Consolidated group of taxpayers as a first legal form of holdings in Russia

Опубликовано: Экономика и предпринимательство, №11 2014, с.194-202,

Текст: Евневич М.А.(Evnevich Maria), Ябурова Д.В.(Yaburova Dinara)

Evnevich Maria - PhD (economics), associate professor at St. Petersburg State University

Yaburova Dinara - graduate at St. Petersburg State University

Данные для цитирования

Consolidated group of taxpayers as a first legal form of holdings in Russia
Evnevich M.A., Yaburova D.V.
Экономика и предпринимательство. 2014. № 11 (52). С. 194-202

There are many integrations of companies in Russia that in fact exist, but are not registered as such. They can present themselves as holding-like or agreement-based structures. Nevertheless, more often the state regulators view them as single firms. This allows to lower the tax burden for the whole integrated business group due to tax optimization.
The objective of this work is to examine changes in the Tax Code, identify opportunities to make the tax reporting easier and legally lower the tax burden of groups of companies, and also identify new tax hazards and risks for non-registered holding-like integrations, especially those which use offshore schemes, special tax regimes and other ways of optimizing taxes.
The main source of information is the Tax Code of the Russian Federation.

1. Historical development of integrated companies
1.1. Origin of holdings in Russia
Economic and legal concepts of holdings in Russia are evolving in parallel at different rates, but have never been united as a general concept. There are significant differences between the economic and legal concepts of holdings.
One of these differences concerns the regulation of activities of company integrations, particularly of the second stage (as classified by Boyko I.P. [1] (i.e. integrations of holding and/or concern types. Despite their long history, these integrations officially have not been duly regulated yet.
References to the concepts of holding in Russian law appeared in the 1880s. These was cartels, syndicates, trusts and corporations in the field of transport engineering, metallurgy, and in the 1890s – in the textile, sugar beet, oil and oil refining industries. After the revolution of 1917, private holdings ceased to exist due to nationalization of enterprises.
Later in the economy of the Soviet Union, the average control level was restored, and hence certain features of holdings can be traced in Soviet state enterprises [2]. During the planned economy in the Soviet Union there existed trade-industrial complexes and other associations in particular industry branches, representing the meso-level of regulation in the economy. The structure of participants in such an association was clearly established, lines of authority were secured, and the organizational structure was transparent both for the state and for the heads of companies participating in such association. For ordinary workers and the public, there were no mysteries either.

1.2. Development of holdings in contemporary Russia
In today’s Russia, there are a many associations of enterprises, and their number has only increased. They cannot even be properly counted, due to the fact that associations are mostly not registered from a legal point of view. Hundreds of thousands of large, small and medium associations existing in Russia today and representing a holding (second stage) and contract-based (first stage) structures, decide for themselves if they are holdings or not. The presence or absence of unified economic management is determined by the policy of the stakeholders of these associations and at their sole discretion. For the general public and employees, the modern-day holdings can present themselves as single firms or as unrelated companies. The state sees most of these associations as separate legal entities; and this usually makes it possible to reduce the total tax burden on the group through tax optimization, but for managers and owners the fact of consolidated management is no secret.
Several attempts to establish Russian legal regulation of enterprise associations have been made. Stages of contemporary post-Soviet legal regulation of holdings can be viewed in Table 1.

Table 1. Economic and legal evolution of holdings in the post-Soviet period

Stages of evolution of enterprise associations Legal act  Period
Creation of concerns and conglomerates during privatization and subsequent redistribution of property The law on privatization. Mention of a "holding company." Provisional Regulation on holding companies, approved by Presidential Decree No.1392 of November 16, 1992 1991-1992
Emergence and popularization of financial and industrial groups Presidential Decree No.2096 “On financial and industrial groups” and Law No.190-FZ “On financial and industrial groups” dated November 30, 1995 1993-1995
Increase in number of holdings and reduction in their size. Emergence of holdings consisting of small enterprises to optimize tax and financial flows Two attempts to enact a law on holding companies. After corrections it has not been enacted. 1999-2002
Specialization and enlargement of holdings, transformation of concerns into conglomerates, growth of state corporations Price regulation by Articles 20 and 40 of the Tax Code 1999-2011
Emergence of the form of holding – the concept of consolidated taxpayer Interdependent parties and consolidated group (Section V.1 of the Tax Code) 2012-н/в

