Amendments to the tax legislation create new opportunities for the efficient growth of Russian businesses.

By Dmitry Kafanov for KM.ru

“The establishment of a tax amnesty for cases involving the fragmentation of business operations paves the way for the effective development of Russian businesses and the broader utilization of legal instruments to reduce tax burdens by actively developing Russian companies,” remarked Dmitry Kafanov.

Last year, the President of the Russian Federation issued a mandate to create a regulatory mechanism to address the issue of transitioning from the simplified to the general tax regime leads to a substantial increase in tax payments. Many companies with evolving business models faced this predicament – even a minor excess over the thresholds set for the simplified tax system resulted in a significant increase in tax liabilities. This mandate was fully taken into account in the substantial amendments to the tax legislation, which came into effect on January 1, 2025.

According to Dmitry Kafanov, Inmar Legal Ltd senior partner changes regarding the simplified tax system, the legal definition of “business fragmentation,” and the establishment of a tax amnesty for cases of business fragmentation present new opportunities for the effective growth of Russian businesses. These changes encourage the lawful reduction of tax burdens through the proactive development of Russian companies.

The new tax law, on one hand, sets higher thresholds for the application of the simplified tax system – starting next year, these thresholds will increase to 450 million rubles with respect to revenue and to 200 million rubles with respect to the residual value of fixed assets.

On the other hand, the law stipulates that organizations and individual entrepreneurs utilizing the simplified tax system will now, along with other business entities, be recognized as Value Added Tax (VAT) payers. However, the legislation provides for a gradation in VAT liabilities based on annual income levels.

If a taxpayer’s annual income does not exceed 60 million rubles, they will automatically be exempt from the obligation to pay VAT. For incomes ranging from 60 million rubles to 250 million rubles per year, a reduced VAT rate of 5% may apply. For incomes between 250 million rubles and 450 million rubles per year, a reduced VAT rate of 7% is applicable. It is important to note that opting for the reduced rate is at the taxpayer’s discretion. Given that in this scenario, the taxpayer forfeits the ability to claim VAT credits, some organizations may find it more advantageous to apply the standard VAT rate while benefiting from the deductions permitted by law.

For the first time, the law defines the concept of “business fragmentation,” which involves several key substantive elements: a) the division of a singular entrepreneurial activity, b) the formal independence of entities under common control, and c) the presence of a specific objective – to reduce tax amounts by utilizing special tax regimes.