Russian Tax Service explains how the Tax Amnesty for business splitting will work

The Russian Federal Tax Service has published Methodical Recommendations on the Tax Amnesty for Business Splitting (in Russian) that explain how the tax amnesty will work by answering FAQs.

As you may remember, Law No. 176-FZ dated July 12, 2024[1] granted an amnesty to taxpayers that are willing to abandon business splitting schemes—i.e., dividing a single business activity among several formally independent persons, which will be controlled by the same persons, that is solely or primarily aimed at understating taxes by applying special tax regimes. It is understood that the tax amnesty will apply to the obligation to pay taxes for the tax periods of 2022 to 2024, the relevant penalties and fines for offenses related to business splitting, provided that the taxpayer abandons its intention to split the business in relation to the tax periods of 2025 to 2026. In simple terms, if the taxpayer is applying a business splitting scheme now, then, subject to abandonment of its intention to split the business, starting from 2025, the past periods—i.e., 2022 to 2024—will fall under the amnesty.

Russian courts and tax authorities often qualify splitting a business as one of the ways to obtain an unjustified tax benefit (Article 54.1 of the Russian Tax Code). This risk arises when a single business is divided into several non-independent legal entities so that all or some of the participants in the ‘splitting’ scheme can retain the right to apply a special tax regime. According to the Russian Federal Tax Service, in the period from 2018 to 2023, Russian courts heard 643 cases of business splitting for the purpose of tax evasion, with additional tax assessments totaling RUB 506 billion. Considering that not all cases end up in the court, actual additional tax assessments for this reason were even higher.

If Russian tax authorities discover a business splitting for the purpose of tax evasion, the taxpayer will be additionally assessed:

• taxes under the general taxation system (income tax at a rate of 20%, VAT at a rate of 20%) based on the amount of income of the participants in the splitting;
• late fees for the years, for which additional taxes are assessed; and
• a fine at 40% of the amount of additional tax assessments.

Accordingly, the tax amnesty mechanism provided for in Law No. 176-FZ dated July 12, 2024 enables the taxpayer to abandon its effort to split the business without suffering any tax losses.

A list of ways to voluntarily abandon to split a business is not limited. Importantly, a voluntary abandonment will not entail a mandatory tax audit.

Such a voluntary abandonment may be carried out without changing the business structure or by refusing to apply any special tax regimes or transferring activities to one of the persons of the group. Abandonment may also be carried out by changing the business structure through merging or selling companies. In our practice, we encounter situations where business splitting is used not to devise any tax optimization schemes. Sometimes, as the business grows, companies are set up that are responsible for certain lines of business activities, but have a single decision-making center, and they often share their staff. And for ‘historical reasons’, companies are not always willing to revise their approach to doing business, even if they understand the tax risks involved. That is why we hope that the tax amnesty for business splitting will enable us to safely abandon complex structures both in terms of management and tax administration, and continue to develop the business without fear of claims from the Russian tax authorities.

We would be pleased to help you assess your tax risks and the possibility of applying the tax amnesty. Please send an email to Anton Kabakov or Robert Gurdyumov.

[1]Federal Law No. 176- FZ dated July 12, 2024 On the Introduction of Amendments to Parts I and II of the Russian Tax Code, Certain Legislative Acts of the Russian Federation, and the Invalidation of Certain Provisions of Legislative Acts of the Russian Federation.