Creation of concerns and conglomerates during privatization and subsequent redistribution of property. In the classic sense of the term, private holding companies were developed in Russia only in the 1980s and 90s [3] when there was large-scale privatization of state enterprises.
The motives for unification of enterprises into larger structures were also such factors as the need for restructuring production and the increasing transaction costs as a result of changes in the nature of interaction between enterprises in a new economic reality.
Legally, holdings have not been clearly defined, but were mentioned in legal acts, in particular, the concept of a holding company was used in the Law of the Russian Soviet Republic (the ‘RSFSR’) of July 3, 1991 “On privatization of state and municipal enterprises in the Russian Federation”: "On the basis of enterprises included in an association (concern) ... to promote the cooperation of allied enterprises, holding companies can be established" (Paragraph 4 Article 8).
Definition of a holding company was given only in the "Provisional regulations on holding companies created by transformation of state enterprises into joint stock companies," approved by Presidential Decree No.1392 of November 16, 1992. According to the Provisional Regulations, "A holding company is an enterprise, regardless of its legal form, whose assets include controlling stakes in other companies" (Paragraph 1.1). Moreover, the concept “controlling stake” meant “any form of participation in the capital of a company that provides an unconditional right to accept or reject certain decisions at a general meeting of its members (shareholders, stakeholders) and its management bodies.” In other words, the interpretation of a holding in this Decree was not completely identical with the economic concept of holdings. The holding described in the Decree could be based on both strong and weak asset connections that do not give full control and provide only a right of veto. The unconditional right to adopt certain decisions is provided with a share over 50%, and the right to reject – with a blocking share over 25%.

Emergence and popularization of financial and industrial groups (FIGs). In 1993 in Russia, the disintegration of large industrial complexes gave rise to certain problems such as low investment activity, insolvency and lack of working capital. And there was a need for interbranch organizational and economic structures that would be capable of servicing their own financial needs. The concept of financial and industrial groups (FIGs) that would include a bank was created for such structures. On December 5, 1993 the Presidential Decree No.2096 "On financial and industrial groups and the procedure for their creation," was issued, and two years later – the relevant Federal law No.190-FZ "On financial and industrial groups” dated 30.11.1995.
The law gave the following definition: "A financial and industrial groups (FIG) is a group of legal entities acting as one main and several subsidiary companies, or those that completely or partially combine their tangible and intangible assets based on an agreement on the establishment of an FIG for the purpose of technological or economic integration ..." [4]. Thus, the FIG in the interpretation of the law could include associations of both the first and the second stage (in the classification of I.P. Boyko).
Companies included in an FIG generally do not have real economic preconditions for the integration, rather they were attracted by benefits of a financial nature. Subsequently, the law "On financial and industrial groups" was cancelled in 2007.

