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Risks of using incorrect OKVED codes for companies

OKVED is the Russian Classification of Economic Activities. When companies and individual entrepreneurs register with state authorities, they indicate their type of activity in accordance with this classification, and this information is recorded in the State Register of Legal Entities or State Register of Individual Entrepreneurs. 

OKVED codes may not be consistent with actual activities for various reasons (e.g. incorrect codes were initially specified or the company changed its activity, etc.) In addition, when a new OKVED classification became effective in 2017, tax authorities automatically updated the codes in state registers, and this sometimes was done incorrectly. Activities may still be carried out even if there is no code in the OKVED classification for the type of activity performed. State authorities require specifying the type of activity mainly for statistics purposes. At the same time some adverse consequences of using incorrect OKVED codes are possible. 

Possible adverse consequences of using incorrect OKVED codes

Penalty for failure to notify change of OKVED code

Companies must notify the Federal Tax Service of any change of OKVED codes within 3 days of starting a new activity. Failure to comply with this requirement is subject to administrative liability with a warning or fine of RUB 5,000. In practice, companies are rarely brought to liability for this offense because tax authorities must identify the violation within two months to be able to impose the statutory fine. Such omission, nevertheless, can still give rise to more serious risks associated with contributions, benefits and counterparties. 

OKVED codes and social insurance contribution benefits

If a company operates under the general tax system and is entitled to reduced social insurance contributions, but the OKVED code providing this right is not recorded in the State Register of Legal Entities, the company could lose this benefit. It is therefore necessary to specify the appropriate OKVED code in the company’s documents and in the State Register of Legal Entities. 

OKVED codes and higher rates for injuries and accidents

A company’s category of professional risk is determined according to the data provided by the company to the Social Insurance Fund. The higher the risk category, the higher the rate. 

If a company fails to notify its types of activities to the Social Insurance Fund by April 15th, the fund could select the highest risk category from those recorded in the State Register of Legal Entities and charge the appropriate related rate. 

Doing so is not entirely lawful as courts prohibit assigning the highest risk category if the company has not reported its main activity. 

But, to avoid any dispute with the Social Insurance Fund, it is better to confirm the type of activity in time and check the OKVED codes recorded in the State Register of Legal Entities. If some codes of higher risk category are no longer relevant but still recorded in the Register, then they need to be removed. 

OKVED codes and selection of tax regime

According to tax law, not all types of economic activities are subject to special tax regimes. For example, the single tax on imputed income applies only with certain statistics codes.

OKVED codes and counterparties

Tax authorities consider it is a sign of bad faith and unfair practice when OKVED codes are not consistent with actual activities. 

Companies are required to verify counterparties showing due diligence upon selection so it is better to check that all types of activities are recorded in the State Register of Legal Entities to avoid rejection upon conclusion of transactions.

Summary

  • OKVED codes may affect tax benefits and benefits; 
  • Tax authorities consider dubious any counterparties whose activity is not consistent with that which is recorded in the State Register of Legal Entities. 

To avoid problems with funds and counterparties as well as being recognized by the Federal Tax Service as acting in bad faith, we recommend verifying registered OKVED codes and updating them if necessary.

How may we help?

We would be pleased to:

  • Review the types of activities performed by your company as well as determine the company’s main activity and the activities that are not recorded in the State Register of Legal Entities;
  • Prepare the documents that must be submitted to tax authorities to update your company’s OKVED codes;
    Register new statistics codes in the State Register of Legal Entities.

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