Tax violations: crime and punishment
The judicial practice regarding the liability of the head of a taxpayer company for tax offenses.
Marina Mungalova
Marina Mungalova, a lawyer at INTELLECT, examines current judicial approaches to the issue of holding executives liable for failure to submit accurate financial statements to tax authorities, delayed tax payments, or the inability to fully satisfy claims by tax authorities, among other issues.
The general principle determining the relationship between the liability of a taxpayer organization and its executive is established in Paragraph 4 of Article 108 of the Tax Code of the Russian Federation (RF TC): holding an organization liable for committing a tax offense does not exempt its officials from administrative, criminal, or other liability under Russian laws if the relevant grounds exist.
Accordingly, the head of a taxpayer organization may be held civilly, administratively, or criminally liable, as well as bear subsidiary liability within bankruptcy proceedings.
Subsidiary liability of the head of a taxpayer organization in bankruptcy proceedings
According to the Federal Resource Statistical Bulletin on Bankruptcy (2023 results), the percentage of claims for subsidiary liability being granted has been steadily increasing. In 2022, 47% of such claims were satisfied, while in 2023, this figure rose to 51%. The number of individuals held subsidiarily liable also increased: 5,132 in 2022 and 5,275 in 2023.
Within the framework of subsidiary liability, the head of the organization is considered a person controlling the debtor (Article 61.10, Paragraph 1 of the Bankruptcy Law) and is liable for the debtor's obligations if full satisfaction of creditors' claims became impossible due to their actions or omissions (Article 61.11, Paragraph 1 of the Bankruptcy Law).
When reviewing applications to hold the debtor's head subsidiarily liable due to the inability to fully satisfy claims by the tax authority (Article 61.11 of the Bankruptcy Law), courts examine the following circumstances:
- Evidence that the individual acted as the head of the debtor during the period when grounds for bankruptcy arose (e.g., entering into transactions with «technical companies»).
- Elements of the offense: unlawful action (or inaction) by the head, adverse financial consequences for the debtor organization, a causal link between the act and its consequences, and the fault of the head. In other words, the applicant must prove that the tax offense caused the organization's bankruptcy (e.g., Ruling of the Moscow District Arbitration Court dated December 16, 2022, in Case No.А40-117922/2016). Notably, penalties for tax offenses are not included in the amount of subsidiary liability imposed on the debtor's head (Rulings of the Constitutional Court of the Russian Federation dated October 30, 2023, No.50-P, and the Moscow District Arbitration Court dated May 7, 2024, in Case No.А40-252314/2022).
Paragraph 26 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated December 21, 2017, No.53, elaborates on the presumption of liability for the debtor's head (whether nominal or actual) in cases where the debtor commits a tax offense. It is presumed that the actions (or inactions) of the controlling person were a necessary cause of objective bankruptcy if the following circumstances are proven:
- The debtor was held liable for non-payment or incomplete payment of taxes due to understated tax bases, incorrect tax calculations, or other unlawful actions (or inactions).
- The additional tax amounts assessed during tax control activities exceed 50% of the total primary debt owed to third-priority creditors.
It is important to note that materials from tax control activities conducted against the debtor or its counterparties play a key evidentiary role in resolving these disputes (Point 13 of the Review of Judicial Practice on Issues Related to the Participation of Authorized Bodies in Bankruptcy Cases and Procedures, approved by the Presidium of the Supreme Court of the Russian Federation on December 20, 2016).
Civil liability of the head of a taxpayer organization
Enforcement practice allows for holding the head of an organization civilly liable (Article 1064 of the Civil Code of the Russian Federation) for harm caused to public-law entities due to the organization's tax offenses. For this, the tax authority must prove the following cumulative circumstances:
- The organization serves merely as a front for the controlling individual—its head.
- Legal grounds for satisfying the tax authority's claims against the taxpayer organization itself have been exhausted or are absent (e.g., the legal entity has been liquidated).
- The organization's tax liability arose as a result of its head's criminal conduct (Ruling of the Constitutional Court of the Russian Federation dated December 8, 2017, No.39, and Letter of the Ministry of Finance of Russia dated February 15, 2018, No.03-02-08/9589).
