Case study: Determination of compulsory social insurance contributions
Author: Vladimir Ryvkin, Head of Tax Department
This article addresses issues of case law related to the determination of social insurance contributions in cases where the payer of insurance contributions has not submitted the documents required by law to support its main economic activity. This article also addresses whether it is valid for state authorities to apply maximum insurance rates when an organization actually carries out no activities of the highest class of occupational risk.
OOO received a notice from the Social Insurance Fund of the Russian Federation controlling the payment of insurance contributions of the amount of compulsory social insurance against work-related accidents and occupational diseases dated April 28, 2015. According to this notice, class 11 occupational risk class was identified for OOO consistent with the activity “Purchase and Sale of Real Estate Property” from the Russian Classification of Economic Activities (OKVED) or OKVED code 70.12, which corresponds to the insurance rate of 1.2% for compulsory social insurance against work-related accidents and occupational diseases for accrual of employee wages on all grounds (income).
However, it should be noted that the organization’s main and sole activity is the wholesale of clothing, including underwear and footwear (OKVED code 51.42), and that OOO has never carried out the assigned activity, i.e. Purchase and Sale of Real Estate Property.
ООО contested the actions of the Social Insurance Fund of the Russian Federation and challenged them in court. Courts upheld the appellant’s position pointing out that Russian law does not provide that the Social Insurance Fund of the Russian Federation may assign to a payer of insurance contributions (insurant) which has failed to submit supporting documents by April 15 a top occupational risk activity, if the organization does not actually carry out such activity.
(Ruling No. 14943/10 of the Presidium of the Supreme Arbitration Court of the Russian Federation dated 05.07.2011 in Moscow Region State Commercial Court Ruling No. F05-3376/14 dated 25.04.2014 Case No. А40-77063/13, dated 14.08.2013 Case No. А40-124554/12-107-610, dated 14.08.2013 Case No. А40-123422/12-107-608, dated 16.09.2013 Case No. А40-23294/12-107-107, dated 25.02.2013 Case No. А40-97017/12-122-469, Ruling No. KА-А40/7025-11 dated 13.07.2011 Case No. А40-114475/10-90-627).
Article 17(2(2)) of Federal Law No. 125-FZ On Compulsory Social Insurance Against Work-Related Accidents and Occupational Diseases dated July 24, 1998 (further “Federal No. 125-FZ dated 07.24.1998”) provides that the insurant must accrue and pay insurance contributions to the insurer in the prescribed manner and within the time periods set out by the insurer.
Article 21 of Federal No. 125-FZ dated 07.24.1998 provides that the insurance rates for different occupational risks are set out by federal law.
Article 22 of Federal No. 125-FZ dated 07.24.1998 states that the insurant pays out insurance contributions on the basis of an insurance rate taking into account any discount or premium set by the insurer. The Rules for Assigning Types of Economic Activity to A Class of Occupational Risk have been approved by a decree of the Government of the Russian Federation (further the “Decree”).
Pursuant to Item 2 of the Decree (approved by Decree No. 55 of the Russian Ministry of Health and Social Development dated January 31, 2006), the insurant itself determines its main economic activity in accordance with Item 9 of the Rules for Assigning Types of Economic Activity to A Class of Occupational Risk approved by Decree No. 713 of Government of the Russian Federation dated December 01, 2005 which states that the main economic activity for a commercial organization is the activity which at the end of the previous year constituted the largest share in the total volume of produced goods and services rendered, and for non-profit organizations, the activity which at the end of the previous year required the greatest number of employees.
To confirm their main economic activity, every year by April 15, insurants must submit to the Fund executive body at their place of registration the documents listed in Item 3 of the Decree.
Item 5 of the Decree provides that if an insurant, which carries out several economic activities, has not submitted the documents listed in Item 3 of the Decree by April 15, the Fund executive body will assign the highest occupational risk activity that the insurant performs, and will notify the insurant by May 01 of the insurance rate set from the beginning of the current year for the assigned occupational risk activity.
Before confirmation of the main economic activity, the main economic activity confirmed by the insurant in the previous fiscal year is assigned to the insurant and insurant unit (Item 11 Decree).
It is also necessary to consider that when the Fund issued its notice it knew about the activity that the company carried out the previous year (financial leasing) which was the sole activity performed by the company.
The company indeed failed to meet the deadline for submission of documents as set out in Item 5 of the Decree, and the Fund therefore was entitled to assign to this insurant an economic activity with the highest occupational risk.
However, Russian law does not provide that the Social Insurance Fund of the Russian Federation may assign to an insurant which has failed to submit supporting documents by April 15 a top occupational risk activity, if the organization does not actually carry out such activity.
Also, the Fund has not duly determined the economic activity for the insurance rate indicated in the contested notice as it has done so solely on the basis of documents specifying the company’s economic activities.
The Fund department did not take into account that Item 5 of the Decree refers to the “types of activity performed” so the type of activity actually performed by the company cannot be determined solely on the basis of documents specifying the company’s economic activities.
The assignment by the local offices of the Social Insurance Fund of the Russian Federation of a top occupational risk activity to the organization based on the activities indicated in the organization’s foundation documents is therefore unlawful and violates the appellant’s rights and legal interests.