Commercial concession (franchising) is a popular way to scale a business in Russia. As a rule, under a corresponding agreement, one party (the right holder) transfers to the other party (the user) for a fee a certain set of exclusive rights necessary to conduct business. The contract of commercial concession may, among other things, provide that the user gets the opportunity to purchase goods from certain suppliers on favorable terms, preferential terms in the framework of lease relations, management consulting services, as well as many other preferences.
In practice, many business entities consider commercial concession as a tool for continuing to apply preferential tax regimes within the group of companies. For example, this way of structuring a business is very common in the catering sector. One company, which is the rights holder and has an established system of business processes, transfers to its affiliated business entities a set of relevant exclusive rights. At the same time, such users apply special tax regimes, which makes it possible to reduce the tax burden within the group.
In 2022 the tax authorities increased the volume of control measures in relation to companies that use the franchise model of doing business. In particular, the regulatory authorities are checking the above business structures for the possibility of their qualification as a "split" business scheme. Therefore, the relevant question arises - is it possible to clearly state that franchising is a reliable tool that will protect the business from accusations of "splitting" and violation of Article 54.1 of the Tax Code? The answer does not seem so obvious.
"Crushing" a business. Focus of the tax authorities.
In order to qualify a business organization structure as a "split" scheme, the tax authorities need to establish that the group meets two main criteria:
- the nature of the organization of activities within the group is driven by tax motives, e.g. - the main objective of creating a business entity is aimed at obtaining tax savings;
- business entities within a group do not perform real entrepreneurial activities on their own.
Within the framework of control measures the tax authorities shall attempt to identify a list of circumstances, which, in their view, would confirm the compliance of the group with the above criteria, for instance: (1) the economic operators have no assets necessary for conducting their business; (2) economic operations conducted by the group participants on terms different from the market terms; (3) activities of the group participants are managed by the same persons, etc.
Commercial Concession. "Splitting" or not?
A commercial concession makes it possible to legally formalize economic relations between business entities within a group. This approach has its advantages. For example, when users acquire the corresponding set of exclusive rights (e.g. the right to use a trademark) on consideration, the tax authority can no longer conclude that the relations within the group are of a gratuitous nature. With regard to the "splitting" of the business this is significantly different from the situation where several business entities use someone else's trademarks without any payment, and the information about them is available on the website of the main company of the group.
At the same time, it cannot be unequivocally stated that the conclusion of a concession agreement removes all tax risks. In particular, there is negative law enforcement practice for businesses (for example, case A32-45354/2017 (the KFC case)), in which the business structure based on commercial concession agreements was found to be a "split" business scheme.
What is a business to do?
The above criteria are the cornerstone in matters relating to the "splitting" of a business. If the nature of the organization of the business within the group:
- does not meet such criteria - it can be assumed that the risk of tax surcharges will be substantially reduced;
- meets such criteria - the business should be ready to enter into a dispute with the representatives of the tax authorities. It is important to remember that the tax authority is obliged to establish a critical set of circumstances, which will confirm that the business structure represents a "split", i.e., if the tax authority establishes only a small part of the relevant circumstances (for example, (1) that two business entities apply special tax regimes; (2) such entities have a common leader), this will not be a sufficient basis for holding the taxpayer liable.
Considering the above, we believe that the possible algorithm of actions of a business (which plans or already applies the franchise model) depends on the specific stage:
- The group plans to apply the franchise model. In this case, the business may consider building such a structure of business processes in advance, which will not meet the above criteria. At the same time it is not necessary to take into consideration only financial economy issues. As practice shows, tax security and stability are more significant indicators over the long haul.
- The group already applies the franchise model. In such a case, the business may consider assessing its internal business processes independently for compliance with the aforementioned criteria and (if necessary) consider making changes.
- The Group is in a dispute with the tax authority. The tax authorities take a "risk-based" approach to controls. This allows them to focus their efforts on the areas of greatest tax risk. If the tax authority starts asking you questions related to the "splitting" of your business, then there is a possibility that the current structure does not suit the representatives of the controlling body.
What to do in such a situation? We believe that businesses should concentrate on the following aspects:
Show the inspectors the business objectives that were the basis of a particular way of organizing the business (e.g., the requirements of industry legislation);
show the independence of business entities within the group (for example, (1) documents were properly drawn up between companies; (2) all companies independently paid taxes to the budget and other expenses; (3) the heads of such companies themselves determined the business development strategy, etc.).
Regardless of the stage the business is at, it is important to remember that in cases of "splitting" a business there are no universal recipes. Many things depend on the actual circumstances: in one case a franchise agreement can be an effective protective mechanism, while in another case, on the contrary, it can create additional risk factors.
 A list of these circumstances is presented in the Letter of the Federal Tax Service of Russia dated August 11, 2017. N SA-4-7/15895@
 The presence of a tax incentive in the organization of the business structure; business entities do not carry out independent entrepreneurial activities