Business fragmentation: what are they paying attention to?
After the decision of the Constitutional Court of the Russian Federation No. 1440-O in the case of “Master-Instrument” (which recognized a tax arrears of more than 200 million rubles), businessmen had serious concerns about the use of UTII and generally any fragmentation of business using special modes.
The courts once again recognized the right of tax authorities to combine different legal entities into one and charge taxes as if this general legal entity worked on a common taxation system, including the application of VAT.
Transferring retail units to UTII is quite a working option of tax optimization, but it has some risks. The main difficulty in eliminating such risks is the correct application of this option of business structuring. Here is one example of working on bugs (positive and negative practice).
The “Master Instrument” case (No. А12-15531 / 2015): the main company on the general taxation system purchased goods and sold through retail units using UTII. Goods from the main company to retailers were sold with a minimum margin. All entities operated under the same trademark. The tax authorities conducted an on-site inspection, calculated the revenue of the retail units as the revenue of the main company, and accrued income tax and VAT on this amount. The total arrears, including fines and penalties, amounted to over 200 million rubles.
Case Trading House “Aroma” (No. A56-25323 / 2015, A56-22627 / 2015, A56-29540 / 2015, A56-26689 / 2015, A56-22852 / 2015, A56-30731 / 2015): retail sales were carried out through several companies on UTII: LLC “AM-1 SPb”, LLC “AM-2 SPb”, LLC “AM-3 SPb”, LLC “AM-4 SPb”, LLC “AM-10 SPb”. The first two were separated from the main company Trading House Aroma LLC, the rest are registered independently. All companies had the sole executive body LLC Business Solutions Management Company.
At the same time, the “alternative liquidation” procedure was carried out with respect to the main company LLC “Trading House Aroma” (and then with respect to the management company), that is, liquidation through its merger with Econika-Techno LLC, which has a mass director and a mass founder. The tax authorities conducted field inspections in all organizations, including the one-day company Econika-Techno LLC (a legal entity never submitted reports). According to the results of the inspections, as in the “Master Instrument” case, the inspections tried to prove the artificial fragmentation of the business, the unlawful use of UTII and to accrue taxes on the general taxation system. The tax authorities lost all cases.
1. In the Master-Tool case, all retail units leased retail space from an interdependent LLC “Master-Instrument” LLC “Eureka-plus”. The main task of this legal entity was the formal division of the total area of each Master-Instrument store so that the area of the trading floor did not exceed 150 sq. m. for the use of retail units UTII.
In fact, third parties used the entire retail space, the retail space in the same stores were not isolated from each other. There is an established negative practice on this issue. In the case of Aroma Trading House, the real estate objects in which the separate subdivisions were located were leased by them from third parties on the basis of onerous contracts, the contracts were registered with the registration authority. Formal separation of retail space has not been established.
2. In the case of Aroma Trading House, it was established that the audited companies independently purchase goods, works and services from third parties, as well as settlements with counterparties. Selling goods are delivered by sellers on their own and at their own expense directly to stores, are located in trading floors and in utility rooms. Persons questioned by officials of the Inspectorate confirmed the existence of really enforceable civil contracts with the Company.
None of the persons interrogated by the tax authority testified in favor of the fact that the actual activities on behalf of the applicant were ever carried out by Aroma Trading House LLC. While in the Master-Tool case, according to interrogations of employees of retail divisions, it was established that in fact they were employees of LLC “Master-Instrument”. According to the testimony of buyers, selling goods from a retail company, sellers carried it out of a warehouse owned by Master-Instrument LLC.
3. In the Master Tool case, trademark has become another unifying factor. Despite the fact that LLC Master-Instrument presented copies of contracts with retail divisions for the use of the Master-Instrument trademark during the on-site tax audit, however, there is no evidence of money transfers for using the trademark in the case file.
The analysis of the settlement accounts of the above persons for the period under review did not confirm this fact. In the case of Aroma Trading House, there was no common trademark, but the tax authorities nevertheless tried to refer to a single style of store design. However, the court rejected this argument because, in the court's opinion, it did not find its confirmation with relevant and admissible evidence. This is understandable. What is a trademark is well defined and its use can be objectively fixed. But a single style of design is a subjective category and it is very difficult to prove it.
4. I do not get tired of paying attention to the importance of such factors as management accounting in matters of business structuring. In the Master Tool case, the business purpose of using a single software product for the accounting of goods was presented: operational management accounting and control over the margin applied by all retail units. However, the courts did not give any assessment of this fact. Conducting consolidated management accounting is not prohibited (to control margins or other purposes). But this is not enough. In business splitting cases, the main issue is the lack of separate accounting.
How can we talk about the independence of an economic entity if it does not keep records of its own assets, liabilities and financial results. In the case of Aroma Trading House, it follows from the testimony that the applicant provided a separate record of the goods and their movement. Having studied the tax authority’s argument about using one software, the courts noted that organizations used the software on the basis of separate civil contracts concluded by them with the developer, while the accounting systems of the companies are separate. The tax authority has not proved the circumstances of the lack of accounting for the facts of the independent economic life of companies.
5. In both cases, it was established and the parties did not dispute the interdependence of all participants. In both cases, the courts referred to paragraph 6 of the Decree of the Plenum of the Supreme Arbitration Court of the Russian Federation of October 12, 2006 No. 53 stating that the interdependence of the parties to the transaction is not in itself evidence of unjustified tax benefits. However, in the Master-Instrument case, the courts considered that the established circumstances prove the consistency of actions aimed at reducing the tax base of Master-Instrument LLC for VAT and income tax. So, on the basis of the same paragraph 6 of the Decree of the Plenum of the Supreme Arbitration Court of the Russian Federation dated 12.10.2006 No. 53, interdependence, in conjunction with these circumstances, indicates that the taxpayer has received an unjustified tax benefit.
At the same time, in the case of Aroma Trading House, all courts noted that interdependence as a circumstance testifying to the receipt of an unjustified tax benefit can only have legal significance when such interdependence is used by the parties to the transaction in order to carry out concerted actions aimed at underestimating the tax base .
According to general rules, tax legislation does not provide for the possibility of imposing tax obligations of one legal entity on another legal entity. Evidence of the coordination of actions in order to obtain tax benefits or non-independence of the audited business entities by the tax authorities was not provided.
Summary:
1. Do not be afraid of interdependence, we must avoid fictitiousness.
2. Factors that led to a negative decision in the Master Tool case: personnel migration, managerial accounting, formal division of areas during everyday use, lack of full independence, resources, use of other people's intellectual property. These are all factors not of legal design of the scheme, but of its everyday application.
3. In the forefront among the evidence of the tax authorities are testimony. To ensure that all employees, customers, and contractors give only the evidence you need is unrealistic. The only option is to maximize the synchronization of business processes and the legal structure of the business. In this case, they will not even have the opportunity to say the wrong thing.
Structure your business correctly.
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September 22, 2017
Kirill Soppa, partner. I am engaged in taxes, I like to build business processes. I am writing articles, looking for interesting information and proposing ways of its practical use. I believe that thanks to high-quality legal analytics, clients come to a law firm, and not vice versa. Do you agree? Then let's be friends on Facebook.
