In the economic and legal environment, the terms "affiliated person" and "affiliation" are quite popular. Definition of the "affiliated person" concept is given in article 4 of the RSFSR Law No. 948-1 of March 22, 1991: it means a company that has a significant influence over the business activities of other legal entities. It shall be noted, that all the provisions of this law, except for Article 4, are no longer valid.
In the Civil Code of the Russian Federation, the term "affiliation" appeared in 2014 in a new article 53.2, and it means a relationship of association of persons. Affiliation of legal entities is also mentioned in the following regulatory legal acts: Tax Code of the Russian Federation, Federal Law "On Limited Liability Companies", Federal Law "On Joint Stock Companies", etc. In some cases, the lawmaker uses synonymous terms, such as "interdependent persons", "dependent persons", "group of companies", etc.
Affiliated entities in the Tax Code of the Russian Federation
Despite the fact that the definition of the concept in question was originally given in the law On Competition, it is currently used for taxation purposes. Thus, according to clause 1 of Article 105.1 of the Tax Code of the Russian Federation, affiliated or interdependent persons are companies that, due to the specific relations between them, can influence terms and results of transactions, as well as the economic results of their activities.
While analyzing Article 105.1 of the Tax Code of the Russian Federation, it can be concluded that interdependence can be determined based on the fact of participation in capital, implementation of management function or official subordination.
Interdependent persons are the following:
· companies directly or indirectly participating in another organization, provided that the share of such participation is at least 25%;
· organizations where the share of participation of the same person exceeds 25%;
· companies where 50% of members of the collegial executive body or the board of directors are the same individuals as interdependent persons, etc.
Rules for determining the share of participation are described in Article 105.2 of the Tax Code of the Russian Federation.
This list is non-exclusive, so legal entities can be recognized by the court as affiliated and for some other reasons. For instance, tax officials most often use the following arguments to prove affiliation:
1. Use of the same IP address (unique numeric identifier of PC connected to the local network). Also, the same phone numbers and email addresses may be the signs of affiliation.
2. Accounts opened in the same bank at the same time.
3. Significant deviation from the average market prices in transactions between the companies..
4. The same employees in the companies staff schedule.
5. Use of the same property.
6. Accounting services are provided by the same third-party organization.
7. Presence of documents and seals of a third-party organization in the company's office.
It should be kept in mind, that none of the above signs is being a proof of affiliation of the legal entities. However, grouped with other evidence, they can be upheld by the court.
It is also necessary to note the cases where affiliation does not exist:
· terms of transaction are influenced by economic factors (for instance, a monopolistic position in the market);
· organization is controlled by Russia, subject of the Russian Federation or municipality.
Consequences of recognition of companies as affiliated
General consequences of recognizing a company as an affiliate are as follows:
· transactions of legal entities may be declared controlled;
· interdependence is taken into account by the tax authorities, when there is a matter of receiving unjustified tax benefits by the companies;
· restoration of depreciation premium, in case if the affiliated person has been given the fixed asset commissioned less than 5 years ago;
· in case if non-market prices are applied in transactions between affiliated entities, taxpayers can adjust the tax base and the amount of taxes themselves;
· in case where arrears exceeding 3 months are detected, the Federal Tax Service Inspectorate has the right to recover it in court.
As for controlled transactions, they normally get special attention of the tax authorities. In case if, due to manipulation of the amount of income, expenses and losses, there is a reduction in the amount of taxes, the Federal Tax Service will adjust the tax base.
Taxpayers shall submit notifications on controlled transactions at the location of the head office of the organization, in a form approved byBy Order of the Federal Tax Service of Russia dated May 7, 2018 No. MMV-7-13/249@. Moreover, it applies to both sides of transaction. Notification shall contain basic information on transaction: amount of income received and amount of expenses, subject of transaction, date and place of the agreement, etc. Notification shall be provided until May 20th of the year following the calendar year the transaction took place in. Failure to provide notification does not prevent identification of controlled transactions.
