The Russian Federal Tax Service has explained how taxes should be paid during bankruptcy
Pepeliaev Group advises on the main provisions of letter No. Kch-4-18/9242@ of the Russian Federal Tax Service dated 20 July 2023 regarding the order in which tax obligations should be performed when debtors’ assets are sold during receivership proceedings (the “Letter”).Letter No. Kch-4-18/9242@ of the Russian Federal Tax Service dated 20 July 2023, together with the Procedure of actions of the competent authority in various situations connected with the order in which to perform obligations to pay corporate profit tax from the sale of property that forms the bankruptcy estate in a bankruptcy case
The Federal Tax Service has established a temporary order of actions of the tax authorities in connection with Resolution No. 28-P of the Russian Constitutional Court dated 31 May 2023 being adopted.Resolution No. 28-P of the Constitutional Court dated 31 May 2023 “On a case connected with examining whether articles 248 and 249, article 251(1) and 271 of the Russian Tax Code, as well as articles 5(1) and 5(3) and article 134(2) of the Federal Law “On insolvency (bankruptcy)” are constitutional in connection with a request of the Russian Supreme Court and a complaint of limited liability company “Enterprise for construction works in the energy sector” (the “Resolution”).
Please be reminded that the Russian Constitutional Court has established a temporary order in accordance with which this tax is included in third priority register-based claims (the “temporary order”)Please find the content of the Resolution in more detail in our alert dated 7 June 2023.
. At the same time the Constitutional Court has ordered that the legislature should resolve the issue of the order in which to pay profit tax that accrues when debtor's bankruptcy estate is sold (the “profit tax”).
Please find below the basic provisions of the Letter.
Scope of application of the Resolution of the Constitutional Court
The Letter underlines that the temporary order for including profit tax in third priority claims does not apply to other types of taxes, including VAT, unified agricultural tax and unified tax when the simplified taxation system is applied.
The Federal Tax Service states that reinstated VAT must be included in fifth-priority current claims.[
The current regulatory developments do not allow for determining in what order to pay reinstated VAT, as well as unified agricultural tax and unified tax when the simplified taxation system is applied. Further, the Supreme Court has not laid down its position on this matter5. The Federal Tax Service’s position is at odds with the legal approaches laid down in the Resolution. It contains a legal position common for all taxes connected with the sale of a debtor’s assets in receivership proceedings. For example, it states that such tax obligations are not in line with the nature and criteria of current payments. The Federal Tax Service’s position is at odds with the principles and goals of receivership proceedings laid down in the Resolution. We believe that the approach laid down by the Constitutional Court gives all grounds for applying the temporary order to reinstated VAT and the unified tax when the simplified taxation system is applied.
The Federal Tax Service sets out exceptions for applying the temporary order
In opinion of the competent authority, profit tax should be paid as a priority, before the claims of persons affiliated with the debtor, in the following situations:
The buyer of an asset has a stake in (is affiliated to) the debtor and creditors;
if there are signs that the bankruptcy/auction are controlled.
If any of the above signs are identified, it is recommended that lower-level inspectorates file a claim with the court to resolve a disagreement with regard to the order in which their claims should be paid.
The Federal Tax Service has explained that in the above situations claims should be paid as a priority because, as a result of coordinated actions of affiliated persons, tax obligations are artificially ignored.
However, if property is bought out by a stakeholder or if there are “friendly” creditors in the third level of creditors, this does not in itself evidence that an intentional tax avoidance scheme is in place. If such persons do not do anything in bad faith, it would be unlawful on the part of the lower-instance tax authorities to perform recommendations of the Federal Tax Service.
The order in which to pay claims of the tax authorities with regard to property tax
The receiver determines the amount of profit tax and records it in the register. However, the tax authorities are obliged to check whether the tax has been calculated correctly and, if they identify an error, file a claim with the court to resolve their disagreements.
This provision of the Letter is at odds with the procedure for determining the order of register-based claims which is laid down by articles 100 and 142 of the Law on Bankruptcy. Actually, the Federal Tax Service recommends using the order set out in the above Law for current payments, which goes against the Resolution.
What becomes of profit tax paid as current profit tax before the Resolution is adopted
The letter lays down the following approach to this issue:
The amounts of profit tax paid as current claims are not unjustified enrichment and cannot be included in the bankruptcy estate.
Court rulings in which profit tax claims are not included in the register may be re-examined based on new circumstances only with regard to disputes in which the Supreme Court has directly pointed out that this is possible.
It is possible to challenge the receiver’s failure to perform judicial decisions regarding the profit tax being treated as claims of another priority, apart from third-level priority (as current payments), making reference to the Resolution. Moreover, a claim to recover losses may be filed against the receiver.
What to think about?
After the relevant letter is communicated to regional authorities, it may be expected that the Federal Tax Service will become more active in disputes regarding the priority in which taxes connected with the sale of the bankruptcy estate should be paid. At the same time, pressure from the authorised body on court-appointed administrators will increase in order for the latter not to apply the Resolution to other taxes apart from profit tax.
We recommend using the legal position laid down in the Resolution regarding the fact that tax liabilities connected with the sale of the bankruptcy estate are not in line with the nature and criteria of current payments and principles of receivership proceedings. We also recommend insisting that the temporary order apply to obligations regarding reinstated VAT and unified tax when the simplified taxation system is applied. At the same time, we believe it is possible, with regard to reinstated VAT, to refer to the fact that there are separate grounds for including it in third-priority claims (in particular, reinstatement is just an adjustment of the amount of tax liabilities that arose in connection with an asset being purchased and a tax rebate being received in the previous tax period).
We recommend monitoring the news about this draft law about the priority order of tax obligations in bankruptcy and other potential changes of the Law on Bankruptcy and the Tax Code, since the Constitutional Court has established an order that is just temporary with regard to a single tax and a number of issues are still unresolved.
Help from your adviser
Pepeliaev Group's specialists have extensive experience in the sphere of protecting beneficiaries, members, the debtor, creditors and controlling parties in connection with the priority order in which payments should be made in bankruptcy, including tax payments, as well as extensive experience of representing our clients in the Constitutional Court.
We are ready to provide legal support for disputes connected with the priority order in which payments should be made in bankruptcy, including issues connected with considering disputes with receivers and authorised bodies, with challenging actions of the receiver in connection with performance of tax obligations where the priority order is violated or in disputes regarding whether to include claims of the authorised body in the register.