On 12.07.2024, Federal Law No. 176-FZ (hereinafter - Law No. 176-FZ) came into force, which not only amended tax legislation in terms of VAT, corporate income tax, simplified taxation system and so on, but also established a tax amnesty mechanism for business splitting.

In addition to Law No. 176-FZ, on 18.10.2024 the Federal Tax Service of Russia published recommendations on the application of tax amnesty for business splitting (hereinafter - Methodological Recommendations), which are designed to help entrepreneurs and companies understand the specifics of this mechanism. 

What is a business split?

To begin with, it is necessary to understand what a business split is for the purposes of applying the provisions of Law No. 176-FZ. The legislator has identified the following signs that indicate illegal business splitting :

- the division of a single business activity between a group of persons;

- application of special tax regimes;

- exercise of control by the same persons;

- the purpose of splitting a business is to understate taxes or preferentially understate them.

It should be noted that Law No. 176-FZ provides for the possibility to take advantage of the tax amnesty only for those persons who split their business by applying special tax regimes.

In identifying facts of business splitting, the tax authorities are guided primarily by the signs formed by judicial practice, on the basis of which the signs of fictitious business splitting can be divided into several groups:

- non-self-sufficiency of persons formed as a result of the division of a business;

- commonality of material and technical base and personnel;

- identity of types of activity;

- commonality of counterparties with whom transactions are concluded;

- absence of a business purpose for the division of a business between several persons.

If the tax authority has identified risks of business splitting for 2022-2026, taxpayers may be invited to the inspectorate to inform about the identified risks before the appointment of the relevant audits.

In the event of a dispute with the tax authority, the taxpayer has the right to present evidence confirming the independence of all group members, as well as the business purpose of splitting the business.

What is a tax amnesty?

Amnesty for business splitting is a mechanism to terminate the obligation to pay taxes incurred in 2022-2024, as well as related penalties and fines, upon voluntary full or partial refusal by the persons involved in the split to split the business in respect of 2025-2026.

In fact, it is a question of forgiveness by the state of tax claims related to artificial business splitting in 2022-2024, provided that taxpayers voluntarily abandon such scheme in 2025-2026.

How to give up business splitting?

According to the Methodological Recommendations , a voluntary refusal to split a business is the following:

- consolidation for the entire group of persons of income and other indicators which need to be complied with when applying special tax regimes;

- the calculation and payment of taxes by those persons in the appropriate amount.

In fact, the Federal Tax Service of Russia speaks of the need to restructure one's business in such a way as if economic activities were carried out without the use of organizations and individual entrepreneurs applying special tax regimes, i.e. by switching to the general taxation system.

The Federal Tax Service of Russia gives the following examples of voluntary refusal to split both without and with a change in the organizational structure of a business:

- transfer of all group participants to the general system of taxation;

- transferring a business to one business entity of the group;

- consolidation of group members into one legal entity;

- alienation of stakes (shares) of group companies to independent persons so that the group ceases to operate as a single entity.

At the same time, the above list of actions indicating a taxpayer's voluntary refusal to split a business is not exhaustive. Taxpayers have the right to refuse to split a business in any other way.

What cases are not covered by the tax amnesty?

As previously stated, the tax amnesty is only available for cases where a business split is accomplished through the application of special tax regimes. 

The Federal Tax Service of Russia notes that the tax amnesty does not apply to situations that are not related to business splitting, as well as when business splitting was carried out without the use of special tax regimes (e.g. IT companies, VAT benefits for catering, etc.).

If the tax authority identifies the above violations, the taxpayer is not entitled to a tax amnesty, even if all other necessary conditions are met, which will be described below.

Who can benefit from the tax amnesty?

In order for a taxpayer to benefit from a tax amnesty, he/she must simultaneously meet the following requirements:

- there is a tax audit decision for 2022-2024 against him/her;

- the decision has not entered into force as of 12.07.2024;

- the taxpayer has refused to split the business for 2025-2026.

Consequently, tax violations identified by the tax authority for 2021 and earlier periods are not covered by the tax amnesty . At the same time, this has no effect on the taxpayer's ability to appeal against such a decision under the general procedure.

For more details on the options for applying the tax amnesty, see the material of our expert Ivan Tsvetkov in the article for the publication «Company Lawyer».