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Pepeliaev Group advises that the State Duma and the Federation Council have adopted the final version of a draft lawThe Draft law “On amending parts one and two of the Russian Tax Code and individual items of Russian legislation (to improve the tax system),
https://sozd.duma.gov.ru/bill/639663-8
which sets the rules of a “tax amnesty” for taxpayers that use the “splitting up of a business”.
It can be expected that, within the next few days, the draft law will be signed by the Russian President, be published and come into force.
Previously, in the first edition of this alert, we commented on an earlier version of the draft law which had been adopted in the first reading. In the second and the third readings, the rules of the “amnesty” were amended as we highlight below.
1. The law was drafted in pursuance of the Russian President’s instruction issued for the purposes of implementing the Address to the Federal Assembly“To establish the parameters of a tax amnesty for taxpayers who applied special tax regimes and despite the actual growth of business used the splitting-up of it to retain the right to apply such regimes for the purposes of avoiding paying taxes, levies and insurance contributions, to take measures to prevent the possibility of having additional taxes, default interest and fines assessed, and of criminal liability being imposed on such taxpayers”,
http://www.kremlin.ru/acts/assignments/orders/73759 .
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2. Technically, the rules are stated in article 6 of a large-scale draft law on amending the Russian Tax Code. Neither a separate lawSimilarly to the “amnesty of capitals” before (Federal Law No. 140-FZ dated 8 June 2015 "On individuals voluntarily declaring assets and accounts (deposits) in banks and on amending particular items of the legislation of the Russian Federation").
, nor amendments to the texts of the Russian Tax Code (the “Tax Code”), Russian Criminal Procedure Code (the “Criminal Procedure Code”) or Russian Criminal Code (the “Criminal Code”), have been made in connection with the “tax amnesty”.
No special terms (“tax amnesty”, “voluntary declaring” and so on) are used to name the rules in the text of the draft law. Below, we will use the word “amnesty”.
3. The amnesty applies only to the “splitting up of a business” using special tax regimes, which follows from the definition in the text:
The “splitting up of a business” means the splitting up of a single business activity between multiple persons (companies or individual entrepreneurs) which are formally independent and over which control is exercised by the same persons, with such act being exclusively or primarily aimed at reducing amounts of taxes by way of such persons applying special tax regimes while exceeding the limits provided for by article 54.1 of the Russian Tax Code for exercising rights relating to calculating the tax base and/or amount of taxes”.
Accordingly, the amnesty will not extend to cases when companies were created specifically for applying benefits that are not connected with special tax regimes (for example, IT benefits, the splitting up of a business between a company using the general taxation system and an individual entrepreneur using the general taxation system in order to apply a personal income tax rate which is lower than profit tax rate, and so on).
The definition of the “splitting up of a business” covers, in general, the approaches that have been formed in judicial practice, but the wording of it is rather unspecific. Disputes can be expected concerning what a “single business activity” is and how can it be “split up”. Disputes are possible on other matters as well. Please see the comments of Yulia Osipova, Senior Associate at Pepeliaev Group, on the PG Tax channel.
As compared with the version of the draft law which was adopted in the first reading, the latest version contains a reference to the general “anti-avoidance” article 54.1. of the Tax Code. This will make it possible to link the rules of the amnesty with approaches developed in judicial practice.
4. The rules of the amnesty do not assume that tax or law enforcement authorities will issue any instruments connected with the application of the amnesty (a resolution to terminate a criminal case in connection with the amnesty, a decision of the tax authority to write off tax arrears in view of the application of the amnesty and so on). Neither is it assumed that a taxpayer will submit a document (an application, voluntary statement and so on) regarding the application of the amnesty.
5. The algorithm envisaged in the draft law is as follows:
During the period from 2022 to 2024, the taxpayer used the “splitting up of a business”.
For the period from 2025 to 2026 it voluntarily rejected the “splitting up of a business”. The draft law is worded as follows:
The addition stating that voluntary rejection presupposes that taxes will be paid in the amount assessed across the entire group is intended to eliminate uncertainty. However, it may give rise to more questions instead. Let us assume that, in 2024, activities were split between three companies with each applying the simplified tax system. The total amount of income in 2024 exceeded the limit for the simplified tax system. Will it be classified as the “voluntary rejection of splitting up” if, starting from 2025, all operations will be performed by only one company which will pay taxes under the general system while the other two will discontinue their business? Or is it necessary for all parties involved in “splitting up” in 2024 to pay taxes under the general system in 2025?
6. However, the amnesty will not apply in situations when, before the law comes into force, decisions come into effect based on field audits from 2022-2024 which establish an omission to pay taxes in connection with the “splitting up of a business”. Also, if criminal cases are initiated based on the results of such audits, no special grounds are established for terminating such cases.
Therefore, the “cut-off point” is when the tax authority’s decision based on a field tax audit for 2022-2024 comes into effect before the law comes into force. According to the latest version, the law will come into force when it is officially published.
The initial version stated that the law would come into force on 1 January 2025, which would create uncertainty for taxpayers and, on the other hand, discretionary leeway for tax authorities because it would be possible to expedite the audit and all subsequent procedures including the consideration of an appeal, so that the decision came into effect in 2024 and the new procedure did not apply. Currently, this uncertainty is eliminated, which is welcome news.