Increase of the number of holdings and reduction of their size. Emergence of holdings consisting of small enterprises to optimize tax and financial flows. By the end of the 1990s, the number of holdings had increased, yet they became smaller. Accordingly, the next attempt to legally regulate activities of commercial associations was development of the Law on holdings that was never adopted, but was actively discussed. The purpose of the law was to create legal instruments to formalize integrated structures. The bill included a definition of a holding, their legal status, rights and duties of their members, the procedure and methods of creation, their reorganization and liquidation, etc. Holdings, according to the bill, were subject to state registration, resulting in a certificate being issued (Draft Federal Law “On holdings”).
Taxation was an important aspect. According to the bill, the holding would pay consolidated taxes, as in many developed countries such as Germany, Switzerland, England, and so on [5].
Although the state would be expected to be the party most interested in the adoption of the law on holding companies, the law in the end was not adopted. After numerous amendments and reworks, the Law on holding was excluded from consideration in 2002, but the idea of a consolidated group of taxpayers has found a use 10 years later.
Specialization and enlargement of holdings, transformation of concerns into conglomerates, growth of state corporations. Until 2012, when amendments to the Tax Code related to controlled transactions between interdependent parties and consolidated groups of taxpayers became effective, the "Provisional regulations on holding companies" of 1992 was the only document regulating aspects of activities of groups of companies. In addition, the question of interdependent parties and transactions between them was raised in Part I of the Tax Code, but has not been resolved clearly enough (Articles 20 and 40 of the Tax Code). In terms of the absence of clear central regulation of holding companies, control of their activity in Russia seems to be falling behind.

 2. New laws on holdings
2.1. Changes in the Tax Code New regulations in the Russian Tax Code
Taking into account that the main area where the absence of formal holdings influences economic interests of the state is taxation, it is no wonder that the first serious attempts to regulate the relations of private enterprises – legal entities within the holding – have been made specifically in the tax laws. Such active tax regulation may lead to the realization of the interests of the state such as collection of taxes in the amount ensuring the minimum required for government consumption and efficient social spending, stabilization, GDP growth, etc. [6].
A new section V.1 of Part I of the Tax Code “Interdependent entities. General provisions on pricing and taxation. Tax control. Agreement on pricing” was adopted in 2001 and took effect in 2012.
Section V.1 clarifies the concept of "interdependent parties," introduces the well-forgotten concept of "consolidated group of taxpayers" and obliges both strictly subordinated holdings and diluted groups of companies, based on informal and personal relationships, to jointly control the amount of paid taxes, in particular, profit tax. This innovation sets new rules for control over transactions between interdependent parties and introduces the concept of "controlled and similar transactions." These measures should allow tax authorities to monitor interdependent taxpayers, i.e. those that are part of a holding in the economic sense of the word, to prevent their use of non-market prices in order to unfairly optimize the tax burden and to fine them. Thus, some innovations of different degree of significance have appeared in the Tax Code.
Section V.1 Chapter 14.1 redefines the concept of interdependent parties. Previously, it was determined by Article 20 of the Tax Code that interdependent parties were entities whose relations can affect the conditions or economic results of their activities or the activities of entities they represent. Interdependent parties are organizations which
• directly and/or indirectly participate in the other organization, and the share of such participation is over 25%,
• individuals subordinated to one another by official position,
• and individuals related through marriage, relatives, adoptive relations and guardian-ward relations.

Individuals are deemed interdependent for tax purposes if the relations between the parties can influence conditions and/or results of transactions made by these entities and/or economic results of activities of these entities or entities they represent.
Compared with the version that was in effect until 2011, the new version’s grounds for individuals and organizations to be deemed interdependent are complicated and expanded.
Previously, the concept of interdependence was assigned only by Article 20, and now the entire Chapter 14.1 is dedicated to the concept. Comparing provisions of Article 20 and new Article 105.1 of the Tax Code, the following insignificant changes can be found (see Table 2, column 1):
• If according to Article 20 to be interdependent the share of direct or indirect participation of one organization in the other needed to be over 20%, now according to Article 105.1 it needs to be over 25%.
• Article 105.1 clearly defines the persons who are related, to avoid disputes: an individual, his or her spouse, parents (including adoptive parents), children (including adopted children), full and half brothers and sisters, guardian and ward.

The third ground – subordination of individuals by official position – remained unchanged. Moreover, new grounds for interdependence which did not appear in the legislation earlier were set (see Table 2, column 1).

