The rules governing the recently announced amnesty for business splitting schemes are complex and not always clear. In this article we will address the questions of what business splitting actually is, what the legislator is proposing, how the amnesty will be implemented in practice, the factors that need to be considered in deciding whether to take part in it and what is needed for that purpose.
Introduction
Federal Law No. 176-FZ (“the Law”)[1], which was published on 12 July 2024, includes provisions that offer exemption from taxes, fines and penalties for business splitting offences relating to the period 2022-2024 (“the Amnesty”). Those provisions take effect from the date of publication of the Law[2].
It follows from the Law that the Amnesty represents a safe way for businesses to “wipe the slate clean” by accepting forgiveness for business splitting offences in past periods (2022-2024) in return for an undertaking not to commit infringements in the future.
Companies whose activities potentially fall within the scope of the Amnesty are finding it necessary to review their approach to risk management. They need to decide whether it is advisable for them to take advantage of the Amnesty based on the rules laid down in the Law.
Below we consider in detail the matter of what needs to be done.
What is business splitting?
The concepts of business splitting and voluntary discontinuation of business splitting
Until the Law was passed, the concept of business splitting was not defined in law and was interpreted on the basis of relevant case law and letters issued by the Federal Tax Service[3]. As a result, a number of criteria came to be established as reference points for settling disputes of this kind. The concept of the voluntary discontinuation of business splitting did not previously exist.
According to the Law, business splitting is defined as the division of unified business activities among multiple notionally separate persons (a group of persons) that are controlled by the same persons, undertaken for the purpose of artificially lowering amounts of taxes through the application of special tax regimes in a manner that exceeds the rights provided for in Article 54.1 of the Tax Code regarding the calculation of the tax base and/or the amount of taxes.
The voluntary discontinuation of business splitting (“voluntary discontinuation”) is the calculation and payment of taxes by persons that have been involved in business splitting in amounts determined as a result of the consolidation of the income, and (or) other indicators on which the application of special tax regimes is conditional, of an entire group of persons. Voluntary discontinuation may be full or partial (the Law does not go into detail on this).
Generally, the Law adheres to approaches taken in administrative practice in terms of the attributes that characterize business splitting: for example, the organizations or individual entrepreneurs (“IEs”) involved are controlled by a single person, they all form part of a unified manufacturing cycle (business process), and the splitting is aimed at abusing special tax regimes such as the simplified taxation system (“STS”).
To form your own understanding of whether your activities may be affected by business splitting risks, we suggest taking our quick test:
Key business splitting criteria
- Are activities structured to ensure that all or some of the entities involved (organizations, IEs) remain eligible to apply the STS or other special tax regimes?
- Does your business have a single beneficiary that oversees the activities of all entities?
- Does your business comprise a unified manufacturing cycle (business process)?
Additional business splitting criteria
- Are operational decisions relating to the activities of all organizations and IEs made by one person?
- Are there cases of some entities’ expenses being paid by others?
- Are there common suppliers and customers?
- Do staff have employment relationships with more than one entity at a time or does “internal migration” of employees take place?
- Use of common property?
- Are the accounts of all entities managed by the same people?
If you find that you have answered yes to most of the above questions, this may indicate the existence of substantial business splitting risks. B1’s professional team would be happy to assist you in going through the test and interpreting the results, as well as in analyzing relevant risks.
Business splitting risks
If the tax authorities find that a business splitting scheme was undertaken for the purpose of reducing taxes payable to the budget, this may have the following adverse consequences:
- Tax consequences. The taxpayer may be ordered to pay additional taxes based on the general taxation system (from 01.01.2025 the corporate tax will be 25% instead of 20%). The taxpayer may also have to pay a fine equal to 40% of the additional tax assessments and corresponding penalties. These consequences may have a major impact on the taxpayer’s financial position, leading to serious financial losses and even the cessation of business.
- Bankruptcy/subsidiary liability. If arrears are not paid, the tax authorities may initiate bankruptcy proceedings against the taxpayer. In addition, arrears may be collected from controlling persons of the taxpayer via the subsidiary liability mechanism[4].
