Companies are increasingly trying to collect additional tax payments from executives

Russian business is increasingly trying to shift the additional tax charges against them to managers (including former ones), but only half of such attempts are successful, according to a review by BFL | Arbitrazh.ru, which Kommersant got acquainted with. The number of such disputes has almost doubled since 2020. Of the required 1.8 billion rubles. companies were awarded only 325 million rubles over 3.5 years, refusals were mainly motivated by lack of proof of guilt and dishonesty of the director. Lawyers explain the trend both by an increase in business activity and a massive change of owners of organizations, and by the increasing frequency of claims by tax authorities against persons controlling the business.

BFL | Arbitrage.ru analyzed judicial practice for 2020 – the first half of 2023 on disputes about tax losses of a company that can be recovered from its manager in favor of a legal entity. The law obliges the director to act in the interests of the company in good faith and reasonably, this also applies to paying taxes. If an organization is brought to tax liability due to dishonest behavior of the director, the losses incurred may be recovered from him.

The authors of the review studied 101 disputes regarding claims against the heads of various legal entities (LLC, JSC, cooperatives, unitary enterprises, etc.). Most often, demands were made by the companies themselves, represented by a new director (70% of cases), or by their participants or shareholders (30%). “Majority shareholders most often act together with the director, foresee possible consequences in advance, so they are not always ready to enter into conflict with the former director,” says ProLegals partner Elena Kravtsova. “And new managers can file lawsuits in order to “cover” themselves.” In addition, notes Nariman Huseynov, a lawyer in the dispute resolution practice of the Kosenkov and Suvorov law firm, in Russian practice, in principle, claims from company participants are not very common.

The majority of cases involve companies engaged in manufacturing (24 disputes), construction (17), real estate operations (12), wholesale and retail trade and vehicle repair (10). Partner in the commercial disputes practice at MEF Legal, Rimma Malinskaya, believes that this may indicate a high tax burden in these industries and the general activity of enterprises in confrontation with tax authorities.

The growth began in 2021, and in 2022, compared to 2020, the number of company proceedings against directors almost doubled from 20 to 37 cases. Since the end of 2020, after the lifting of quarantine restrictions, the economy has picked up, this has caused an increase in the number of corporate disputes, believes Nariman Huseynov. “The events of 2022 further spurred growth, and, apparently, the trend will continue in 2023, since the economy is at the stage of serious transformation,” says Mr. Huseynov. “And the key element of the ongoing processes is the massive change of asset owners.”

Elena Kravtsova connects the increase in the number of disputes “with the increased activity of tax authorities, including when bringing controlling persons to subsidiary liability.” The fact that a significant part of business operations is now in the “gray zone” and “characterized, in particular, by tax optimizations” will contribute to the spread of such disputes, Mr. Huseynov believes.

The average success rate for plaintiffs is close to 50%—49 cases won versus 52 lost. The total amount of damages required from directors amounted to 1.8 billion rubles, recovered by the courts – 325 million rubles. In general, says Mikhail Merkulov, director of the organizational development practice at KSK Group, the outcome of the case depends not only on practice, but also on the factual circumstances and evidence presented by the parties.

According to Rimma Malinskaya, court refusals can be explained by the fact that many claims are brought not because of improper performance of duties by the director, but as “an attempt by other persons controlling the company to isolate themselves from the director and show that they themselves are not involved in violations.” “This is relevant in case of possible bankruptcy of the company and the risks of being brought to subsidiary liability,” says Kira Gin, managing partner of the law firm “Gin and Partners”.

The largest number of claims for “tax” losses against directors were in the Moscow (26 disputes) and North-Western districts (14), followed by the Ural (13), Volga (12) and West Siberian (11). Mr. Merkulov notes that the majority of Russian companies are registered and operate in the first two districts. In addition, Mr. Guseinov says, Moscow and St. Petersburg are distinguished by “a high level of conflict in the business environment.” The Volga, Ural and West Siberian districts “remain among the leaders in terms of the pace of development of large, profitable enterprises and businesses, and the increase in the number of disputes indirectly indicates an increase in business activity in these regions,” he adds.

The Central District was in first place in terms of the number of plaintiffs’ victories (100%, but only three cases), the Far Eastern District was in second place (56.53%), and the Western Siberian District was in third (47.34%). But in the Moscow District, claims against directors were satisfied only in 1.5% of cases. “The larger the sample, the greater its variability,” explains Nariman Huseynov.

From the review it follows that in practice there is no uniform approach to whether the losses required from the director include only fines and penalties or the tax arrears themselves. But according to statistics, financial sanctions are collected almost four times more often than tax amounts (40% of cases versus 9%).

“If the company’s obligation to pay tax is not related to the actions or inaction of the director, the amount of arrears cannot be transferred to him,” emphasizes Elena Kravtsova. Kira Gin explains that arrears can be included in losses “if their occurrence is associated with the director’s proven guilt in committing fictitious transactions that were carried out solely in the interests of the director.” That is, the arrears should be “an additional burden for the legal entity that arose precisely because of the dishonest actions of the manager,” clarifies Mr. Huseynov.

At the same time, the authors of the review note, sometimes claims are based on the director’s inaction regarding the legal entity’s overpayment of taxes or the possibility of VAT reimbursement from the budget, “which led to the loss of the company’s right to receive tax benefits.”

To substantiate their claims, plaintiffs often refer to the fact that the director himself was the organizer of a scheme to obtain unjustified tax benefits (34 cases out of 101), did not pay taxes and fees (28 cases), did not show prudence when carrying out business transactions (24), and distorted reporting or did not present it to the tax authorities (20).

Defendants-managers mainly argue about the expiration of the statute of limitations (41 disputes out of 101), about the conscientiousness and reasonableness of their actions and the lack of proof of causing losses (35 cases), about the compliance of transactions with the Tax Code (28 cases), about the presence of a direct order or approval on the part of the beneficiary of the company (20 cases).

The most common reason for dismissal of claims is that the plaintiffs did not prove bad faith and unreasonable behavior of the director or the composition of the damages (31 cases). Other frequently encountered motives include non-recognition of taxes and penalties as company losses (18 cases), missing the statute of limitations (14 cases), and decisions not made by the director alone (8 cases). In general, Nariman Huseynov says, to increase the chances of success, plaintiffs “need to work more carefully with the evidence” in order to “refute the presumption of the director’s good faith and confirm his culpability for the losses caused.”

Anna Zanina