Case study: Base for accrual of insurance contributions upon corporate restructuring
Author: Vladimir Ryvkin, Head of Tax Department
This article addresses legal practice issues related to the determination of base for accrual of insurance contributions upon corporate restructuring.
The company submitted a calculation of insurance contributions, but, according to the data from the authority inspecting insurance contribution payments, this calculation is incorrect because the company indicated the figures for the first 9 months of 2014 and for 2014 on an accrual basis, and inspectors do not take into account the payments and other compensations made to the employees of a restructured organization.
The position held by the authority inspecting insurance contribution payments is based on the clarifications provided by the Russian Ministry of Labor and Social Protection which upholds that when a legal entity is restructured through company transformation, the period from the date of establishment to the end of the calendar year is the accounting period for the newly established organization and, consequently, is also the period for determining the base for accrual of insurance contributions, and that such organization is not entitled to take into account the payments and other compensations made to the employees of the restructured organization (Russian Ministry of Labor Letters No. 17-3/В-249 dated 19.05.2015, No. 17-3/10/В-5634 dated 05.09.2014). A similar position was previously held by the Russian Health Ministry (Letter No. 1375-19 dated 28.05.2010).
The Russian Ministry of Labor also upholds the opinion that there is no conflict between the Russian Labor Code and Federal Law No. 212-FZ dated 24.07.2009 as the law regulates how insurance contributions should be calculated and paid, while the Labor Code sets out how to protect employees’ labor rights and lawful interests.
Courts tend towards the opposite conclusion and point out that reorganization (regardless of its form) cannot serve as grounds for termination of employment (Article 75 Russian Labor Code) and that insurance contributions for each individual should be calculated on an accrual basis from the beginning of the year (Article 8(3), Article 10(1) Federal Law No. 212-FZ dated 24.07.2009).
(Moscow State Commercial Court Ruling dated 02.06.15 Case No. А40-64392/15; Ninth State Commercial Appeal Court Ruling No. 09 АП-30314/2015 dated 11.08.2015).
Payments and other compensations to employees have been included in the newly established organization’s base for accrual of insurance contributions starting from the date of establishment of the organization, i.e. from the date of state registration.
The case materials show that the company is the legal successor of ZAO which was reorganized by transformation.
The court considers that under these circumstances the fund’s non-acceptance of calculations of insurance contributions taking into account the payments accrued from the beginning of 2014 for the employees of ZAO, the restructured organization, was unlawful.
Article 11(2) of Federal Law No. 27-FZ dated 01.04.1996 requires insurants to submit to their local office of the Russian Pension Fund information about each of their insured employees (including the persons with whom they entered into a civil law contract as the fees under such contracts are subject to insurance contributions under Russian law).
Article 5 Federal Law No. 27-FZ dated 01.04.1996 provides that the Pension Fund of the Russian Federation is the agency keeping individual (personalized) records in the compulsory pension system.
The insurant submits (Article 8) to the relevant local office of the Russian Pension Fund information about each of its insured employees and about the insurance contributions payable overall for all insured employees. Information is to be submitted on duly approved forms, following specific instructions.
Article 8(3) of Federal Law No. 212-FZ dated 24.07.2009 provides that insurance contribution payers determine the base for accrual of insurance contributions separately for each individual on an accrual basis from the beginning of the accounting period which, pursuant to Article 10(1) of Federal Law No. 212-FZ dated 24.07.2009, is a calendar year.
Article 15(6) of Federal Law No. 212-FZ dated 24.07.2009 requires insurance contribution payers to keep records of the amounts of accrued payments and other compensations, the related amounts of insurance contributions for each individual to whom payments are made. The taxable base of insurance contribution payers is defined as the amount of payments and compensations accrued by insurance contribution payers for individuals working for them either under employment contracts or civil law contracts for performance of work/provision of services (Article 7(1) Federal Law No. 212-FZ dated 24.07.2009).
When a legal entity changes legal form and is reorganized under another legal form, the rights and obligations of the reorganized legal entity do not change in relation to other entities, except for the rights and obligations to founders (shareholders) which change as a result of the reorganization (Article 58(5) Russian Civil Code).
The company is the legal successor of all the rights and obligations of ZAO without exception, including ZAO obligations to the defendant.
When a legal entity is reorganized through transformation, the rights and obligations of the reorganized entity are transferred to the newly established legal entity (Article 58(5) Russian Civil Code). In this case, legal succession is universal so even the rights related to payment of insurance contributions are transferred to the newly established organization.
In addition, given that only the legal form changed as a result of the transformation, while the employer remains unchanged, the employment relationships between employees and the reorganized company remain the same (Article 75 Russian Labor Code). The nature of the relationships between the insurance contribution payer and its employees is very important to determine the taxable base for insurance contributions. When an organization is restructured through transformation without dismissal of employees, the accounting period is determined taking into account the work performed in the reorganized company.
The organization arising from transformation is therefore entitled to take into account the payments and other compensations accrued for the restructured organization’s employees.
Russian law does not provide for any other procedure for determining the base for accrual of insurance contributions in case of reorganization of an insurance contribution payer. Nor does it set out any special conditions for interruption in the calculation of this base within a calendar year.
Since employment relationships have remained the same after changing the legal form from ZAO to OOO, reporting was transferred to the legal successor, and the new applicant is entitled to take into account the payments accrued from the beginning of the year by the restructured organization upon calculation of the base for payment of insurance contributions.
Based on the above, the accounting period for the company paying insurance contributions in the calendar year when the reorganization took place is uninterrupted because the legal successor should calculate the base on an accrual basis taking into account the payments made by the reorganized legal entity.
In case of reorganization of an insurance contribution payer, its legal successor(s) should pay insurance contributions as well as submit calculations for accrued and paid insurance contributions regardless of whether the legal successor(s) was aware of the non-performance or improper performance by the reorganized legal entity of obligations to pay insurance contributions before the reorganization (Article 15(16) Federal Law No. 212-FZ dated 24.07.2009). Applicable law on insurance contributions thus expressly provides for legal succession of the obligations to accrue and pay insurance contributions.
The court considers that the company has duly determined the amounts of payments and other compensations to employees and duly calculated contributions for compulsory pension and medical insurance.
The fund’s non-acceptance of insurance contribution calculations taking into account the payments accrued for the employees of the restructured organization (ZAO) since the beginning of 2014 is contrary to the law and violates the company’s rights.
The fund’s non-acceptance of such reporting violates not only the rights and lawful interests of the applicant against which claims for payment of penalties may be filed, but also the rights and lawful interests of the company’s employees. In particular, no information about the amounts paid to the company’s employees was recorded in the fund database for the period during which the defendant declined the applicant’s reporting, and this information will not therefore be recorded in the employees’ personal pension account.
Taking the above into consideration, the court finds unlawful the fund’s non-acceptance of calculations for medical and pension insurance contributions for the first 9 months of 2014 and for 2014 taking into account the payments accrued for the employees of the reorganized company (ZAO) starting from 2014.
The court is thus of the opinion that legal successors are entitled to take into account the payments accrued by reorganized companies from the beginning of the year when they calculate the base for payments of insurance contributions.
Despite the certainty of court practice on this issue, it should nevertheless be noted that including payments accrued before reorganization in the base for accrual of insurance contributions could give rise to claims from inspection authorities, and, in such case, the validity of this approach will need to be supported in court.
We would be pleased to answer any questions you may have, as well as assist in defending this position in court.