Table 2. New grounds for parties to be deemed interdependent

Provision from previous version moved to Chapter 14.1  New provision: absent in Article 20, stated only in Chapter 14.1
Individuals when one is subordinated to the other by official position individual and organization if such individual is directly and/or indirectly involved in such organization and the share of such participation is over 25%
related individuals (clearly defined in the new version) organizations if the same entity is involved in these organizations, and the share of such participation is over 25%
organizations when the share of direct or indirect participation of one organization in the other is over 20% (Article 20) or 25% (Section V.1) organization and individual which has the power to appoint/elect the sole executive body of the organization, or to appoint/elect at least 50% of the collegial executive body (board of directors) of the organization
  organizations where the sole executive bodies or board of directors are appointed or elected by decision of one and the same individual;
  organizations where over 50% of the board of directors is comprised of the same individuals
  organization and the person exercising powers of the sole executive body
  organizations where the powers of the sole executive body are exercised by the same person
  organizations and individuals in the event the share of direct participation of every previous person in each subsequent organization of more than 50%

As pertains to proprietary stake holding, interdependent parties are
• organization and individual directly or indirectly participating in such organization,
• or organizations where the same individual directly or indirectly participates and the share of such participation is over 25%.
• As well as organizations and/or individuals in the event the share of direct participation of every previous person in each subsequent organization of more than 50%.

As regards management relations, interdependent parties are an organization and individual who has the power to appoint/elect the sole executive body of the organization, or to appoint/elect at least 50% of the collegial executive body (the board of directors), or who carries out the functions of the sole executive body of the organization. Interdependent parties are also organizations where over 50% of the collegial executive body (board of directors) is comprised of the same individuals, or where these management bodies are appointed or elected by decision of one and the same person, or where the powers of the sole executive body are exercised by the same person. New grounds for parties to be deemed interdependent are presented in Table 2.
If earlier due to the vagueness of some statements tax authorities had to establish interdependence (by juridical means), now, after clarification of the criteria of interdependence, tax authorities can immediately determine if organizations fall under tax control "as a holding" or not.
Thus, the provisions of Article 105.2, in contrast to Article 20, provide the definition of direct and indirect participation of one organization in the other, and also establish the procedure of determining the share of indirect participation – by multiplying shares, including those of less than 50% (see Figure 1). Thus, not only rigid relations, assuming full control, fall under the regulation, but also rather weak proprietary relations, amounting in essence to only a blocking stake.

Figure.1 Scheme of indirect participation for interdependent parties

Another new rule states that if when multiplying the shareholding stakes, the ultimate shareholding will be less than 25%, but at every level the shareholding will be over 50%, that is, each proprietary relation provides full control, the persons will still be deemed interdependent. This eliminates the ability to avoid interdependence by simply lengthening the chain of ownership of the company (see Figure 2).

Figure.2 Scheme of considering relationships of full control

It should also be noted that the concept of interdependent parties used in the new section of the Tax Code is substantially broader than that of the formal holding to which economists are accustomed. The state, represented by tax authorities, is interested not only in strictly structured pyramidal holdings, but also in diluted ones. In addition, the Tax Code takes into account not only relations of participation between companies, but also different sorts of contractual and informal relationships, personal connections of owners and managers of these companies, and labor relations through subordination by official position (see Figure 3), by which a weak formal dependence is compensated [7] (see Figure 3).

Figure.3 Interdependent parties considering personal, family and labor relations

Moreover, as previously, if there are no direct references to interdependence, individuals can be recognized as being interdependent by court.
2.2. Tax optimization on holding-like groups of companies
Formalization of the concept of interdependent parties was carried out to deprive taxpayers of opportunities to use tax optimization, particularly as regards profit tax, using transfer pricing and offshore schemes.
Interdependent parties often manipulate the prices in transactions among themselves, thus minimizing their tax burden. Considering that parties are interdependent, i.e. represent in fact a holding company, they are interested not in maximizing profit of a particular company, but the total benefit for the whole group. Therefore, a transaction may be under- or overpriced, depending on which company involved in this transaction is more favorable for accumulating profits in the current fiscal situation, in other words, where the tax regime is more favorable (see Figure 4).