7. The specific amount of a taxpayer’s arrears connected with the “splitting up of a business” may be assessed based on the results of the field tax audit for 2022-2024.
In the tax audit report and the decision based on the results of the audit for 2022-2024, the description of the identified violations and the assessment of the amount of the arrears to be paid resulting from the splitting up of a business and on other grounds are provided separately in the narrative and operative parts of the report and the decision.
Starting from when the law comes into force, the entry into effect is suspended of decisions based on the results of audits for 2022-2024 with respect to violations connected with the splitting up of a business.
It is stated separately that the suspension does not supersede the taxpayer’s right to appeal the tax authority’s decision to the higher level authority and in court within the timeframe and according to the procedure established in the Tax Code, and does not interrupt the timeframe for appealing such decision.
A certain contradiction appears because, under the Tax Code, the first level appeal is filed against a decision of the tax authority that has not come into effect and then the decision which has come into effect is appealed to a higher level authority. Will the possibility remain to file appeals with the Russian Federal Tax Service as an administrative authority of the “second level”?
8. The specific procedure for terminating the obligation to pay the arrears assessed during the field tax audit for 2022-2024 depends on whether the tax authority carries out a field tax audit for 2025-2026.
if the field tax audit is carried out and no continuation has been identified of the “splitting up of a business”, the obligation to pay the arrears for 2022-2024 will terminate when decisions resulting from field tax audits for 2025-2026 come into effect. If there were several such audits, it will terminate on the later of such dates.
if an audit is not carried out, the obligation to pay the arrears will terminate only on 1 January 2030.
However, if the field tax audit for 2025-2026 identifies that the taxpayer has not rejected (or has partially rejected) the splitting up of a business, then its obligation to pay the arrears for 2022-2024 will not terminate (or will terminate only to the corresponding extent). The decision establishing the arrears for 2022-2024 will in this case come into effect and may be enforced.
It appears that, if the tax authority has not carried out an audit for 2022-2024 and has not identified the fact of the “splitting up of a business” and the amount of the arrears, a taxpayer has no grounds to apply the amnesty. However, in this case, full certainty will only come on 1 January 2028, when the tax authority will no longer be able to schedule a field tax audit for 2024.
9. If a taxpayer that used the “splitting up of a business” in 2022-2024 rejected “splitting up” in 2025 and/or 2026 only after an audit was scheduled for 2025-2026, a peculiar “incentive” will be applied to it: the taxpayer will need to discharge the arrears for 2024 also, so that its obligation is terminated to pay the arrears for 2022-2023.
10. Here is how the draft law intends to eliminate criminal law risks for taxpayers. No amendments are planned to the Criminal Code and the Criminal Procedure Code.
The procedure will work by “blocking” tax authorities from sending materials to law enforcement authorities under article 32(3) of the Tax Code (to eliminate the only ground for a criminal case to be initiated under the “tax” articles from 198 to 199.2 of the Criminal Code, which is provided for by article 140(1.3) of the Criminal Procedure Code).
11. The draft law sets special rules for corporate taxpayers regarding which a field tax audit for 2022-2024 identified the “splitting up of a business” if, subsequently, records are entered in the Unified State Register of Legal Entities that the company is in the process of liquidation or that a decision has been issued concerning this company of its forthcoming removal from the Unified State Register of Legal Entities, or of the debtor being declared bankrupt or of receivership proceedings being opened. Such companies’ obligation will terminate to pay arrears for 2022-2024 connected with the splitting up of a business.
However, if subsequently a decision based on the results of a field tax audit establishes that the taxpayer’s activity using the splitting up of a business is being continued in 2025 and 2026 by another group of persons controlled by the same persons who previously controlled the taxpayer’s business, those included in such other group of persons will be charged with an obligation to pay the taxes specified in the decision based on the results of the taxpayer's audit for the 2022-2024 tax periods, together with default interest and fines connected with the splitting up of a business.
This rule has also changed as compared with the original version. Among other things, it will not apply in connection with the arrears of individual entrepreneurs who have discontinued their business.
However, even the version which has been approved can give rise to some uncertainty and disputes.
The question is, what does “business is continued by another group of persons” mean? The performance of what conditions should mean that a business is a continuation of the same business? The same brand name being used? The same places of business being used? (for example, places where shops and cafés were located of a taxpayer which has discontinued its activities)
Next, how will the obligation to pay arrears be imposed on the new “group of persons” and how will it be enforced? Does this mean the enforcement of decisions based on field tax audits for 2022-2024 at the expense of the property of the “other group of persons” (under the rules set out in articles 46 and 47 of the Tax Code), or recovery through going to court based on claims of tax authorities (similarly to article 45(3)(1) of the Tax Code)?
The rules for the “amnesty” give rise to many questions.
We recommend those taxpayers who can see in their activities elements of the “splitting up of a business” to check if these rules are applicable in their situation.
Pepeliaev Group’s lawyers are well versed in advising their clients on the risks associated with the “splitting up of a business” and in protecting their clients’ interests when they challenge the claims of tax authorities.
We are ready to help you to assess your business to understand whether the rules we have commented on apply to your circumstances and what action could be taken to protect your rights and interests. More detailed information is available in a separate alert.
