Short-lived companies

In terms of legislation there is still no distinct definition that indicates short-lived companies. It is a discrepancy, because in reality they exist and conduct vigorous activities, often inflicting significant damages both to the state and bona fide businessmen.

According to official data of the Federal tax service only during the year of 2016 the authority detected more than 5 million companies having all the signs of short-lived companies. About 20% of them conceal information on their activity and do not file financial accounts during the year. It implies fraud.

Despite the fact that this term does not have any legal support, under a short-lived company the following company is meant that is registered as LLC or IP most often having one objective – to conduct illegal transactions for getting tax benefits.

There are two standard schemes, and for their realization short-lived companies are established.

Scheme № 1: Fake expenses legalization, by means of what a company manages to decrease the taxable base.

Example: In order to get unjustified tax benefit, a company concludes a contract for goods delivery/service rendering with a controlled short-lived company. According to the contract, the stated amount is transferred to the account of an ostensible partner, what is confirmed by primary documents exchange, but actually no works/services are provided. As a result of this scheme realization a company documents incurred expenses and pays taxes net of VAT.

Scheme № 2: Tax burden shifting of a legal entity that does not meet budget commitments and evades taxes.

Example: A company sells goods to a controlled intermediary for the amount that hardly exceeds their prime cost. The deal is confirmed by the full document set. The intermediary having made essential extra charge hands over goods to the ultimate seller who realizes them by retail. The profit of this fraud lies in the fact that an initial seller makes a good profit at the same time, that is not reflected in the accounts, increases the share of own expenses and can expect additional tax deduction on the basis of paid VAT amount. Legal entities working under such principle and taking upon themselves general tax burden do not file accounts to the Federal tax service and do not make any contribution to the budget.

Characteristics of a short-lived company

Tax offices of all levels conduct a vigorous activity on detection of fictitious companies and restraint of tax fraud. At the authority there is even a non-public register of short-lived companies, where those companies are entered caught in receiving unjustified tax benefits. So, according to the results of the year 2015 tax officers excluded 3% of companies conducting a fictitious activity from the state register of legal entities.

On the basis of accomplished work, gathered experience in 2016 the Federal tax service issued a separate order having indicated the characteristics according to which it would be possible to determine short-lived companies and therewith insure the legal business against getting involved into fraud schemes.

Let us enumerate 10 criteria indicating company’s unfair practice as a taxpayer:

  1. The legal address stated at the documents does not exist in reality, or it belongs to scores of other companies.

  2. The company balance sheet does not have any property, immovable, transport, unfinished objects and other material things.

  3. The only contact person is a director general of a short-lived company (in other words, there are no other employees in company’s structure, all transactions are carried out through the direct participation of a director).

  4. Either there are no incorporating documents at all or they have superficial information on director’s personality, limits of his/her responsibility.

  5. Either there are no data on real location of an enterprise or there are no workshops, production areas at the stated address.

  6. A company makes transactions without money resources using (it is engaged in bills of exchange issue/buy and sell, takes part in securities turnover).

  7. A legal entity lends under non-market conditions, admitting delays in payment and taking no measures for money repayment.

  8. The majority of goods purchase transactions by physical persons/individual entrepreneurs are conducted with the participation of intermediary companies.

  9. The balance sheet reflects debt for rendered works/supplied goods, however despite this fact cooperation is going on and no measures are taken for recovery of overdue payments amount.

  10. Tax office does not receive accounting, and if does it is zero balance one.

It may seem that attracting short-lived companies as business partners an honest businessman does not take the risk. However, it is not so. If the Federal tax service detects illegal schemes of tax evasion, then entrepreneurs ever having business deals with such companies may be held administratively or even criminally liable. Such cases carry not only big fines, but also serious reputation consequences and costs in public image.

Detection of short-lived companies

A traditional way to determine if your business partner is a short-lived company or not, - is to make an enquiry to the Federal tax service. On the basis of business partner’s registration data analysis and his filed accounting study it is possible to make a conclusion on company’s good faith as a taxpayer.

If you are suspicious of factual information characterizing business partner’s activity, then you need to compare provided data with the real one additionally. For example, to make certain of a legal address, to check company’s director through public sources.

One of the simplest, but at the same time prompt ways to detect falsification with business partner’s legal data, - is to apply to the service. Its database contains a full set of information on all legal entities and individual entrepreneurs registered in our country.

Using the data provided by the system it is possible to make a brief analysis and come to necessary conclusion on business partner’s reliability, his/her reputation in business environment. Thus, short-lived companies detection will take no more than 5 minutes. Quite this time is necessary for service to prepare a detailed analytics on a required entity.

If a fictitious legal entity ceased its activity or undergoes liquidation, the system will show this information along with other data. Except for registration card, the base of service is integrated with information sources of arbitration court of all instances. Consequently, making an enquiry, you will manage to look through the list of active and closed court proceedings, and also to get references to definite court decisions.

Full checking of short-lived companies through the service is conducted on the basis of various data. It is possible to obtain information using the following:

  • Company’s INN;

  • A full name of a director general, founder;

  • Legal entity’s name;

  • Company’s legal address;

  • Other registration data.

The enquiry is processed within seconds, afterwards the system provides with all available information on a required entity, up to the current financial standing and participation in government contracts.

Taking into consideration all above mentioned, it is safe to say that nowadays the service is a reliable, effective and the fullest source of information for detection of mala fide taxpayers and protection of interests of honest businessmen.

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