Figure.4 Possibility of reducing the total profit tax using different tax rates

The difference in the profit tax rates can occur in the following cases:
1. One of the parties to a transaction uses a special tax regime (single tax on imputed income or single agricultural tax), thereby, it is not a payer of profit tax and its total tax burden is lower than that of the other party to the transaction.
2. One of the parties to a transaction is exempt from profit tax as a participant of Skolkovo.
3. One of the parties to a transaction is included in the "privileged category" because it deals with production of consumer goods, medicine, medical equipment, etc. [8]
4. One of the parties to a transaction is registered in a special economic zone where benefits are provided in terms of profit tax, property tax, transport and land tax (Tax Code Part 2, Article 284)
5. One of the parties to a transaction is registered in a Russian region where there are benefits on profit tax. Russian regions may decrease the profit tax rate to a certain extent for certain types of taxpayers as an incentive for various industries and the investment process as a whole
Russian regions have the right to lower the tax rate only to a certain extent [9] (by a maximum of 4.5%, where the regional portion of the tax will be 13.5% and the minimum profit tax will hence be 15.5% instead of the regular rate of 20%.
6. One of the parties to a transaction is registered in an offshore zone (or simply in the country with a lower level of tax rates).

2.3.Tax control of holding-like integrations
Accordingly, the state has set a goal to avoid reducing the amount of tax for the whole group of companies if only one participant has the right to use such benefit. For these purposes, different mechanisms of control over market prices described in the new Section V.1 of the Tax Code are applied. The tax authority monitors the prices for transactions between interdependent parties, making sure they do not deviate from the market price by more than 20%. Accordingly, major transactions between interdependent parties under the new legislation are deemed to be controlled. And tax authorities immediately begin to pay special attention to such transactions, use special procedures of tax control and higher fines.
A tax audit for controlled transactions can last 2 years, whereas a usual field audit cannot exceed 1 year; moreover, this audit is conducted not by the territorial tax office, but by the Federal Tax Service. Such a long tax audit adversely affects the quality of work of financial and accounting personnel, and has many other negative consequences. Based on the results of the tax audit, the tax authority has a right to recognize prices as not being in line with the market and to recalculate them using their own methods; recalculate the sales proceeds; charge additional taxes in accordance with the adjusted income (usually an increase) that were underpaid by the taxpayer because of the use of non-market prices; and then charge fines and penalties. Financial losses from such recalculations can be very significant.
The changes in legislation not only allow better control over holdings, but are also aimed at decreasing the use of offshore schemes. Firstly, transactions with offshore companies and other parties are equated to interdependent ones even if there are no grounds to deem the offshore company as being interdependent with other participants of the transaction. This eliminates the possibility to "conceal a holding," increasing the length of the supply chain or making a deal with a foreign "technical" company.
Secondly, the lower boundary for deeming transactions as being controlled for offshore companies is significantly lower than for the others. There are limits for controlled transactions between regular interdependent parties: in 2012 these were transactions with a total amount from 3 bln RUB, in 2013 – from 2 bln RUB, in 2014 and subsequent years – from 1 bln RUB. And if the transaction is executed with a company located in an offshore zone, special tax control measures are taken starting from 60 mln RUB, that is, with the amount that is 15-50 times smaller.
In view of these limitations, we can conclude that measures to control inner prices are being taken only for large-scale holdings. Small and medium-sized business, in general, is free from such special tax control over holding prices, unless it uses offshore schemes. And if a medium-sized company took up tax optimization using offshore tax havens, it should be prepared for the fact that control over the company will be ten times greater.
These measures accompany the anti-offshore policy developed by Ministry of Finance at the beginning of 2014 [10]. Russian government is concerned that profit of Russian companies is “leaking” abroad because a number of companies are owned not by individuals, but by organizations that are tax residents of other countries. Certainly, no less damage to the economy is caused when an offshore company is an intermediary in the transaction and the profit on it accumulates in a simple "natural" way without transfer through dividends. The scale of the problem becomes clear when corporations with state participation begin to also fear ‘deoffshorization,’ though a simple taxpayer would never suspect them of using tax schemes. For example, “The Russian Railways included risks on deoffshorization into the Eurobond prospectus, Interfax reports. Anti-offshore policy of the Russian state may adversely affect the Group, its financial condition and results of operations, the prospectus states” [11].

