The risks of a formal migration for entrepreneurs

It is well known that low-tax regions attract many entrepreneurs who wish to optimise their tax obligations.

A future owner of commercial premises, for example, registers in Udmurtia, registers as an individual entrepreneur on the simplified tax system, and then buys real estate in Moscow. After that he starts to let the property and to pay tax at the rates of Udmurtia (the simplified tax system, at 1%).

The Ministry of Finance has recently set out to fight this practice, known as "formal" migration. The proposal is that the reduced tax rate will apply not from the moment of re-registration, but only three years after the move to the low-tax region.

That does not mean that the risks have disappeared for companies and individual entrepreneurs who have "moved" to a low-tax area solely in order to optimise tax. The dangers for such entrepreneurs remain and, now that the authorities have recognised the problem, the chances of those risks arising only increase.

Owners of small commercial properties often tell us that they use this "brilliant" scheme. The worst of these stories are those in which the entrepreneur first buys the commercial premises and starts to let them, and only then "migrates" from Moscow to a notional Udmurtia, while continuing to live and work in Moscow. One does not have to be an inspector, or an investigator, to see the elements of a tax offence in conduct of that kind.

We have always taken the view, and we still do, that in 99% of cases this is an extremely risky strategy. It can lead to serious consequences: arrears of tax, penalties and late-payment interest for manoeuvres of this kind. Sergei Pivovarchik, managing partner of Consul Group, comments.

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