- Criminal liability. Individuals found to be at fault for the non-payment of taxes may face criminal sanctions under Articles 198 and 199 of the Criminal Code of Russia (depending on whether the non-payer of taxes is an individual or a legal entity). Criminal liability for the non-payment of taxes by an organization may take the form of a fine of up to 500,000 rubles, compulsory labor, imprisonment for a period of one to three years, detention, and the deprivation of the right to hold certain positions or engage in certain activities for a period of up to three years[5].
How the Amnesty will work
The Law as currently worded lays down the following conditions for the application of the Amnesty.
Tax audit for 2022-2024 with business splitting found
| Suspension of decision | Further inspection and action taken by the taxpayer | Is the Amnesty applicable? |
---|---|---|---|
Decision based on tax audit in which indications of business splitting were found (“Decision”) entered into force before 01.01.2025
| No | Not relevant | No |
The Decision is to enter into force after 01.01.2025 | Yes |
Field tax audits[6] for 2025-2026 took place and did not find business splitting
| Yes, after the entry into force of the latest dated decision on field tax audits for 2025-2026 |
Field tax audits for 2025-2026 took place and did not find business splitting but the taxpayer voluntarily discontinued business splitting only after the decision to carry out the field tax audit was issued
| Yes, after the entry into force of decisions on field tax audits for 2025-2026, subject to voluntary discontinuation for 2024 before the date of entry into force of the earliest audit decision | ||
Field tax audits for 2025-2026 took place and found business splitting
| No | ||
Field tax audits for 2025-2026 took place and found partial business splitting
| Partially | ||
No field tax audits carried out for 2025-2026
| Yes, from 01.01.2030 |
Areas of uncertainty in the Law
- The concepts of “business splitting” and “voluntary discontinuation” are not defined with sufficient precision:
- The business splitting criteria established by the Law are general in nature and essentially come down to two factors (control by the same persons and intention to achieve artificial tax reduction), which may make judgments more subjective and result in differing interpretations of the criteria both by tax authorities and by businesses.
- The term “unified business activities” is not explained in the Law or in regulatory acts. In practice, the term is interpreted differently according to the circumstances.
- It is not clear whether the Amnesty is applicable in cases where a company does not apply special tax regimes but claims tax benefits such as those for IT companies.
- No procedures or mechanisms are established for declaring, documenting and implementing voluntary discontinuation (whether full or partial). The Law does not specify what documents must be provided or the time within which or manner in which they are to be considered.
- The Law provides for a partial Amnesty in the case of partial voluntary discontinuation but does not establish a mechanism for correlating them or calculating the eligible “part”.
- The Amnesty also applies to companies that will cease their activities after 2025 as result of liquidation, bankruptcy or re-organization. It must be noted, however, that if their activities are continued by another entity, the tax authorities may transfer liability for taxes, fines and penalties onto that entity. However, the Law contains no criteria for determining whether activities of other persons would be treated as a continuation of the taxpayer’s activities.
- The Amnesty applies in cases where audits for 2022-2024 (the type of audit is not specified) found the occurrence of business splitting. It is still unclear, however, whether the Amnesty applies where:
- Business splitting was established by a desk tax audit for a tax/reporting period falling within the period 2022-2024.
- A field audit was carried out for a period that falls partly within and partly outside the period 2022-2024 (for example, 2021-2023).
- If a field tax audit were to cover only one year (2025 or 2026), would the Amnesty for 2022-2024 apply, and if so, when?
- If business splitting is found to have occurred in 2022-2024 and no field tax audit is scheduled for 2025-2026, must the taxpayer voluntarily discontinue business splitting for 2025-2026 and notify the tax authorities accordingly in order for the Amnesty to be applied before 01.01.2030?
- Uncertainties over the calculation of the timeframes for administrative and court appeals against Decisions for 2022-2024.
- If a taxpayer disagrees with imputed business splitting for 2025-2026, it is unclear whether the Amnesty for 2022-2024 would apply when the procedural time limits for appealing against a business splitting finding for that period have already expired.
Points to consider now in analyzing business splitting risks and implications
The adoption of the Law has forced many companies to reconsider whether it is possible or desirable to continue having entities that apply special tax regimes as part of their structures. If a company thinks that it may be exposed to business splitting risks, it should take the following steps without delay:
- Carry out a comprehensive analysis of the company’s business to determine whether business splitting attributes are present and identify relevant risks.