2.4. Opportunities for tax optimization: consolidated group of taxpayers and agreement on pricing
For strictly subordinated megacorporations in the new version of the Tax Code, a special registration procedure is developed. Groups of companies where one company holds over 90% of the other, can register as a consolidated group of taxpayers (CGT), if
• total amount of income from the sale of goods, works and services for the previous year is 100 bln RUB or greater;
• total value of assets at the end of the previous year is 300 bln RUB or greater
• total amount of taxes paid for the previous year, including VAT, excise tax, profit tax and mining and natural resource tax is 10 bln RUB or greater.
According to Article 25.1 of the Tax Code, a CGT is a voluntary union of organizations that pay profit tax on the basis of a contract, for the calculation and payment of profit tax, taking into account the total financial result of the economic activities of these taxpayers. In the Consolidated group, a participant in charge is assigned, and he must calculate and pay the tax on the profit according to the consolidated books. Such form of existence of associations can already be deemed almost a completely formalized holding. The participant in charge receives funds, including advances, penalties and fines from other participants. The payment of tax to the state budget is performed at the location of the participant in charge, and the tax rate is applied in accordance with the location of the participant. Organizations that have certain benefits or that are exempt from the profit tax (residents of special zones, organizations using special tax regimes, etc.), (Tax Code Part 1) cannot be participants of a СGT. Naturally, price control in such associations is not conducted by the tax authorities.
Another possibility to avoid increased attention of the tax authorities is to conclude an agreement on pricing (Chapter 14.6 of the Tax Code). This method of price regulation has been in effect in Russia only since 2012, whereas in Europe and the United States such agreements have been used for a long time [12]. When entering into the agreement on price regulation, the taxpayer’s methodology for determining the market price is predefined (Article 105.19). If such agreement is concluded, the price may be adjusted by the tax authority only if the agreement is breached. A.S. Baev, a former member of the board of the Ministry of Economic Development and Trade, believes that conducting the agreement on price is rational when comparison of the price of the transaction with the market price is not possible due to the unique scheme of the taxpayer and when studying pricing in different countries [13]. Concluding the agreement on pricing is also a method available only for large-scale companies because of the high cost: there is a state duty of 1.5 mln RUB for considering the application.

3. Significance of new methods of tax control for holdings of different types
3.1. Benefits of technologically linked holdings
Despite the potential difficulties, organizations are striving to unite, and that is caused by economic, financial and other reasons. Russian integrated business groups (IBGs), created to achieve economic benefits, are similar to Western ones, and an IBGs created for tax and financial optimization and strengthening control over property, are significantly different from Western ones [14].
The most important economic reason is the synergetic effect achieved by forming material and non-material economic interdependences and accumulation of financial and other resources. Business integration allows reducing costs due to scale, by reducing fixed costs of R&D, marketing, etc., receiving bulk discounts from suppliers because of large volume of orders, optimization and cost reduction of certain business processes, combining human resources, etc.
Financial reasons, first of all, are in gaining benefits from joint tax planning and financial management, using financial and tax schemes. Many Russian associations make use of specifically these aspects of the tax burden management, including by price mechanisms. Benefits from such a mechanism is an important incentive to keep companies in the form of groups of companies.
Introducing new provisions to the Tax Code on tax control over operations within a holding company has lowered the effectiveness of such techniques for minimizing the tax burden. Accordingly, it can be expected that the share of holdings created not for financial and tax purposes, but rather for economic and technological ones, will increase.

