Entrepreneurs do not hire lawyers – Newspaper Kommersant No. 60 (7505) dated 04/07/2023
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The Supreme Court of the Russian Federation (SC) will consider a dispute about the right of a lawyer to be an individual entrepreneur (IP) and apply the simplified taxation system (STS). Arbitration courts decided that the status of a lawyer does not allow him to be an entrepreneur, let alone use benefits. Lawyers say that because of the ambiguity with taxation, many lawyers have to conduct entrepreneurial activities “indirectly, through a legal entity.” Now there is hope for a solution to the problem.
The Supreme Court will consider the dispute between Vsevolod Sazonov, a lawyer and managing partner of the Sazonov and Partners Law Office, and the tax authorities. Mr. Sazonov decided to get the status of an individual entrepreneur, and in October 2021 the Moscow tax office registered him as such. The entrepreneur immediately asked the tax office to transfer him to the simplified tax system, but was refused with an explanation that he did not meet the requirements. An appeal against the refusal in a higher tax authority did not bring success, and then Mr. Sazonov applied to the court with a request to recognize the decision of the tax authorities as illegal.
The Moscow Arbitration Court, and then the appeal and cassation rejected the lawyer’s claim, referring to the provisions of the Tax Code of the Russian Federation (TC), the Law on the Bar and the Lawyer’s Code of Professional Ethics. In particular, paragraph 3 of Art. 346.12 of the Tax Code contains a list of persons who are not entitled to apply the simplified tax system, including lawyers who have established law offices, as well as other forms of lawyer formations. According to the courts, it follows from these acts that a person with a lawyer’s status cannot “simultaneously be an individual entrepreneur”, therefore, “such a citizen cannot apply the simplified taxation system.”
Vsevolod Sazonov filed a complaint with the Supreme Court, insisting that the Tax Code “prohibits the use of a simplified taxation system in relation to income received specifically from advocacy.” At the same time, there is no prohibition in the law on “the right of lawyers to register as an individual entrepreneur for the purpose of carrying out entrepreneurial activities not related to the conduct of a lawyer”. Thus, according to the applicant, if he conducts other business activities not related to the provision of legal assistance, he has the right to apply the simplified tax system. Based on these arguments, the case was referred to the Economic Collegium of the Armed Forces, the consideration will take place on April 19.
In 2022, Vsevolod Sazonov challenged in the Supreme Court the letter of the Federal Tax Service dated November 2, 2020, from which it followed that lawyers should not apply the simplified tax system. In April 2022, the SC recognized the letter as legal, noting that it did not go “beyond the scope of an adequate interpretation of the provisions of the law.” Julius Tai, Managing Partner at Bartolius Law Firm, notes that at that time the Supreme Court “essentially evaded solving the problem”, stating only that a lawyer was not entitled to apply the simplified tax system for his main activity, “but did not say anything about taxing a lawyer’s entrepreneurial income.”
The law considers advocacy as “professional legal assistance provided on a non-commercial basis”, and in relation to this activity, a lawyer “cannot have the status of an individual entrepreneur and is not entitled to apply special tax regimes to income,” explains the head of the Tax practice at Andrey Gorodissky and partners” Valentin Moiseev. In other words, “lawyers can be entrepreneurs, but they are prohibited from using this status to provide professional legal assistance,” Julius Tai clarifies.
Until 2017, the Code of Professional Ethics did indeed contain a clause stating that a lawyer was not entitled to engage in “other paid activities in the form of direct participation in the process of selling goods, performing work or providing services,” explains Egor Kovalev, a lawyer at Delcredere. But now there are no such restrictions, emphasizes Julius Tai. The code states that a lawyer “has the right to invest funds and dispose of his property,” as well as to derive income from other sources, if this “activity does not involve the use of the status of a lawyer,” Mikhail Voronin, senior partner at Yukov and Partners, clarifies. Activities only “should not interfere with the lawyer to perform duties to clients and should not harm the authority of the bar,” adds Yegor Kovalev.
There are no statistics on the number of lawyers with IP status, “but such a combination is common,” says Valentin Moiseev. In particular, he notes, this can be investment activity, the work of a patent attorney, etc. But “due to the ambiguity of the issue of taxation,” many lawyers are engaged in entrepreneurship “indirectly, through participation in legal entities,” Yegor Kovalev notes. Lawyers expect that the Economic Collegium of the Armed Forces will consolidate the right of lawyers to be individual entrepreneurs and allow them to apply the simplified tax system for entrepreneurial activities.
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