Separate subdivision or affiliate branch: How to avoid tax claims and at the same time minimize paperwork

A customer recently contacted us. The company provides electrical equipment as well as electrical installation services, from design to final facility commissioning. The central office is registered in Moscow, but work is done all over Russia. 

The Voronezh region is home to the company's largest division. In September, a tax audit was conducted. Tax officials have determined that the majority of the company's income is generated by the division's activities in the Voronezh region, but this division is not recorded in any way for tax accounting purposes. The inspectors stated that the company faces a fine of 10% of the Voronezh division's income for the previous year and a half. This is approximately 1.5 million rubles.
In order to avoid punishment, the client approached our company and requested to register the division in Voronezh before the end of the tax audit.

The first step was to reassure the client. The company did not face a fine of that amount for failing to register a division. Tax authorities could afford to charge 10% of income for unregistered division until 2017. However, the Russian Federation's Federal Tax Service later identified the issue and stated that a fine of this amount should be imposed if the company did not register with the tax authorities at all, i.e. when she does not have taxpayer ID number. For example, when a foreign organization that receives income in the Russian Federation but does not have taxpayer ID number. 

And because a Russian legal entity already has a tax identification number, the tax authorities have every opportunity to regulate its income, whether it was received at the registered central office or in the office in another region. 

The only penalty that the company faced was a fine of 200 rubles according to clause 1 of article 126 of the Russian Federation's Tax Code. 

Second, we discussed how to avoid similar incidents with tax authorities in the future. If an organization operates outside its central office, the company's director must consider whether this location qualifies as a “separate division”. The equipment of a stationary workplace is the main feature of division. As a result, if your central office is registered in Moscow and your plant employs people in the Moscow region, registration is unavoidable. The only thing left to decide is how to register the separate division. 

The law provides the following options: 

An affiliate branch. It is required when a person in the peripheral office is authorized to conduct transactions on behalf of the parent company. The company's economic activities will also run concurrently. As a result, if a peripheral office has some autonomy in the management system, it must be registered as a branch. To register an affiliate branch, the name of the branch must be added to the charter and a tax application on Form 13014 must be submitted so that the name of the branch appears in the Unified State Register of Legal Entities. The affiliate branch's only disadvantage relates to businesses with simplified taxation system. Such legal entities are not permitted to have affiliate branch. If they open it, they will be taken to the general taxation system. 

A representative office. Its purpose is to ensure that there is someone in place who is authorized to conduct transactions on behalf of the parent company. There are no commercial activities. The registration process is identical to that of the affiliate branch. The only disadvantage is that the functionality is limited. 

Separate subdivision. It is the option with the least amount of paperwork. It is suitable for businesses where business is conducted outside the central office. The charter will not need to be changed. It is only necessary to notify the tax authorities of the opening of the separate property, i.e. if the central office is registered in Moscow and the separate subdivision is in Voronezh, you should submit documents to the Moscow tax authority. 

We prepared and promptly submitted documents for our client to register the division under the third option, as well as participated in a tax audit and spoke with tax officials, explaining the mistake that they made of their position regarding the fine.