3.2. Features of tax control of formalized and non-formalized holdings. Prospects of registering consolidated groups of taxpayers
Whether a holding is formalized or not, it still falls under control of the state. The difference for the holding is whether this control is voluntary or not. Moreover, formal holdings are encouraged by the state, and informal ones acquire new problems and difficulties.
After the inclusion of new provisions on interdependent parties to the Tax Code, there are two main ways to formalize a holding. The first formal legal way implies creation of a legally established CGT, and the participant in charge, selected and prescribed in the contract, must provide unified reporting for the profit tax, where the financial results of companies are combined (Tax Code Part 1, Article 25.1)
Creation of a CGT is voluntary and offers certain advantages to the companies included in it and to its owner(s):
1. Reduction of the tax base for profit tax purposes. Payment of profit tax is done jointly by all the participants, so the base is defined as the arithmetic sum of incomes of all members of the group, less the arithmetic sum of all expenses of the members (Tax Code Part 2, Article 321.2). If some of them have profit, and others a loss, the amounts of profit tax are jointly offset and the overall tax burden is reduced. In addition, the tax base of a future period may be reduced by the cumulative loss of the CGT in the current period.
2. Tax benefits. There are profit tax benefits in a number of Russian regions. In the Leningrad Region, CGTs pay 16% profit tax (14% regional and 2% federal) instead of 20% (18% regional and 2% federal).
3. Control measures for market prices are not taken for transactions within the CGT. Tax authorities conduct general audits, but do not regulate transactions within the group. Thus, holdings independently determine the price for internal transactions in accordance with their own purposes and without regard for the regulator.

Therefore, taxpayers are quite interested in forming a CGT, but not everyone can afford it. Among the significant constraints are, of course, the very rigid restrictions: property qualification, amount of revenue, substantial degree of relationships (share of 90%). While the law works only in respect to the largest companies, its importance is diminished. M. Mishustin (Russian statesman, Class I State Counselor of the Russian Federation of, Doctor of Economics), said that prior to the law 227-FZ on transfer pricing working at full capacity (the law became effective for not just large corporations only since 2013), we could not speak about legal formation of holdings [15]. However, the government may soften formal requirements in the future, which will lead to mass formalization of holdings in the country.
Creation of a CGT is voluntary and offers certain advantages to included companies and its owner(s). Firstly, reduction of the profit tax base due to mutual offsetting of the profits and losses. Secondly, direct benefits in form of decreased profit tax rates. Thirdly, the external tax administration is simplified.
1. Adding profits and losses: the tax base is defined as the arithmetic sum of incomes of all members of the group, less the arithmetic sum of all expenses of the members (Clause 5 Article 321.2). If one of them has a profit, while others loss, the aggregate tax burden is reduced. Also, a CTG’s loss, unlike that of ordinary taxpayers, may be carried forward to reduce the tax base in the next period. Application of this method of tax optimization is confirmed in the complaints of Perm Region Administration about reduction of the burden on profit tax due to the introduction of CGTs: it is argued that Perm Region lost over 3 billion rubles due to CTGs: “In the Perm Region there were 29 participants in 2012 included in 6 consolidated groups of taxpayers, and in 2013 this number increased to 33 participants of 8 consolidated groups of taxpayers. Group members add up profits and losses. This leads to reducing the overall tax amount” [16].
2. Tax benefits. There are benefits of profit tax in a number of Russian regions. In the Leningrad Region CGTs pay 16% profit tax (14% regional and 2% federal) instead of 20% (18% regional and 2% federal). Many regions in the first 3 quarters of 2013 complained that they lost in profit taxes because of the CGT benefits. Although calculations made by the Federal Tax Service speak only of a slight decrease, "Operation of the system of consolidated groups of taxpayers (CGTs) has led to an increase of revenues from profit tax of organizations in 42 regions (51% of the subjects of the Russian Federation), decrease of revenues in 34 regions (41% of the subjects of the Russian Federation) and zero revenue acquisition for 7 Russian subjects" [17]. According to the Federal Tax Service, the overall decline of revenues to consolidated budgets of subjects of the Russian Federation as a result of the creation of CGTs was 11 billion rubles in the first 9 months of 2013 and 8 billion rubles in 2012. At this stage, is not possible to clearly evaluate for whom СGTs are more profitable – for the state or for business, due to the highly differing information: some regions benefited from the introduction of CGTs, and others lost significantly.
3. Control measures for market prices are not applied for transactions within the CGT. Also CGTs are not obliged to report controlled transactions as required for informal holdings (transactions within the CGT are automatically excluded from the list of controlled ones because no matter how the price of the transaction changes, the amount of profit tax will remain the same).