Thus, the income that was not received due to special conditions of transactions should be taken into account for tax purposes. In case is the above requirement is not complied with, the Federal Tax Service will charge taxes, penalties and fines unilaterally. In most cases, such arrears may amount to several hundred million rubles. Tax authority decision can be appealed in the arbitration court.
In the Civil Code of the Russian Federation, the term "affiliation" appeared in 2014 in a new article 53.2, and it means a relationship of association of persons. Affiliation of legal entities is also mentioned in the following regulatory legal acts: Tax Code of the Russian Federation, Federal Law "On Limited Liability Companies", Federal Law "On Joint Stock Companies", etc. In some cases, the lawmaker uses synonymous terms, such as "interdependent persons", "dependent persons", "group of companies", etc.
Affiliated entities in the Tax Code of the Russian Federation
Despite the fact that the definition of the concept in question was originally given in the law On Competition, it is currently used for taxation purposes. Thus, according to clause 1 of Article 105.1 of the Tax Code of the Russian Federation, affiliated or interdependent persons are companies that, due to the specific relations between them, can influence terms and results of transactions, as well as the economic results of their activities.
While analyzing Article 105.1 of the Tax Code of the Russian Federation, it can be concluded that interdependence can be determined based on the fact of participation in capital, implementation of management function or official subordination.
Interdependent persons are the following:
· companies directly or indirectly participating in another organization, provided that the share of such participation is at least 25%;
· organizations where the share of participation of the same person exceeds 25%;
· companies where 50% of members of the collegial executive body or the board of directors are the same individuals as interdependent persons, etc.
Rules for determining the share of participation are described in Article 105.2 of the Tax Code of the Russian Federation.
This list is non-exclusive, so legal entities can be recognized by the court as affiliated and for some other reasons. For instance, tax officials most often use the following arguments to prove affiliation:
1. Use of the same IP address (unique numeric identifier of PC connected to the local network). Also, the same phone numbers and email addresses may be the signs of affiliation.
2. Accounts opened in the same bank at the same time.
3. Significant deviation from the average market prices in transactions between the companies..
4. The same employees in the companies staff schedule.
5. Use of the same property.
6. Accounting services are provided by the same third-party organization.
7. Presence of documents and seals of a third-party organization in the company's office.
It should be kept in mind, that none of the above signs is being a proof of affiliation of the legal entities. However, grouped with other evidence, they can be upheld by the court.
It is also necessary to note the cases where affiliation does not exist:
· terms of transaction are influenced by economic factors (for instance, a monopolistic position in the market);
· organization is controlled by Russia, subject of the Russian Federation or municipality.
Consequences of recognition of companies as affiliated
General consequences of recognizing a company as an affiliate are as follows:
· transactions of legal entities may be declared controlled;
· interdependence is taken into account by the tax authorities, when there is a matter of receiving unjustified tax benefits by the companies;
· restoration of depreciation premium, in case if the affiliated person has been given the fixed asset commissioned less than 5 years ago;
· in case if non-market prices are applied in transactions between affiliated entities, taxpayers can adjust the tax base and the amount of taxes themselves;
· in case where arrears exceeding 3 months are detected, the Federal Tax Service Inspectorate has the right to recover it in court.
As for controlled transactions, they normally get special attention of the tax authorities. In case if, due to manipulation of the amount of income, expenses and losses, there is a reduction in the amount of taxes, the Federal Tax Service will adjust the tax base.
Taxpayers shall submit notifications on controlled transactions at the location of the head office of the organization, in a form approved byBy Order of the Federal Tax Service of Russia dated May 7, 2018 No. MMV-7-13/249@. Moreover, it applies to both sides of transaction. Notification shall contain basic information on transaction: amount of income received and amount of expenses, subject of transaction, date and place of the agreement, etc. Notification shall be provided until May 20th of the year following the calendar year the transaction took place in. Failure to provide notification does not prevent identification of controlled transactions.
Thus, the income that was not received due to special conditions of transactions should be taken into account for tax purposes. In case is the above requirement is not complied with, the Federal Tax Service will charge taxes, penalties and fines unilaterally. In most cases, such arrears may amount to several hundred million rubles. Tax authority decision can be appealed in the arbitration court.
