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In brief

The Russian Federal Tax Service (the “FTS“) has issued a letter clarifying the provisions of Article 54.1 of the Russian Tax Code on tax avoidance, outlining a methodology for tax inspectorates on how to identify misrepresentations of business operations, check material facts and intent to use sham or “fly-by-night” companies. It also provides taxpayers with criteria for counterparty due diligence, which should eliminate the possibility of their subsequent tax liability.

In addition, the FTS has finally admitted the need for so-called “full tax reconstruction” (a comprehensive reclassification of transactions previously applied only by the courts) and the ability to deduct actual expenses for corporate profits tax purposes and to offset input VAT on transactions with sham companies. However, this is possible only if a taxpayer discloses the actual suppliers and financial terms in such transactions.

The FTS letter in more detail

In its letter1,  the FTS provides examples of illegal misrepresentation of business operations for tax purposes and maintains that transactions need to be performed by real counterparties (not by sham companies).

The FTS urges tax inspectorates to stop using a formalistic approach and instead to analyze in aggregate all the circumstances involved in the concluding and performing of transactions, and to trace financial flows. Tax assessments are admissible only if the tax authorities come to an unambiguous conclusion that a taxpayer has engaged in tax avoidance.

The letter also revisits the concept of counterparty due diligence as a means of ruling out taxpayer guilt (negligence). Although this is a positive change, the FTS has now shifted the burden of proof to the taxpayers, including the review of their suppliers’ business reputation, their location and solvency, the availability of necessary resources and experience, and the assessment of default risks. Also, using suppliers with prices below market levels may be viewed as a conspiracy with a non-bona fide supplier.

The FTS directly confirms that inspectors may perform a tax reconstruction (recalculating the tax results of a company’s actual transactions, without the tax avoidance), but only if there is no guilt or negligence on the part of the taxpayer, and if information is disclosed on the actual suppliers and the terms of such transactions.

Given the position of the FTS, taxpayers should collect and save information on suppliers to support their due diligence. This information will be of crucial importance during a tax audit, including for subsequent successful litigation. Therefore, we recommend revising internal policies on the selection of suppliers and on the approach to documenting relevant steps and compliance procedures in light of the clarifications of the FTS.

The new position of the FTS may substantially affect tax practices on a wide range of transactions. In particular, when looking into cases of tax avoidance, inspectors are advised by the FTS to assess not only the overall economic effect of a transaction, but also its separate elements and steps (similar to the “step transaction” approach in certain foreign countries). The new approach may affect not only complex deals inside Russia, but also transactions with foreign companies, which will require companies to more thoroughly plan, justify and document their transactions.

View Russian version

1 Letter of the Russian Federal Tax Service No. БВ-4-7/[email protected], dated March 10, 2021 “On Application of Article 54.1 of the Russian Tax Code.”


Sergei Zhestkov is a partner in the Moscow office of Baker McKenzie and a licensed Russian advocate. He is experienced in advising multinational corporate and private clients on the broad scope of tax and asset protection issues, including international tax and trust planning and structuring.


Kirill Vikulov is a partner in the Tax law practice group of Baker McKenzie’s Moscow Office. He has extensive experience in advising Russian and multinational clients on a wide range of complex tax issues, including M&A deals, joint ventures, international holding and financing structures, and various financial and capital markets transactions. Prior to joining Baker McKenzie in 2007, Kirill worked as a tax consultant in the international tax structuring department of an international audit company. Kirill is also a visiting professor of international tax law at MGIMO.


Marina Tokunova is a partner in Baker McKenzie's Tax Practice Group in Moscow and a member of the Baker McKenzie Global Reorganizations Group. Marina advises Russian and multinational clients on complex tax issues, including tax advice for M&A deals, joint ventures, carve-out transactions and corporate reorganizations. Marina joined Baker McKenzie in 2007. Prior to joining the Firm, Marina had several years of experience working at EY, where she mainly focused on transactional (M&A) tax work. Marina is also a visiting professor of tax law at Moscow State University.


Maxim Kalinin serves as managing partner of Baker & McKenzie’s St. Petersburg office and head of the Mergers & Acquisitions, Corporate, Real Estate & Construction and Employment practice groups. He was named a European legal expert in Russia by European Legal Experts 2008, and was recognized by Chambers Europe "for his expertise in M&A and real estate work". He is also cited by Legal 500, Who’s Who Legal 2009, The International Who’s Who of Real Estate Lawyers 2008 and the Private Equity Handbook 2007/2008 for his corporate and real estate work