Tax inspectors have found a new way of reinforcing the state budget. They are accusing holding companies of overstating business expenses and denying them the ability to write off business expenses from their profit tax base. Most of these charges are thrown out in courts and the tax inspectors win only if they can prove that the operating company was created specifically to avoid taxes.

Holding companies create operating companies (OCs) to improve cash flow management and to reduce administrative expenses. The OC acts as a single general director for the businesses of the group, fulfilling this function not as a single person, but as a whole company and managerial center. The OC usually defines the financial, registration, administrative and marketing policies of the companies it operates, and supervises the assets of the group scattered over several regions. OCs rarely own the companies they operate and are limited in their powers over them – they cannot make transactions or spend money over certain sums. All these decisions, however, are made by the OC. Often, payment for these administrative services is made by delivering to the OC a share of the proceeds or profits and/or a fixed sum and sometimes bonuses as incentives.

But these expenses are nothing in comparison with the savings OCs provide. For example, if the group includes 24 enterprises, it would need to employ 24 highly qualified, hard-to-find, and highly paid general directors. OCs can also provide competent lawyers, bookkeepers and financial experts for all the enterprises.

Objectively speaking, OCs have developed bad reputations as tax schemes. For example, if the OC uses simplified taxation, it must pay only the unified tax of 6% rather than the profit tax of 24%.

Courts generally rule in support of tax inspectors specialists in cases of outright schemes, but almost always through out cases involving functional companies. Most judgments in favor of tax inspectors have been made on the grounds that OCs are providing redundant services to those already supplied internally to the companies they manage.