In recent years the revaluation of the cadastral value of plots of land by state authorities has become a very pressing problem for land owners and users since the cadastral value is the main measure used to calculate land tax and rent payments. New legislation in this area is now being discussed, although the business community has serious doubts that it will help solve the problem and believes it could even make matters worse.
In Russia payments for the use of land are in the form of land tax paid by land owners and rent paid by holders of leases from the state. The amount of both land tax and rent is calculated based on the cadastral value of the particular plot of land.
The cadastral value is the cost of a plot of land set during a state appraisal using mass valuation methods. The cadastral value of land in Russia is established by the state and can be found in the state cadastre which is open to the public. Cadastral values for the majority of land in Russia were initially established and entered in the cadastre in 2005.
Since 2012 state authorities have begun revising the cadastral value of land to bring it into line with market values and thereby raise more funds for local budgets as land tax is a local tax. However, the mass valuation criteria used for the revaluation have led to a misrepresentation of the true market value of land as they do not take into account the individual characteristics of the land (for example, location, use, plot shape, etc).As a result the cadastral value of many plots of land now exceeds the market value of the land several times over.
For land owners and land users this has meant an increased tax and rent burden which of course has had a knock-on effect on the economic performance of the land.
Tax and rent increases
Under Russian law, land tax is set by local authorities but cannot be more than 1.5 per cent of the land’s cadastral value. In most big cities (such as Moscow, certain areas around Moscow, and St Petersburg) the land tax is set at the maximum amount allowed by law.
The rent due on state-owned land is also calculated on the basis of the land’s current cadastral value.
Before 2010 the state cadastral value was revised at least once every five years but no more than once every three years. However, in 2010 this provision was changed and the limit on the frequency with which the cadastral value of land could be revised (ie not more than once every three years) was abolished.
Therefore, each plot of land may now be revalued as often as required by local authorities, which, according to the business community, may lead to potential corruption and abuse.
Challenging the cadastral value
A land owner or user who is unhappy with the new cadastral value of a plot of land is entitled to challenge it and there are two ways of doing so:
- Challenging the statutory act which approved the new cadastral value, perhaps on the grounds of abuses occurring during the approval of the act. However, the majority of such cases are not resolved in favour of land owners and users.
- Challenging the results of the cadastral value assessment. A ground for revision may be the submission that the market value of the plot of land is less than the cadastral value. Such a challenge may be made in court or by applying to a special state commission. However any claims to the commission must be brought within six months of the new cadastral value being set.
In practice land owners and users may face the following problems:
- The commission is formed from representatives of the same bodies which set the current cadastral value meaning that it may be reluctant to make a decision revising that cadastral value.
- Land owners often only learn of the new cadastral value when they receive a new tax notification or a notification that their last tax payment was incorrect, after the six-month term has already expired. This means the owner has no choice but to challenge the revised cadastral value in court (which in practice means long and expensive judicial proceedings).
Furthermore, it may be an endless circle as a new cadastral value may be approved for the challenged amount as soon as the owner or user successfully challenges the previous value. In this case the owner or user would have to go through the same procedure of challenging it once again. A highly controversial case in recent years is that involving one of Russia’s biggest metallurgical companies, which spent almost three years challenging the cadastral value of the land underlying its metallurgical plant (which was several times higher than the land market value). However, as soon as the company was successful in its legal challenge, another cadastral revaluation took place and a new cadastral value for the same amount was set again, regardless of the court decision!
As a result of these problems and the flaws in the revaluation method and applicable legislation, the issue of cadastral value reassessment is currently being actively debated in the media and within the business community.
Notwithstanding the problems with the current practice, the State Duma is now discussing a new bill which may even make matters worse. The business community is objecting strongly to the proposed new provisions and trying hard to find some compromise.
- It is proposed that a mandatory pre-trial challenge before a special commission be introduced where the cadastral value exceeds the market value by more than 30 per cent. As noted earlier, at present, the owner or user is entitled to choose to bring a claim to the commission or to go to court without the requirement for any pre-trial challenge.
Such a mandatory pre-trial challenge may increase the length of time needed to challenge a cadastral value, during which time an owner or user will have to pay excessive tax or rent and the state authorities may perform a new revaluation and effectively disregard the court’s decision on the correct cadastral value.It is likely that this provision of the bill will not be accepted by the State Duma in further hearings as it limits the owner’s or the user’s right to challenge a set cadastral value.
- It is proposed that the frequency of revaluation remains the same—at least once every five years.
The business community suggests returning to the previous revaluation terms (ie before 2010)—at least once every five years but no more than once every three years. We believe the business community may be able to influence this aspect of the bill and the previous revaluation terms might be returned.
- It is proposed that the mass valuation method remains the same.
A large body of case law confirms that the mass and non-individual method of cadastral valuation is ineffective and in some cases misrepresents and exceeds the market value several times over. The business community is therefore convinced that a new, more effective, calculation methodology needs to be developed.
- It is proposed that the new challenged cadastral value will have no retrospective effect.
The business community suggests the new cadastral value successfully challenged by the owner should be used for tax purposes starting from the tax period (year) when the challenge procedure was started. Currently, a new cadastral value becomes effective only starting from the year following the year when the value was challenged.
The problem of the revaluation of land cadastral values in Russia is now a burning issue. The situation may become even worse if the legislator implements innovations which are widely agreed to be inappropriate for land owners and users. However the hope remains that the business community will be able to influence the situation and the State Duma will revise its initiative and make the new bill more effective in meeting business needs.