russia's reputation as an investment partner.

"This could affect in a very bad way further investment in Russia," he said.