The demand for the “business splitting” scheme to save on taxes is growing, despite the risks

As Kommersant found out, the demand for the “business splitting” scheme to save on taxes is growing, despite the risks of administrative and criminal penalties. The number of such disputes in courts in 2023 increased by a third. Tax authorities still win most cases, but the chances of taxpayers have almost doubled – from 12% to 21%.

As tax lawyers told Kommersant, despite the increasing frequency of tax claims and in some cases even the initiation of criminal cases (see “Kommersant” dated January 2), fragmenting a business to save on payments to the state remains popular among small and medium-sized enterprises (SMEs). Fragmentation with the creation of individual entrepreneurs is “more than relevant,” says Taxology partner Alexey Artyukh. “In essence, with the abolition of UTII (in 2021), there are no other significant tax saving options left for medium-sized businesses,” he explains.

Managing partner of the Compliance Solutions law firm, Ivan Kuznetsov, confirms that now “business fragmentation is one of the most popular ways to optimize taxes.” Moreover, there is no such term in the legislation, which allows tax authorities and courts to interpret this concept quite freely.

According to Ivan Kuznetsov, there are two main crushing models.

The first is that all participants belonging to one group of companies apply the simplified taxation system (STS), but their total income exceeds the limits for it. The second model is that a company resells goods using the general taxation system through “simplified companies” actually controlled by it (individual entrepreneurs or LLCs), but may not be legally connected with them. “Such methods of building a group allow you to optimize not only income tax, but also not pay or reduce VAT. But the greater the tax savings, the greater the risks,” warns Mr. Kuznetsov.

The relevance of tax optimization through fragmentation is confirmed by the practice of arbitration courts. According to Compliance Solutions estimates, the number of legal disputes with tax authorities on this issue increased by a third in the first half of 2023. Mr. Kuznetsov considers the main problem in disputes over fragmentation to be “the lack of clear criteria distinguishing between the legal structuring of a group of companies (for example, the separation of separate lines of business) and the artificial fragmentation of a single business.”

In most disputes, tax authorities win, but in 2023, the share of taxpayer victories in the courts almost doubled – from 12% to 21%.

According to Mr. Kuznetsov, business has become better prepared for such tax claims: “The Federal Tax Service uses standard signs of fragmentation to prove unjustified tax benefits, and taxpayers have begun to adapt to them. This is also why the head of the Federal Tax Service, Daniil Egorov, in May 2023 proposed to completely reconsider the approach to defining business fragmentation, simply equating fragmentation with interdependence.”

Senior partner of Pepeliaev Group Sergei Savseris clarifies that “large businesses almost never use such schemes” precisely because of the high risks of tax claims. However, this often does not stop SMEs, despite the significant amounts of possible additional charges.

“Arrears due to fragmentation can reach up to 20–30% of the turnover for the audited period, and together with penalties and fines – up to 40–45% of the business turnover as a whole. But until they are caught, many believe that they will be lucky,” notes Mr. Artyukh. “Tax additional charges are usually very significant. And one “lesson” is usually enough; I have not heard of the continued use of the crushing scheme (after the company was caught.— “Kommersant”),” says Mr. Savseris.

According to Alexey Artyukh, after additional tax assessments, “a business is rebuilt if it survives.” Nevertheless, Mr. Savseris continues, one can often find homogeneous claims against the same company: “This does not mean that the taxpayer continues to apply the tax regime despite additional assessments. Often the inspectorate makes claims “in parts” – over several consecutive tax periods.”

Companies from chain retail trade and those providing catering services are most exposed to the risks of tax authorities recognizing the structure of their group as fragmentation, as noted in Compliance Solutions. Alexey Artyukh adds that business fragmentation is also found in the field of real estate rental (for example, when a shopping center is subleased in parts) and can be used in construction and logistics.

Among the current major cases of fragmentation is the dispute between the shoe retailer Zenden and the tax authorities.

In 2022, Dom Clothes LLC (manages a shoe chain) lost a dispute based on the results of a tax audit for 2013–2015. The courts agreed with the tax authorities that the company split its business through 22 controlled individual entrepreneurs, to which part of the proceeds was transferred, which allowed the retailer to reduce income tax and VAT by a total of 592 million rubles.

Taking into account penalties and fines, the amount of claims for this inspection reached 1.35 billion rubles, and now the Clothes House is trying to challenge the collection of funds from the accounts, Zenden told Kommersant. The company refers to the fact that the Federal Tax Service missed the two-year deadline for collecting tax arrears. Sergei Savseris notes that tax authorities often violate the deadlines for drawing up an act, making a decision, considering a complaint, but, according to the positions of the Supreme Court, this does not shift the deadlines for collection. In general, “courts are reluctant to accept arguments about two years of delay, especially when there is a significant amount of tax claims,” adds Alexey Artyukh.

Recently, as Kommersant found out, the House of Clothes received new tax claims for splitting up the business, now based on the results of an audit for 2016–2018, and is also challenging them in court. The amount of additional charges excluding penalties and fines amounted to 642 million rubles, the company clarified. Thus, the total amount of additional charges to the network for two tax audits is about 2 billion rubles.

Zenden calls the position of the Federal Tax Service “contradictory”, since the number of individual entrepreneurs who are considered associated with the company differs: according to the first inspection there were 22 entrepreneurs, according to the second – 16, and in the criminal case (now discontinued) only three appeared.

Sergei Savseris believes that the loss of the splitting dispute in 2013–2015 will be a “negative factor for the outcome of the new Zenden case” based on the audit for 2016–2018. Alexey Artyukh clarifies that “if these 16 individual entrepreneurs were among those 22 individual entrepreneurs who were affected by the previous audit, it will be extremely difficult to win a new case.”

The company has a chance, but it “will have to demonstrate significant differences in the activities of individual entrepreneurs compared to previous ones,” says Alexey Artyukh. If the taxpayer brings new arguments and can prove procedural violations on the part of the tax authorities, Mr. Savseris adds, the court may rule in his favor.

Anna Zanina, Alina Savitskaya