On 12 July 2016 the Commercial Court of Moscow rendered a decision in case No. А40-98958/16-108-827.
This case considered a dispute between ORSKNEFTEORGSINTEZ OJSC (the “Company”) and Federal Tax Service Interregional Inspectorate No. 1 for Major Taxpayers connected with the Company’s failure to pay corporate property tax in 2013 on an industrial pipeline (the “Facility”) installed as part of implementing a project for construction of a loading rack for light petroleum products. The Company took the position that the tax is not payable since the facility is movable property accounted as fixed assets in 2013 and, hence, is subject to exemption from taxation according to Article 374(4)(8) of the RF Tax Code.
The tax authority disagreed with the Company, stating that the industrial pipeline shall be considered immovable property as it satisfies relevant criteria and, therefore, is subject to corporate property tax. The court upheld the tax authority’s position, noting the following:
- A facility is considered immovable property if (i) it is bound to the earth (e.g., has a foundation), (ii) such facility may be defined (under the method of its assembling) as substantial, durable, solid, unique, stationary and impossible to be moved in space without causing substantial damage to its integrity, and (iii) dismantling and assembly of the disputed Facility in a new place will certainly also result in substantial damage to the integrity of the entire structure, and its designated functional purpose will be changed as a result of moving and connecting the Facility to other industrial facilities.
- The fact that the Facility has an above-ground routing (it is installed on trestles) is not a basis to consider the Facility movable property, because it is impermissible to erect and operate it without the trestles pursuant to the requirements of law, the way the Facility is sited is dictated by the need to make it possible to observe its technical state, its safe operation, the performance of installation and repair work, and also by economic factors (optimizing operating and maintenance costs).
- The fact that there is no construction permit for the Facility (which is an ancillary structure) or state registration of ownership to the Facility as an item of immovable property does not confirm that the Facility is movable property. State registration of title to a thing is not a mandatory criterion for considering it an item of immovable property.
This finding was made by the court, among other things, after examining certificates of acceptance for the building and the technical documentation for the Facility, and the considerable expenses for construction works that made up a substantial part (74%) of the Facility’s value were taken into account. It is noteworthy that the court did not consider the expert opinion submitted by the Company as valid evidence that the Facility should not be recognized as immovable property, on the ground that the opinion (among other things) was based solely on a visual inspection of the Facility, and the experts had not analyzed data of the Facility’s technical documentation or investigated the nature of the work involved in erecting it and tying the foundation to the land.
At the same time, the court rejected the Company’s arguments that modern technologies make it possible to dismantle the Facility without any damage to the integrity of its elements and to lay it in any other place, noting that the Facility was installed in accordance with the construction design for loading rack, is part of a single unique immovable property facility, and moving the Facility will change its initial condition and configuration and will result in replacement of some structurally joined elements.
The court’s position in this case evidences that the problem of treating industrial, infrastructure and engineering facilities as immovable property is relevant, including for tax purposes, and also that the tax authorities are committed to using the most conservative approaches to such treatment.
Based on their considerable experience of advising, contractual and court work, Dentons’ lawyers are prepared to analyze tax risks related to construction and/or acquisition of properties, and to provide the necessary assistance in developing documentation substantiating and supporting the validity of your position on tax matters, and also in defending that position in pretrial and judicial resolution of a tax dispute.