New input on "splitting a business" from the tax authorities

New input on "splitting a business" from the tax authorities

The topic of "business splitting" remains a hot topic for taxpayers. At the same time, the claims of tax authorities are dynamic and constantly changing. Alexey Stanchin, Senior Tax Consultant at Tax Compliance, commented on the latest changes in the issue of "splitting" a business for the Financial Director publication and our website.

Change in the crush situation over the last two years

Firstly, many taxpayers are used to associating the scheme of "splitting" a business with the use of special tax regimes by a group of companies (e.g., simplified taxation system, patent, etc.), but more and more often auditors began to pay attention to the application of various benefits by the taxpayer, taking into account the revenue limitation. Thus, for example, auditors pay attention to the business purpose of taxpayers who apply incentives for IT activities.

Taxpayers who apply exemptions for the sale of catering and exemptions for educational and medical activities may also potentially be at risk.

Secondly, previously, when a scheme for "splitting" a business was discovered, the tax authority charged additional VAT and corporate income tax, while now it is increasingly common to see additional charges for mineral extraction tax as well. This is typical for some extractive industries.

However, not all changes are negative. Recently (in particular, based on the results of 2023), it is noticeable that when considering disputes related to the "split of business", there has been a positive shift in favor of taxpayers. Previously, when a business splitting scheme was discovered, the tax authority made additional tax assessments to all participants of the scheme without taking into account the damage to the budget; in addition, the tax authority did not determine which of the participants of the scheme was the beneficiary.

For 2023, the practice in this matter has undergone a really positive change:

  • Donations are made to the beneficiary;
  • In determining the amount of additional taxes, all taxes previously paid by group members are taken into account;
  • The amount of additional charges is adjusted depending on the proof of attribution of a particular participant to a beneficiary.
  • In the acts of tax audits, the tax authority not only additional charges, but also reflects the amounts of losses that arise

These observations were also confirmed by the Federal Tax Service in its Letter dated October 3, 2023, N BV-4-9/12603@ "Review of legal positions formed by the Federal Tax Service of Russia based on the results of consideration of complaints (appeals) of taxpayers".

Indirect indications that the company is under the crosshairs of the tax authorities regarding "split" issues

Although the nature of the claims is changing, the tax authority still conducts a pre-inspection analysis as before.

It is possible to understand that the tax authority has begun to conduct a pre-inspection analysis by the following signs: company employees are summoned for questioning as witnesses, requests for documents (information) are sent to the taxpayer, the general director and accountant are summoned to the tax authority to give explanations on the company's business activities. In cases where the accounting function is outsourced, the control measures will affect this organization as well.

At the same time, as practice has shown, these actions will affect not only the potential beneficiary, but may also include control actions in respect of all the persons included in the "potential" group. We have witnessed inspections of different entities conducting such similar actions.

In which case the tax authority suspects "splitting"

As practice shows, auditors are still guided by the Letter of the Federal Tax Service of Russia dated 11.08.2017 N СА-4-7/15895@, which contains 17 signs indicating that a taxpayer is using a "business splitting" scheme. These 17 signs are not exhaustive, but they are a "starting point" for controllers at the stage of pre-inspection analysis.

Thus, if the auditors establish overlap or affiliation between the founders, identical signboards, websites, phone numbers, overlapping suppliers, etc., the risk of close attention increases. As a consequence, it may result in an on-site tax audit of the taxpayer.

What turnovers are the inspectorate interested in?

If we proceed exclusively from this criterion, we should proceed from the rule that in the case of the "merger" of two or more affiliated legal entities and sole proprietorships, turnover will exceed the limits for the application of a special tax regime or privilege. Thus, for example, in 2024 - 199.35 million rubles.

How a company builds tax planning to avoid claims

In order to reduce the risk of claims regarding business splitting, taxpayers can independently analyze their business for compliance with the 17 attributes set out in the Letter of the Federal Tax Service of Russia dated 11.08.2017 N СА-4-7/15895@. In addition, taxpayers are advised to develop a "protection file" which will disclose the business purpose of the existing business structure.

In addition, it should be borne in mind that certain facts have diametrically opposed interpretations by representatives of a business and a tax authority. As an example, a common operation in commercial activity - the payment of dividends to founders - can be cited. In our practice of supporting tax disputes on "business splitting" our clients have faced situations when tax inspectors interpreted this operation as a fact of enrichment of the founders by withdrawing funds that would not have arisen without the application of a special tax regime.

Therefore, it is important to keep in mind that if there is interest from the tax authorities, it will be necessary to have an argumentation:

  • as in meeting the 17 criteria;
  • for the business purpose of carrying out commercial activities using multiple legal entities;
  • on other industry-specific grounds, which may be interpreted negatively by the tax authorities.

It is worth remembering that depending on the stage of the argument, the emphasis should be different. And at each stage the structure of the argumentation may change. The fact is that, depending on the stage of the dispute, different departments of the tax authority conduct the process.

How the risk of "crushing" charges has changed for businesses

In our opinion, by shifting the actions of the tax authority to the stage of pre-inspection analysis the risk of prosecution has increased. Since at this stage a "superficial" analysis of the taxpayer's business structure is made.

At the same time, the realization in practice of the above risk remains at the same level, as the prosecution within the framework of pre-check analysis will not always reach the decision to bring the taxpayer to tax liability.