On August 19 2017 Article 54.1 of the Tax Code came into force. It introduces new rules and definitions regarding legitimate tax optimisation and determines what should be considered an unreasonable tax benefit.

A tax benefit will be considered unreasonable if it is obtained as a result of misreporting taxpayer information. If no misreporting occurs, a benefit will be considered reasonable, provided that:

  • the transaction's primary aim was not to obtain a tax default or reduction; and
  • the transaction is real and the parties discharged their obligations thereon.

Further, the new rules require the tax authorities to use a less formal approach when assessing the reasonableness of a tax benefit and strive to understand the economic aim of the relevant taxpayer's operations. Previously, the authorities would often refuse tax refunds on formal grounds, such as the presence of a technical error in an invoice. The new Article 54.1 prohibits this.

Before these amendments, no clear criteria for classifying tax benefits as unreasonable existed. All disputes between taxpayers and the authorities on this subject were settled by the courts on the basis of the Supreme Commercial Court's 2006 clarifications. These clarifications included both negative and positive criteria. The court's decision was issued on the basis of the criteria being analysed by the disputing parties and the court. Unsurprisingly, this system was inconvenient and led to similar cases being settled in different ways by the various courts.

Although the new rules for assessing tax benefits presume the conscientiousness of taxpayers, they require taxpayers to exercise due diligence, which means that they must review the counterparty of a transaction before its implementation. If, for example, the counterparty offers to deliver large quantities of goods, but does not have the appropriate warehouse facilities or personnel, taxpayers should be wary. In practice, the new rules reinforce what is established practice in the Russian market when a new business partner is asked to prove the substance of its company.

The abovementioned changes aim to establish clear legal rules regarding what is considered legitimate optimisation and what is considered tax evasion. However, it is unclear whether these amendments will completely resolve this problem.

For further information on this topic please contact Valery Narezhniy or Nikolay Harivulo at Gorodissky & Partners by telephone (+7 495 937 6116) or email (narezhniyv@gorodissky.ru or harivulon@gorodissky.ru). The Gorodissky & Partners website can be accessed at www.gorodissky.com.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.