The Supreme Court of the Russian Federation (Decision of the Supreme Court of the Russian Federation No. 309-ES24-20306) has recognized that the employment of employees disguised as self-employed citizens is tax evasion for companies and is regarded as an abuse of right.

If such employees cooperate with only one company (sole proprietorship) and are subject to the rules of the labor regulations of such a company (sole proprietorship), the employer is obliged to pay personal income tax and insurance fees on behalf of such citizens. Moreover, the amount of income tax cannot be automatically reduced by the amount that its employees have already transferred to the budget as self-employed. Citizens have the right to recover this money as an overpayment, and only at their request can it be set off against the employer’s personal income tax arrears.

The basis for the above decision was the circumstances established by the tax authority during the audit, indicating that the entrepreneur in the period under review had been rendered services by individuals paying professional income tax (PIT) on the basis of civil law contracts concluded with them. On the basis of the evidence obtained in the course of tax control measures, the inspectorate came to the conclusion that in fact the citizens were in the entrepreneur in an employment relationship, and the entrepreneur committed deliberate actions aimed at evading the payment of insurance contributions and personal income tax.

In considering this dispute, the courts agreed with the tax authority’s conclusion that the entrepreneur had deliberately concluded civil law contracts for the performance of work (provision of services) with individuals registered as payers of professional income tax, when the parties actually had labor relations, in order for the employer to obtain an unjustified tax benefit in the form of savings on the payment of insurance contributions and personal income tax for employees.