Elena Sokolovskaya,

Partner, Head of Antimonopoly Practice, Pepeliaev Group

Starting from 1 January 2025, a tax amnesty in the case of a split-up of a business¹ has been launched in Russia. Taxpayers that have voluntarily refused to apply such schemes and that comply with a number of conditions will be able to avoid additional taxes, default interest and fines being accrued based on the outcome of tax audits for 2022-2024. It is a tempting idea to be able to reorganise one’s business and avoid any tax liability along the way. However, from the perspective of antitrust and procurement legislation, structural changes within a company and a refusal to split a business up may prompt quite a few questions. An example is if a small business enterprise decides to use the amnesty.

It is not rare for small enterprises (SEs) to participate in public procurement. Moreover, by virtue of article 30(1) of Federal Law No. 44-FZ “On the contractual system in the area of the procurement of goods, work or services to secure state and municipal needs” dated 5 April 2013 (“Law No. 44-FZ”), customers are obliged to make a certain percentage of their purchases from the above business entities and conduct competition-related procedures in which only SEs are able to participate. What if a business entity that is a participant or a service provider under public procurement loses its status of an SE as a result of the amnesty? Or what will happen if it is revealed that the business entity was previously using such status unlawfully and split its business? Let us straighten all this out.

Losing SE status may raise questions when a public contract is concluded and performed

We believe that if an SE loses its status, this may entail risks if it happens at the stage when a supplier (service provider) is determined. An example is when, at the moment a bid has been submitted to participate in a procurement exercise, information regarding such entity was still in the Unified Register of Small- and Medium-Sized Enterprises (the ‘Register’), only to disappear from the Register as soon as the bid has been considered². In that case, the customer’s committee may decline the bid as not complying with the requirements for tender documentation.

The antitrust regulator takes the standpoint that nor is a procurement committee deprived of the right to check the actual status of a party in the Register when it is considering bids. It may also carry out its checks if a statement has been provided evidencing that the business entity is classified as an SE (the Decision of the Ulyanovsk Department of the Federal Antimonopoly Service dated 20 July 2022 in case No. 073/06/106-385/2022). A conclusion can be made that it is absolutely lawful for a bid to be declined if there is no relevant information in the Register regarding the bidder at the moment when the committee is considering and evaluating bids.

Nonetheless, a customer’s committee does not always diligently fulfil its obligations and properly check whether the information regarding a business entity being an SE is accurate. It is a fairly common event for a person that does not have such status to become a winner in a bidding process in which only SEs can take part (the Resolution of the Commercial Court for the Central Circuit dated 31 May 2023 in case No. A83-1630/2022). A person who has lost a bid may file a claim seeking to have the outcome of the bidding declared invalid as well as the contract which was concluded as well as for the consequences to be applied of the transaction being held invalid which pertains to the public contract. A court will most likely uphold the claim. In other words, for a person that has decided to use the amnesty and lost its status of an SE, issues may arise when it enters into (performs) a public contract.

The fact of an unlawful split-up of a business does not have any elements of an offence from the perspective of procurement legislation

Whether a business was unlawfully split up is an even more sensitive issue in relation to taking part in a bidding process. It is obvious acting in circumvention of the law should not provide a business entity that performs such actions with any advantages, including in the field of public procurement. However, if a bidder loses its SE status, this constitutes a legal ground (article 48(12)(3) of Law No. 44-FZ) for the bidder to be excluded from the bidding process, while the fact of a business being unlawfully split up does not contain any elements of an offence from the perspective of procurement legislation.

Let us draw a parallel.

Example

To obtain an advantage during a bidding process, a company submitted information, known to be false, that it was an association of disabled people (article 29 of Law No. 44-FZ regulates the specific features of such persons participating in public procurement). As a result, a contract was concluded with the company on terms that were advantageous for it: a 15% mark-up of the contract price was provided on the services that were to be supplied. The antitrust regulator detected in the actions of the company elements of fraud, which was committed by a person through an abuse of an official position and on a large scale (article 159(3) of the Russian Criminal Code). In view of the above, the regulator submitted the case files to law enforcement authorities (the Decision of the Tatarstan Department of the Federal Antimonopoly Service dated 18 January 2021 in case No. 016/01/14.8-124/2020).

It can be assumed that if the antitrust regulator establishes the fact of a bidder having obtained advantage through its business being unlawfully split, this will also be treated as a breach of criminal rather than procurement legislation.

Where do things stand from the perspective of legislation on the protection of competition? Is there a chance that actions involving an artificial split-up of a business will be treated as an offence?

As the decisions of the antitrust regulator show, actions of a bidder which manifest themselves in misleading a customer’s committee can in certain cases be classified as unfair competition (the Decision of the Rostov Department of the Federal Antimonopoly Service dated 22 April 2021 in case No. 061/01/14.8-1700/2020). This would occur, specifically, if a business entity submits fake documents demonstrating that it is complying with statutory requirements. According to the regulator’s approach, such actions are in fact aimed at obtaining advantage over other bidders when they carry out business activities and breach the ban on unfair competition established in article 14.8 of Federal Law No. 135-FZ “On protecting competition” dated 26 July 2006 (the ‘Law on protecting competition’). We also note that the Department of the Federal Antimonopoly Service ordered the offender to transfer, as a sanction, the total income it had obtained as a result of it breaching antitrust legislation. The courts of three levels upheld this position (the Resolution of the Commercial Court for the North-Caucasus Circuit dated 25 February 2022 in case No. A53-15976/2021).

An unlawful split-up of a business may be classified as unfair competition

In view of the above, the risk cannot be excluded that an unlawful split-up of a business could be classified as unfair competition, provided that advantages result for the business entity in its business activity.

Before undertaking any legally significant action, no matter how appealing it may seem, the whole array of risks and implications should be carefully and comprehensively assessed. The tax amnesty is a clear example: if a person applies the amnesty, this may bring it considerable benefits from the perspective of tax legislation. However, new risks may arise from the standpoint of antitrust and procurement legislation.

1. Federal Law No. 176-FZ “On amending parts one and two of the Russian Tax Code and individual legislative instruments of the Russian Federation and on repealing individual provisions of legislative instruments of the Russian Federation” dated 12 July 2024.

2. It seems to be impossible to simulate a situation when a business entity that originally does not have the status of an SE when it submits a bid would be admitted to the bidding process owing to the specific features of the registration procedure in the Unified Information System in Public Procurement.