The absence of means to recover debts from the taxpayer organization may include not only the liquidation (removal from the Unified State Register of Legal Entities) of the legal entity but also the lack of assets to enforce the tax authority's decision. For example, the court accepted the tax authority's argument that the organization lacked funds to initiate bankruptcy proceedings, and №funds were recovered during enforcement proceedings due to their absence (Appellate Ruling of the Civil Chamber of the Rostov Regional Court dated March 30, 2022, in Case No.33-5332/2022). Under such circumstances, the court deemed it lawful and justified to impose liability on the head for the organization's failure to pay taxes.
If the taxpayer organization has paid the assessed arrears, penalties, and fines based on a decision to impose tax liability and continues its operations, it may file a claim to recover damages from the head.
In such cases, the organization must prove the following cumulative circumstances (Articles 15 and 1064 of the Civil Code):
- Unlawful conduct by the head (e.g., imprudent transactions with "technical" companies).
- The existence and amount of damages resulting from the identified tax violations.
- A causal link between the head's unlawful conduct and the resulting damages.
Decisions of the tax authority that have entered into legal force, as well as materials from criminal cases against the head (typically available by this stage), are actively used to establish the elements of damages (Ruling of the Sixth Arbitration Appellate Court dated January 24, 2023, in Case No.А37-2184/2021).
There is №uniformity in judicial practice regarding the scope of the head's civil liability.
According to one legal position, the organization may only recover penalties and fines from the head. Arrears cannot be claimed as damages since the obligation to pay assessed taxes is unconditional and rests solely with the organization, regardless of who served as its head (Rulings of the Ural District Arbitration Court dated April 25, 2019, in Case No.А71-21496/2017, and the East Siberian District Arbitration Court dated July 30, 2019, in Case No.А33-14324/2018).
However, another position holds that additional taxes and levies, which would not have arisen had the head acted in good faith, also constitute damages (alongside penalties and fines). For example, the cassation court noted that the tax authority assessed arrears against the organization due to the discovery of formal document circulation in sugar sales through an affiliated intermediary. Thus, the head's culpable unlawful conduct directly led to the organization's obligation to pay the arrears (Ruling of the Volga District Arbitration Court dated March 22, 2023, in Case No.А65-27540/2021).
Administrative liability of the head of a taxpayer organization
As the individual responsible for the organization's financial and economic activities, accounting and tax recordkeeping, submission of accurate financial statements to tax authorities, and timely tax payments, the head may be held administratively liable under offenses outlined in Chapter 15 of the Code of Administrative Offenses of the Russian Federation (CAO RF). Specifically, this includes Article 15.11, «Gross Violations of Accounting Requirements, Including Financial (Accounting) Reporting.»
The objective aspect of this offense is detailed in the note to Article 15.11 of the CAO RF and includes underreporting taxes and levies by at least 10% due to distorted accounting data, misrepresenting any financial reporting indicator by at least 10%, and similar violations.
Judicial practice has established that violations of Articles 54.1, Paragraphs 1 and 2 of the Tax Code (e.g., creating fictitious document circulation or underreporting income to improperly apply a special tax regime) may serve as grounds for holding the head administratively liable under Part 1 of Article 15.11 of the CAO RF (Rulings of the Fourth Cassation Court of General Jurisdiction dated May 25, 2023, in Case No.16-19/2024, and the First Cassation Court of General Jurisdiction dated May 18, 2023, in Case No.16-2904/2023).
It is also important to consider the interplay between administrative and criminal liability for the head. An individual cannot be held simultaneously liable under both administrative and criminal law for the same act. If a criminal case has been initiated, administrative proceedings cannot begin, and any ongoing administrative case must be terminated (Article 24.5, Paragraph 7, Part 1 of the CAO RF, and Point 23 of the Review of Legislation and Judicial Practice of the Supreme Court of the Russian Federation for Q4 2006, dated March 7, 2007). However, dismissal or termination of a criminal case does not absolve an individual of administrative liability if the act contains elements of an administrative offense (Article 4.5, Part 4 of the CAO RF).
Criminal liability of the head of a taxpayer organization
Tax evasion, levies, or insurance contributions payable by an organization through the non-submission of tax returns (calculations) or other mandatory documents, or by including knowingly false information in such documents, constitutes a crime under Article 199 of the Criminal Code.
