Business splitting – optimization or violation?

Oct, 24 2018

Many companies build their business in such a way that their business operations and assets are not concentrated in one legal entity but divided between several related legal entities.

In some cases, such situation is created artificially to obtain an unjustified tax benefit. Tax officers actively detect such schemes called “business splitting” during check-ups. However, Russian legislation contains neither the term “business splitting” nor criteria for unjustified tax benefit.

Currently tax authorities invoke the Letter of the Federal Tax Service dated August 11, 2017 for detection of business splitting. Being explanatory in nature this Letter is not considered as legislative act.

In this letter the Federal Tax Service lists the following main characteristics of illegal business splitting:

- Business is split between companies, which apply different tax regimes;

- Participants of business splitting are directly or indirectly related, e.g. through family or business relationships, business administration.

- One participant of business splitting can be a sole supplier or customer of another participant or all the participants of business splitting have the same suppliers and customers;

- Actual management of business splitting participants is carried out by the same individuals;

- According to the company’s accounting records profitability of production and sales declines after business splitting;

- The participants of business splitting use the same advertising signboards, contacts, website, addresses of actual location, offices, warehouses;

- The participants of business splitting have the same representatives in relations with government authorities and other contractors.