Fly-by-night companies fine off

newsletter 06/07/2017

For the first time in Russia, the Unified State Register of Legal Entities (EGRUL) is being “cleaned” from the statistical companies. The Federal Tax Service (FTS) began to implement this program in 2016, and following the results of 2017, striking the fly-by-night companies off the register will be continued. On 01.06.2016 there were 4,8 mln active organizations, and on 01.06.2017 the number reduced by 5,7% and amounted to 4,5 mln. In relative figures, most of all legal entities decreased in Murmansk region – 14,8%, Chelyabinsk region – 13,8% and Moscow – 11,8% (see Table 1).

Such a rapid reduction is not a result of negative processes in economy: according to preliminary estimates, growth of the GDP of Russia in Q1 2017 is 0,5%; key industries – trade and construction – are recovering, as well as industrial production is increasing. The main reason of reduction is to be sought in purposive exclusion of fly-by-night companies from EGRUL.

Table 1. Regions with the largest relative decrease in the number of legal entities
Region Number of active legal entities on 01.06.2016 Number of active legal entities on 01.06.2017 Reduction for the year, %
1 Murmansk region 21 187 18 047 -14,8
2 Chelyabinsk region 113 031 97 427 -13,8
3 Moscow 1 090 657 961 590 -11,8
4 Novosibirsk region 137 810 122 294 -11,3
5 The Republic of Kalmykia 4 921 4 388 -10,8
6 Khanty-Mansi autonomous district - Yugra 40 263 36 314 -9,8
7 Tomsk region 35 004 31 572 -9,8
8 Oryol region 15 707 14 171 -9,8
9 The Republic of Mari El 15 482 14 131 -8,7
10 Volgograd region 51 307 46 830 -8,7
  The Russian Federation 4 781 592 4 510 689 -5,7

As explained by Dmitry Grigorenko, deputy head of the FTS, taxmen remove companies, which do not provide any financial reports for a year and beyond and have no account activity. According to various estimates there are 600-700 th fly-by-night companies in Russia; that is 13-16% of total number. That is to say one in ten companies could be statistical, that is why verification of potential partners before closing of deals is crucial for economic security provision.

Several years ago the situation was much worse: in 2011 there were about 1,8 fly-by-night companies or 40% of total number, that is 2,6 times more than now. It is obvious that strike against dubious organizations works. There is also a tendency of shorten the life of such companies: if earlier they could carry out illegal operations for years, now, as a rule, the company is abandoned after 1-2 "transactions" and it no longer shows any signs of activity.

The need for information is especially increased when cooperation with a new counterparty is planned. To reduce the risk of financial loss and involvement in a fraudulent scheme, it is necessary to check all possible information about a potential partner. If the FTS discovers that the counterparty is a fly-by-night company, the transaction with it will be deemed to be directed at obtaining an unreasonable tax benefit. In this case, the exclusion of transaction costs from the income tax base and referring to VAT offset are recognized illegal. As a result, if there is a fact of cooperation with a fly-by-night company, additional taxes will be charged and a claim for payment of a fine and penalty will be raised.

The Tax Service is constantly improving the regulatory framework for struggle against fictitious companies and identifying their signs. Here are the most important documents: Order No. MM-3-06/333@ of the Federal Tax Service of 30 May 2007 and Order No. MMV-7-14/72@ of the Federal Tax Service of 11 February 2016, which recorded signs of a fly-by-night company and measures for their detection. Analysis of the Russian arbitration practice found the most common signs (see Picture 1).

Picture 1. Signs of a fly-by-night company most often found in the materials of arbitration cases Picture 1. Signs of a fly-by-night company most often found in the materials of arbitration cases

Extract from EGRUL confirms the fact of state registration of the company in accordance with the established procedure, but it cannot automatically be sufficient confirmation of "due diligence and caution" of the taxpayer when choosing a partner for cooperation. Further verification through the professional information system is necessary.

Globas users have an opportunity to quickly verify the counterparties using Reliability index, which evaluates the negative signs and takes into account the recommendations of the FTS on identification of fly-by-night companies.

According to Globas, currently the number of companies with negative signs is 10-13% of the entire amount of organizations, which corresponds to official statistics. Reliability index is calculated for all Russian enterprises of the real economy.