A mandatory element of this offense is a large (RUB 18,750,000 over three consecutive financial years) or especially large (RUB 56,250,000 over three consecutive financial years) amount of unpaid taxes. Penalties and fines for tax violations are not included. Notably, criminal liability may arise for a single tax (calculation) period if the evasion meets the large or especially large threshold and the payment deadlines have passed (paragraph 11 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated November 26, 2019, No.48).
The subject of the crime is the head of the organization or the person actually performing the head's duties (paragraph 7 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated November 26, 2019, No.48).
The subjective element of the crime under Article 199 of the Criminal Code is direct intent (paragraph 8 of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated November 26, 2019, No.48). Courts pay close attention to the detailed description of the alleged act.
For example, a court found №criminal offense in the actions of an organization's head because the lower court's verdict cited the director's failure to exercise due diligence in selecting a counterparty (Appellate Ruling of the Judicial Collegium for Criminal Cases of the Rostov Regional Court dated January 13, 2020, in case No.22-7025/2019). As is known, due diligence is a factor examined by tax authorities only when imputing negligence in a tax violation.
The grounds for the tax authority to refer audit materials to investigative authorities are set out in paragraph 3 of Article 32 of the Tax Code:
- Within 75 days of the tax authority's decision to hold the taxpayer liable, the organization's account lacks sufficient funds to fully repay the debt specified in the decision;
- The amount of arrears suggests the commission of a tax crime.
Within 10 days of identifying these circumstances, tax authorities must forward the audit materials to investigative authorities.
Notably, judicial practice allows tax authorities to refer materials before completing the audit (before the decision to hold or not hold the taxpayer liable becomes final). Courts base this on the tax authorities' right to inform investigative authorities about the audit and circumstances suggesting a crime, in accordance with paragraph 3 of Article 82 of the Tax Code and the Agreement on Cooperation between the Investigative Committee of the Russian Federation and the Federal Tax Service dated February 13, 2012, No.101-162-12/MMV-27-2/3. The mere referral of audit materials to investigative authorities is not considered a violation of the taxpayer's rights (Resolution of the Northwestern District Arbitration Court dated April 26, 2023, in case No.A44-4876/2022).
At both the preliminary investigation and trial stages, it is crucial to carefully examine the description of the alleged act. This description must be as detailed and specific as possible, both in terms of evidence and the amounts of unpaid taxes. Several examples illustrate how the lack of detail in the indictment or verdict, as well as arithmetic errors, allowed the head to avoid criminal liability:
- The indictment lacked details such as dates, invoice numbers, VAT amounts for each invoice, and each «problematic» counterparty. Due to the absence of these specifics, the court returned the criminal case to the prosecutor (Appellate Resolution of the Kaliningrad Regional Court dated March 26, 2021, in case No.22-458/2021);
- The specific amount of arrears in the verdict must result from the court's independent calculation, not the tax authority's, as inspectors may make arithmetic errors. Additionally, the court must examine whether the head had overpayments (Appellate Ruling of the Chelyabinsk Regional Court dated August 17, 2018, in case No.10-3643/2018);
- The audit report and tax authority decision must be checked for arithmetic errors. In case No.7U-3323/2024, arithmetic errors in the audit report and decision were confirmed by expert opinions. Moreover, the audit report was not signed by all inspectors, violating paragraph 2 of Article 100 of the Tax Code. Due to these substantial violations, the court acquitted the defendant (Ruling of the Sixth Cassation Court of General Jurisdiction dated April 25, 2024, in case No.7U-3323/2024).
It is also important to note that exemption from criminal liability due to the statute of limitations or other non-rehabilitating grounds does not relieve the head of the obligation to compensate the Russian budget for damages through civil proceedings (Resolution of the Constitutional Court of the Russian Federation dated December 8, 2017, No.39; Letter of the Ministry of Finance of the Russian Federation dated February 15, 2018, No.03-02-08/9589).
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Regardless of the type of liability imposed on the head of a taxpayer organization, the materials of the tax audit carry the most significant evidentiary weight. Therefore, the head must take an active stance, particularly during the resolution of tax disputes, the establishment of factual circumstances of the tax violation, and the qualification of the act (paragraph 1 or 3 of Article 122 of the Tax Code, which presume negligent or intentional fault, respectively).
Source: Newspaper «Economic Journal-Lawyer» (No.43 (1343) / 2024)
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