Tax legislation has no term "business splitting". The practice of detecting such schemes is developing all the same. Where entrepreneurs split a business in order to reduce the tax burden, rather than for a commercial purpose, the Federal Tax Service treats the activity of several persons as the activity of one. It then assesses the organiser of the scheme to profits tax, VAT, penalty interest and fines. Courts generally agree with the tax authorities and uphold the additional assessments. Some participants then try to recover from the budget the tax they paid under a special tax regime. Do they succeed? A real case gives the answer.
Can the money be claimed back from the budget?
In case No. A66-1193/2019 the courts found that Stroybuilding, a limited liability company, had split its business into 11 controlled organisations, including MDS (MDS, a limited liability company).
MDS then adjusted its liabilities under the simplified tax system (STS). It filed amended tax returns with the Federal Tax Service for 2011-2013. The tax due came to 0 rubles. The company took the view that the STS tax it had paid into the budget was an overpayment and should be refunded. It went to court to defend that right. Three instances upheld MDS on the refund of the overpayment. The Supreme Court disagreed. In its ruling of 23 March 2022, No. 307-ES21-17087, it refused to recognise a right, for a participant in a business-splitting scheme, to a refund of tax paid under the STS.
The Supreme Court relied on paragraphs 3 and 7 of Resolution No. 53 of the Plenum of the Supreme Commercial Court of 12 October 2006, "On the assessment by commercial courts of whether a taxpayer's receipt of a tax benefit was justified", and on Article 54.1 of the Tax Code, "Limits on the exercise of rights in calculating the tax base and (or) the amount of a tax, a levy or insurance contributions".
The Supreme Court held that steps taken to get round the limits on a special tax regime (Chapter 26.2 of the Tax Code) may be classified as an abuse of rights.
In its view, tax paid by participants in a splitting scheme on income from activity that was divided artificially must be taken into account when the tax liability of the group's organiser is determined under the general tax system. As a general rule, that tax cannot be treated as paid in excess, or without a legal basis.
The loss caused to the budget by the joint actions of the group's participants had not been made good in full. In particular, the debt found on the tax audit had not been paid, and it was entered in the register of creditors' claims in the bankruptcy of the organiser, Stroybuilding. The Supreme Court therefore held that MDS's rights and legitimate interests had not been infringed, and that the company could not claim the money back from the budget.
The Supreme Court took the same approach in its ruling of 23 March 2022, No. 307-ES21-17713, in case No. A66-1735/2019, which concerned a refund of tax to another participant in the same scheme, Montazhstroy.
No refund, but the tax is credited
Companies that took part in a business-splitting scheme therefore have no right to a refund of the tax they paid while using a special tax regime.
At the same time, the Supreme Court held that tax paid by a participant in a "business-splitting" scheme under a special tax regime must be taken into account when the organiser's arrears are calculated. The Federal Tax Service takes the same position in paragraph 28 of its letter of 10 March 2021, No. BV-4-7/3060@.
The Supreme Court found that the tax authority which audited Stroybuilding had not taken into account the STS tax paid by MDS and by Montazhstroy when it calculated the organiser's arrears. That did not lead to a rehearing. Relying on paragraph 44 of Resolution No. 57 of the Plenum of the Supreme Commercial Court of 30 July 2013, the Supreme Court in effect required the tax authority to recalculate Stroybuilding's tax liabilities: the arrears, the penalty interest and the fine. The tax authority must amend the decision adopted after the audits, in a way that improves the taxpayer's position.
Participants in a business-splitting scheme therefore have reason to ask the court and the tax authority to take into account, when arrears under the general tax system are calculated, the amounts paid under the special tax regime. They should draw the inspectors' attention to whether the tax liabilities found on the audit were calculated correctly.
MDS and Montazhstroy disagreed with the Supreme Court and filed supervisory appeals with the Presidium of the Supreme Court. The Presidium has not yet given its decision.
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