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.