- Identify possible measures to reduce risks (including preparation of a “defense file” and modification of the business structure).
- Consider the advisability of taking advantage of the Amnesty based on the rules laid down in the Law.
- Organize communication with the tax authorities with a view to effective and correct communication of the taxpayer’s position and timely submission of documents required for the application of the Amnesty.
We would be happy to provide comprehensive support in the following areas:
- Analyzing your structures to detect indications of “business splitting” and evaluating the advisability of making use of the Amnesty for an entire group of companies or for individual entities.
- Developing approaches to the organization of a target structure to minimize potential tax risks connected with the application of the Amnesty.
- Assisting in the preparation of a “defense file” to support the current and/or potential business structure and the application of the Amnesty.
- Liaising with the tax authorities at all stages, including support in handling inspections carried out by the tax authorities and appealing against their results.
Our experience
B1 holds top positions in Kommersant and Pravo-300 rankings and its experts are actively involved in the activities of professional communities (such as the Chamber of Tax Consultants).
We have been involved in a range of business splitting disputes in recent times, and in all cases we have succeeded in achieving significant outcomes for our clients. Our most notable engagements include the following cases in which business splitting was imputed to:
- A group of entities engaged in food manufacturing and retail trade in the Far East. Outcome: after taking up the engagement at the litigation stage, we managed to reduce additional assessments by over 20%.
- Relatives who jointly own a retail center and lease out premises. Outcome: the tax authority wholly dropped its claims at the pre-audit analysis stage.
- Large industrial enterprises that carry out some production-related processes via related entities which apply the STS. Outcome: the tax authority dropped 2/3 of the claims, while the remaining part of the claims is still being contested.
B1’s experts are happy to provide support in assessing your business for business splitting and Amnesty-related risks.
AUTHORS
- Dmitry Knizhentsev, B1 Partner
- Andrei Sulin, B1 Partner
- Andrey Kuleshov, B1 Senior Manager
- Irina Erkina, B1 Manager
- Igor Iampolskii, B1 Assistant Manager
- Maksym Kuzmin, B1 Assistant Manager
- Dmitry Iliutovich, B1 Assistant Manager
OTHER PUBLICATIONS
View allNew format approved for notifications of controlled transactions
On 20 August 2024 a draft order of the Federal Tax Service on amendments to Order No. MMV-7-13/249@ of the FTS of 07.05.2018 “Concerning Approval of the Form of a Notification of Controlled Transactions…” (“the Draft”) was published on the federal portal of draft laws and regulations.
24.09.2024
Individual permit to export goods in light of retaliatory export restrictions imposed by Russia
Many cross-border traders face the need to ship goods out of the EAEU for a variety of reasons, such as equipment repairs, sales to foreign counterparties, and so on. However, for over two years now Government Decree No. 311 of 09.03.2022 has imposed a ban on the export of a large range of goods (currently over 200 items). That ban is in place until 31 December 2025.
30.08.2024
The deadline for filing Notifications of Membership of MNE Groups for 2023 is imminent
We would like to draw your attention to the fact that the deadline for submitting Notifications of Membership of a Multinational Enterprise Group (MNE Group) for 2023 expires on 31 August 2024 for MNE groups whose fiscal year coincides with the calendar year.
29.08.2024
The business splitting amnesty – pros and cons
In this article we will address the questions of what business splitting actually is, what the legislator is proposing, how the amnesty will be implemented in practice, the factors that need to be considered in deciding whether to take part in it and what is needed for that purpose.
24.07.2024
Bill on the implementation of tax policy objectives – a summary of key provisions
On 8 July 2024 the text of Bill No. 577665-8 “Concerning Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation Concerning Taxes and Levies” was published in advance of its second reading in the State Duma.
19.07.2024
The tax reform law has been signed by the President. How does the final version look?
On 12 July 2024 the President signed Federal Law No. 176-FZ (“the Law”) approving the proposed amendments.
16.07.2024
Non-preferential rules of origin. Current trends in customs control
In accordance with Article 29 of the EAEU Customs Code, proof of the country of origin of goods is required where the application of tariff measures, prohibitions, restrictions and safeguard measures to protect the domestic market is dependent on the origin of goods. For customs purposes, the country of origin is confirmed either by a declaration of origin or by a certificate of origin of a good.
18.06.2024