On 28 April 2017 the Commercial Court of St. Petersburg and Leningrad Region rendered a decision in case No. А56-87465/2016 (the “Decision”) under the claim of Penobeton-Pikalevo LLC (the “Company”). The case considered the issue of declaring a fixed asset ready for operation for the purpose of starting to pay property tax.
According to the decision, in 2007 the Company completed construction of a cinderblock manufacturing plant (the “Plant”) which includes the following facilities: the manufacturing building of the plant, water supply system, sewage, process line and independent boiler house. By the end of 2011 the Company had connected the plant to all of the required utilities and had started to manufacture products. In 2012-2014, as the Company explained, the plant was at the stage of pre-commissioning operations and bringing the product quality to the necessary level. At the same time, as the Company had not obtained a commissioning permit from the government authorities, the Company recorded the disputed assets on account 08 “Investments in non-current assets” and the Company did not pay property tax on the disputed assets.
In the tax authority's opinion, the Company wrongfully failed to include the disputed assets in the fixed assets when they were brought to a condition fit for use, and, consequently, wrongfully failed to pay property tax during the period audited.
The court upheld the tax authority's position that it had validly charged additional property tax in light of the following:
- The plant had been connected to electricity, gas distribution, water supply and sewage networks long before it started manufacturing products.
- The independent boiler systems had undergone pre-commissioning and had been commissioned, which was confirmed by acceptance reports and inspection reports by the competent authorities.
- The water supply well had been commissioned, which was confirmed by an inventory card for accounting for fixed assets.
- The water supply system had been brought to a state of readiness, construction was not being done on the facility in the audited periods, water was being pumped into the plumbing and was being used in production.
- Finished products were being regularly released during the periods audited and the Company posted revenue from the sale of products.
- The Company's argument that there was a manufacturing defect in the period audited was unconfirmed because the products met the regulatory prescriptions, for which the Company had received certificates of conformity following certification testing. At the same time, the Company did not have expenses in its accounting associated with releasing defective products.
- An inspection of the grounds confirmed that all of the structures for manufacturing products were present and in use. The employees interviewed confirmed that products were being manufactured on a daily basis, that there was water and that the sewage system was working.
We note that the decision in this case is consistent with existing court practice according to which once the historical cost is formed, an immovable property that has become fit for use for its intended purpose should be included in the fixed assets, which gives rise to the obligation to pay property tax on such facilities.
In practice, the general criteria for recognizing an asset as a fixed asset set forth in item 4 of Russian Accounting Standards 6/01 and which are a matter of judgment often result in disputes with the tax authorities over when the costs of construction, refitting and renovation should be accounted for in taxation. The lawyers of Dentons’ Tax practice have considerable experience advising on how to account for construction projects, calculating property tax and applying tax benefits, and are prepared to provide you with assistance at the stages of both planning and implementing construction projects, and in the event of tax disputes.