On increased risk of taxes underpaid by companies being recovered from guilty individuals

08.09.2015

Goltsblat BLP advises of an increased risk of taxes underpaid by companies being recovered from guilty individuals.

In its Ruling No. 81-КГ14-19 on the Ivkin case of 27 January 2015, the Civil Cases Board of the Supreme Court of the Russian Federation secured possible application of a concept stipulating personal liability of an organisation's CEO to the Russian budget.

In essence, this means that an organisation's tax arrears might be recovered from an individual found guilty of a crime specified by Article 199 of the Criminal Code of the Russian Federation (evasion of taxes payable by an organisation) as damage caused to the state by this crime.

In the above case, following consideration of the appeal, the Supreme Court of the Russian Federation (the “Russian Supreme Court”) quashed judicial acts that had refused damages recovery by the tax authority and remanded the case to the first instance court for reconsideration, further noting that such recovery was allowed if there was no other real possibility of compensating for the damage caused.

Upon reconsideration of the case (No. 2-979/2015), the Leninsky District Court of Kemerovo recovered damages in the form of value-added tax arrears from the organisation's CEO by its decision of 16 June 2015.

Previously, there had been two diametrically opposite trends in the relevant judicial practice, with some courts holding that recovery from individuals was impossible in such situations since individuals were not subject to the relevant taxes and others confirming the lawful nature of recovery through compensation for damage caused by a crime.

The Russian Supreme Court has, therefore, dotted all the “i”s in such disputes by confirming that taxes unpaid by companies may be recovered from individuals (see also Cassational Ruling of the Russian Supreme Court of 30 July 2014 No. 3-УДп14-2 on the Zagursky case).

Formalisation of this approach at Russian Supreme Court level might result in more criminal proceedings for tax offences and significantly more relevant lawsuits against guilty individuals, not only CEOs and chief accountants but also other persons found guilty by the court of evading taxes payable by an organisation, such as CFOs and business owners who made relevant decisions.

Please also note that, in practice, there are cases when courts have actually issued conclusions confirming that organisations' outstanding amounts may be recovered twice: from the organisations themselves (as tax arrears) and from individuals guilty of relevant crimes (as compensation for damage caused by such crimes).

We recommend being wary of the risk of adverse circumstances in terms of personal material liability, as well as criminal-law prosecution, and structuring a legal position for defending both the business as a whole and its management from the very beginning of a tax or other audit of the company's tax liabilities.

Should you have any questions or require additional information, please contact Tax Crime Defence Group advocates:

  • Alexander Erasov, Head of Tax Dispute Resolution Group, Tax Practice, +7 495 287 44 44, Alexander.Erasov@gblplaw.com;
  • Anton Gusev, Senior Associate, White Collar Crime Defence, +7 495 287 44 44, Anton.Gusev@gblplaw.com.
You may also contact the Partners heading the relevant Practices.

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