Thus, taxpayers are quite interested in forming CGTs, but not everyone can afford it. Among the significant constraints are, of course, the very rigid restrictions: property qualification, amount of revenue, substantial degree of relationships (share of 90%). While the law works only in respect to the largest companies, its importance is diminished. A number of corporations such as Gazprom, Rosneft, Surgutneftegas and several other major companies in the oil and gas sector and the energy sector have announced the creation of consolidated groups. There have not been any announcements about creation of CGTs in other sectors, perhaps due to their smaller scale. However, the government may soften formal requirements in the future, which will lead to mass formalization of holdings in the country.
The second way of forming a holding is non-formalized and at the same time compulsory. On the one hand, the holding is not registered, and on the other hand, there is a group of interdependent parties and companies whose inner transactions fall under special tax control. This path is compulsory: if a group has signs of interdependence in terms of the Tax Code, they are deemed to be something of a "latent" holding. In other words, absence of a formalized holding with consolidated statements, while there is the presence of stable inner relations, gives the government the right to check intra-group transactions as to the amounts and prices, as well as to compare and control the levels of profitability in the different companies of one group. Such a "compulsory" holding, in contrast to the CGT, has no restrictions as to the amounts of revenue, assets and paid taxes; it is enough to have signs of interdependence as described in the Tax Code.
An informal holding has an additional reporting burden: all holding participants are required to submit to the tax authorities information about all committed controlled (large) transactions (Tax Code Part 1, article 105.16). The only way to avoid constant monitoring of the tax authorities is to enter into an agreement on pricing. However, this procedure is "not for everyone," since the state duty for registration of the agreement on pricing is 1.5 mln RUB.

Key conclusions:

1. Changes in regulation of holdings are aimed at curbing offshore schemes. Holding-like groups of companies will face additional tax risks as interdependent parties.
2. Legal concept of holding-like companies has been extended. Before Chapter V.1 of the Tax Code was adopted, only subordinated holdings fell under the state control, and thereafter both distributed and informal ones were affected, i.e. property and financial belonging to a holding company is supplemented with belonging on the basis of management and personal relations.
3. Opportunities of tax optimization for informal holdings (interdependent parties) are decreasing. Associations that use the form of a holding not for economic benefit, but rather for tax optimization, with the adoption of a new section of the Tax Code fall under strict tax regulation. That is, the state is making effort to encourage holding companies which are established to minimize the tax burden and to "complicate their life."
4. The state encourages companies to establish holdings – consolidated groups of taxpayers, but restrictions on the size of CGTs deprive most companies of the opportunity to become one.
In the future, if the restrictions are relaxed, an increase in the number of formalized holdings can be expected.
5. Some registered CGTs showed successful optimization of profit tax in 2013 due to mutual settlements as regards profits and losses of different participants of the group of one CGT and due to possible tax benefits offered by the regions.

List of references

1. Boyko I.P. (2003), ‘Lecture course (Economics and entrepreneurship)’. St. Petersburg, St. Petersburg State University
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