Law on Mitigating Criminal Liability for Tax Crimes Enters into Force

Federal Law No. 383-FZ dated 29 December 2009 “On Amendments to Part One of the Russian Tax Code and Specific Legislative Acts of the Russian Federation” entered into force on 1 January 2010. The law aims to improve the system for holding taxpayers liable for tax offences. The adopted law turned out to be even more liberal than the draft law proposed by State Duma deputies in July 2009.

Largeandparticularlylargeamounts oftax evasion

Effective 1 January 2010 the amended notes to articles 198, 199 and 199.1 of the Russian Criminal Code come into effect. They raise significantly the threshold for large and particularly large amounts of tax evasion. These amendments aim to mitigate criminal liability and accordingly have retroactive effect, in other words, they apply, inter alia, to actions committed before 1 January 2010.

In the table below we compare the previous and current provisions of the Russian Criminal Code regarding the concept of large arrears and what qualifies as large tax evasion, which constitutes one of the grounds for initiating criminal proceedings.

Exemptionfromliability

According to Federal Law No. 383-FZ, special grounds for providing an exemption fr om liability for tax offences are being revived in criminal practice: a person guilty of committing a tax crime for the first time is exempted from liability if said person pays the amount of arrears, default interest and penalty in full. An individual or company may exercise the right to repay in full a company’s debt.

According to the new article 28.1 of the Russian Criminal Procedure Code, criminal proceedings on a case relating to violation of legislation on taxes and levies should be terminated if the arrears, default interest and penalty are paid prior to the completion of the preliminary investigation. As exemption from liability on the grounds of compensation for damage to the Russian budgetary system does not constitute an exonerating circumstance, criminal proceedings may not be terminated if the interested party raises an objection to this effect.

Transfer of materials and initiation of a criminal case

In accordance with the amendments to the Russian Criminal Code and the Russian Criminal Procedure Code, the procedures for initiating, investigating and terminating criminal cases for tax offences and also the procedure for information exchanges between tax offices and police departments have been changed. For example, according to clause 3, article 108 of the Russian Tax Code, a person is held liable for violation of legislation on taxes and levies provided that the actual violation has been established in a resolution of the tax office that has come into legal force. These amendments make it possible to prevent instances wh ere criminal proceedings are initiated solely on the grounds of police findings, without the performance of tax audits by the tax office, as stipulated by the Russian Tax Code.

At the same time tax offices must warn a taxpayer on possible criminal consequences if the latter does not discharge its obligation to pay the tax. According to the amended clause 4, article 69 of the Russian Tax Code, “if the arrears identified during a tax audit make it possible to assume that there has been a violation of legislation on taxes and levies that possesses material elements of a tax offence, a claim filed with the taxpayer should contain a warning that if the taxpayer fails to pay the arrears, default interest and penalties in full within the established timeframe, the tax office must send the relevant materials to the police, wh ere a decision shall be taken as to whether to initiate criminal proceedings.

Impact of court resolutions for a criminal case (prejudice)

According to the amendments to the Russian Criminal Procedure Code, resolutions issued by arbitration courts and courts of general jurisdiction that conduct civil trials acquire higher status as proof in criminal cases (prejudice): circumstances established by a sentence that has entered into force or other effective court resolution, which was issued within the scope of a civilian, arbitration or administrative trial, are recognised by the court, prosecutor or investigator without any additional verification. At the same time, however, such a sentence or resolution may not predetermine the guilt of persons, who were not previously involved in the criminal case under review.

Placementincustody

The amended law places restrictions on such a measure of restraint as placement in custody with respect to a tax offence. Placement in custody may not serve as a measure of restraint for a suspect or person accused of an offence under articles 198-199.2 of the Russian Criminal Code with the exception of four instances:

1) the suspect or accused does not have a permanent place of residence in the Russian Federation;

2) the person’s identity has not been established;

3) the person violated the previous measure of restraint;

4) the person avoided the preliminary investigation or a court.

Jurisdictionovercasesinvolvingtaxoffences

From 1 January 2011 a preliminary investigation on tax offences (including article 199.2 of the Russian Criminal Code) will be transferred from the police investigators to the Investigative Committee of the Russian Federation Prosecutor’s Office.

Effect of law over time

According to article 10 of the Russian Criminal Code, the provisions of Federal Law No. 383-FZ that eliminate the criminality of an act or otherwise improve the position of the person who committed a crime have retroactive effect, in other words, such provisions apply to persons, who committed the relevant acts prior to the adoption of this law, including those who are serving their sentence and those who have served their sentence, but have an outstanding conviction.

For further information, please contact:

in Moscow – Denis Schekin, Senior Partner, or Vadim Strelnikov, Attorney, at: (495) 967-0007 or by e-mail: info@pgplaw.ru

in St Petersburg  - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail: spb@pgplaw.ru