Global Tax Alert | 20 August 2013

Russian Tax Authorities publish guidance on two high tax risk transactions

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Russia's Federal Tax Service (FTS) has published a letter1 regarding two methods used to obtain unjustified tax benefits which were identified during the course of its activities, including pre-court settlement of disputes with taxpayers and tax litigation. These are in addition to those previously set out in the FTS's Conceptual Framework for the On-Site Tax Audit Planning System.2 A taxpayer engaged in any business activity perceived as potentially abusive or high tax risk is more likely to be selected for an on-site tax audit.

The tax authorities are on the lookout for transactions resembling the schemes identified by the FTS when choosing companies to audit, and will scrutinize such transactions more closely performing tax control measures. A company not engaged in tax evasion may attract the attention of the tax authorities by participating in transactions bearing a superficial resemblance to an element or elements of such schemes. Companies employing agents for bona fide purposes, for example, are likely to face closer scrutiny as a result of the letter.

The first scheme for obtaining an unjustified tax benefit involves the use of agents or other intermediaries (either Russian or foreign). The documentation concerning the use of these agents is intended to create the appearance of real financial and economic activity. In reality, these entities neither carry out work nor provide services.

The Principal nominally engages the Agent to perform certain tasks, in particular, to find additional customers for the Principal. The Agency's fees purportedly relate to generating business for the Principal with customers found through the efforts of the Agency. However, in reality searching for customers, negotiations with potential customers and contract preparation are carried out by the Principal. The Agent's sole function is to create a document trail supporting the payment of fictitious agency fees. This scheme results in an unjustified tax benefit for the Principal in the form of deductions for the costs under fictitious agency agreements.

The second scheme involves obtaining an unjustified tax benefit by acquiring and selling securities. The issuance of the securities is usually carried out by a foreign company which does not perform any real economic activity. This company would have no assets, and would have purchased no guarantees from banks or other third parties which might be expected to be engaged to underwrite a genuine issuance of securities.

The issued securities are sold to a pre-determined group of entities. Payment for the securities is due after their redemption, which indicates that the purpose of the issuance and subsequent sale of securities is not the raising of funds. Later the securities are contributed to the charter capital of Russian companies. The Russian companies sell the securities to “one-day companies” at a loss. The unjustified tax benefit arises from reducing the profits tax base by the amount of the resulting loss.


1. Letter No. АС-4-2/22619@ of the FTS of 28 December 2012.

2. Approved by Order No. MM-3-06/333@ of the FTS of 30 May 2007.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Moscow
  • Alexandra Lobova
    +7 495 705 9730
  • Sergei Nosov
    +7 495 755 9874
Ernst & Young LLP, Russian Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088

EYG no. CM3742