Liability for VAT “on paper” (fake VAT)

On 12 November 2024, the State Duma adopted in its third reading a draft law [1] introducing criminal liability for VAT “on paper" (fake VAT). We have previously discussed this draft law [2].

The draft law adopted in its third reading differs from the version adopted in the first reading. Specifically, Article 173 added to the Criminal Code of the Russian Federation will provide for the following:

• a liability is introduced for arranging activities that involve the submission to the tax authorities of the Russian Federation and/or the distribution of knowingly falsified invoices and/or tax returns (computations) on behalf of legal entities incorporated through nominee front persons, or using personal data obtained illegally, if these acts involve generation of high income;
• those found guilty face a fine, extracted labour, or imprisonment for up to 4 years, and in case of aggravating circumstances (an act committed by a group of persons by prior conspiracy or by an organised group, or generation of income on an especially large scale) – a fine, extracted labour, or imprisonment for up to 7 years;
• invoices and/or tax returns (computations) are considered falsified if they contain false information about the shipment of goods, performance of work, provision of services, or the transfer of property rights.

As a reminder, the original proposal was to establish a liability only for the distribution and/or submission to tax authorities of knowingly false invoices and tax returns if these acts caused significant damage to individuals or organisations or involved the extraction of income on a large scale.

In our opinion, the current version more clearly formulates that a person is liable specifically for arranging criminal activity, i.e. an organised trade in VAT “on paper”. However, if an entity illegally reimburses fake VAT for its own needs, there should be no criminal liability, in our point of view.

If we interpret the new rule directly, it turns out that a liability can arise in two cases:

• either the head of the organisation recognises himself as a front person,
• or the company was registered using illegally obtained personal data.

As for the definition of a large scale, currently, one should be guided by Article 170.2 of the Criminal Code of the Russian Federation, where it is established for the purposes of Chapter 22 "Crimes in the Sphere of Economy" which will include a new article. According to this article, a large scale, large damage, income or debt on a large scale is defined as cost, damage, income, or debt exceeding RUB 3 500 000, and an especially large scale is defined as an amount exceeding RUB 13 500 000.

The draft law, as before, retains a liability only for knowingly fake invoices, without mentioning universal transfer documents (UTDs) which combine the functions of an invoice and a source document.

As in the first wording of the document, the guilty person can be released from criminal liability if he compensates for the damage caused to the state as a result of the committed crime. For this, he will have to transfer to the federal budget either monetary compensation equal to twice the amount of damage caused, or income received as a result of committing a crime, and monetary compensation equal to twice the amount of such income (Part 2, Article 76.1, Part 3, Article 28.1 of the Criminal Procedure Code of the Russian Federation).

This raises the question of how the amount of damage will be determined. It is possible that this will involve the entire amount of VAT that was not paid to the tax authorities in a timely manner as a result of the activities of the guilty person.

[1] No.263208-8Draft Law: Legislative Support System

[2] Liability for VAT "on paper" will become stricter — Unicon

Unicon VAT team will be happy to take care of the de-registration process.

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