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ANTI-TRANSACTION. WHICH CONTRACT WILL BE RE-QUALIFIED?

ANTI-TRANSACTION. WHICH CONTRACT WILL BE RE-QUALIFIED?

PUBLICATIONS \ 20.10.2020

It is known that tax authorities carefully study contracts concluded and executed by business during inspections. Why do inspectors do this? To re-qualify the agreement and charge additional taxes in case of identified discrepancies in the contract. Alla Kipriyanova studied the problem and made a list of tools to protect companies from illegal actions of inspectors specifically for “Raschet” magazine.

Despite the fact that the term “transaction requalification” is not among the official terms of the Tax Code, in practice this concept is widely used. The phrase refers to a legal change in the civil law status of the transaction, its meaning or the nature of the company’s activities by the tax authorities for additional tax assessment and (or) bringing to responsibility.

In turn, law status is the determination of the fundamental characteristics of the transaction, which allow to understand what rules of the Civil Code regulate the relationships that have arisen between the parties. For example, whether the transaction is a purchase and sale agreement or is subject to the rules of the Civil Code of the Russian Federation on the contract of exchange (Ruling No. 282-O of the Constitutional court of the Russian Federation dated 16/12/2000).

The tax authorities have the right to independently change the civil law status of concluded and executed contracts and to collect additional taxes in a judicial procedure (sub-clause 3, clause 2 of article 45 of the Tax Code of the Russian Federation). Apart from the tax increase, inspectors charge fines and penalties for late payment of taxes owing to incorrect status of the contract. 

Let us analyze the procedure for requalification of a transaction by inspectors on a specific example.

A purchase and sale agreement was concluded between the Russian company RosCvetMet LLC and the foreign company Spectratron System Ltd, according to which the Russian company exported aluminium alloys. RosCvetMet LLC purchased goods from its Russian contractor, Resurs LLC, which in turn purchased products from PromResurs LLC.

RosCvetMet LLC applied to the tax authority for value added tax refund on the basis of article 172 of the Tax Code. According to the norm, deductions are made on the basis of invoices issued by sellers when the taxpayer purchases goods (works, services), and documents confirming the actual payment of tax amounts when goods are imported into Russia.

As part of the fiscal check, the purchase and sale agreement was re-qualified as an agency agreement, since in fact the exporter acted as a sub-agent, the Russian contractor of the exporter – as an agent, and the foreign company – as a principal. From the analysis of the concluded contracts, the inspectors concluded that RosCvetMet LLC was not the actual owner of goods, but provided sub-agent’s activities services to Resurs LLC, and Resurs LLC provided the same services to the principal of PromResurs LLC. The tax authority’s conclusion is confirmed by the following circumstances:

  • RosCvetMet LLC did not incur any expenses associated with ensuring the execution of the transaction for the purchase of goods, as well as expenses associated with the export of goods from the customs frontiers of the Russian Federation;
  • RosCvetMet LLC did not have its own circulating assets;
  • the storages of RosCvetMet LLC , Resurs LLC, PromResurs LLC were located at the same address;
  • Resurs LLC and PromResurs LLC were represented by the same individuals during the period of concluding contracts.

Despite the fact that RosCvetMet went to court with a lawsuit for to invalidate the decision of the tax authority to hold the company liable, the courts of trial, appeal and cassation dismissed the claims, agreeing with the conclusions of the tax authority (Decision dated August 27, 2015 in case A56-66370/2014).

This example clearly demonstrates that if the tax authority, within the framework of control measures, establishes the fact that the concluded purchase and sale agreement is an agency agreement in its legal substance, it is possible to re-qualify the transaction and apply the provisions of the Tax Code corresponding to the new status.

DISPUTABLE PROCEDURE

Inspectors can collect additional taxes accrued as a result of requalification of the transaction only in a judicial procedure, the relevant rule is established in sub-clause 3 of clause 2 of article 45 of the Tax Code. The judicial procedure, in which the final decision on the correctness of the inspectors’ findings remains with the court, serves as a guarantee of compliance with business rights. This approach is one example of the practical application of the principle of separation of powers.

At the same time, the development of practice allowed judges to find exceptions to the general rule on the legal collection of additional taxes.

Thus, in the Resolution No. 16064/09 of the Presidium of the Supreme commercial (‘arbitration’) court of the Russian Federation dated June 1, 2010 states that if a transaction is determined to be imaginary or false, additional taxes can be charged undoubtedly, in extrajudicial procedure, since imaginary and false transactions are invalid regardless of whether they are recognized as such by the court.

Let me remind you that according to article 170 of the Civil Code, an imaginary transaction is made without the intention of creating the corresponding legal consequences, and a false transaction is a transaction that covers up another operation. In my opinion, an extrajudicial procedure for collecting additional taxes cannot be applied at least in a situation where the tax authority determines a transaction as a false one. By this action, the inspectors still perform the qualification of the transaction, since they determine the intentions of both parties, as well as identify the type of civil law contracts that should be in reality. Therefore, based on the determination of the status of transactions, it should be concluded that the assessment of the transaction as false is identical to the legal requalification of the transaction by the tax authority. Consequently, the collection of additional taxes should be carried out exclusively in a judicial procedure.

AT RISK

Which contracts are most often re-qualified? There are several most common situations with the risk of requalification. The main reason for the requalification of the following types of agreements is, first of all, the similarity of their legal nature and, accordingly, the possibility of choosing one type of contracts de jure to create the legal consequences of another contract de facto. I recommend paying special attention to the similarities and differences between these types of contracts in the process of agreeing on their provisions:

  • requalification of a lease-purchase contract into a property lease contract or a purchase and sale agreement with a late payment;
  • requalification of an intermediary contract into a purchase and sale agreement;
  • requalification of a loan into a deemed dividend distribution; requalification of an intermediary agreement into a services contract;
  • requalification of the supply contract into a contract of hiring work; requalification of investment contracts into a purchase and sale agreement.

Tax authorities have the right to independently change the civil law status of concluded and executed contracts and to collect additional taxes in a judicial procedure

Alla Kipriyanova

Lawyer