On 3 November 2016 the Commercial Court of Moscow delivered a decision in case No. А40 167541/16 140 1462.

Within this case the court considered a dispute between Gazpromtrans LLC and Federal Tax Service of Russia Interdistrict Inspectorate for Major Taxpayers No. 6, including the issue of whether VAT should be accrued in connection with transfer of inseparable improvements of leased property to the landlord.

Per the facts of the case Gazpromtrans LLC leased nonresidential premises where it installed air conditioners, windows, a fire alarm system, CCTV and security systems. In the taxpayer’s opinion, transfer of such improvements to the landlord at the end of the lease term should not be treated as a sale and, accordingly, should not be subject to VAT. The tax inspectorate disagreed with that approach and accrued VAT on the cost of the inseparable improvements that were realized.

The court agreed with the inspectorate's position and denied Gazpromtrans LLC’s request to find its decision illegal, stating the following:

  • The air-conditioners (split systems), windows, fire alarm system, CCTV and security systems qualify as inseparable improvements, which is supported by the arbitration practice and by the court decision on the civil-law dispute between the tenant and the landlord;
  • The facts that the taxpayer created the fixed assets in the form of inseparable improvements and that those were transferred to the landlord were supported by the taxpayer’s written explanations and primary source documents (inventory cards, certificates of fixed assets decommissioning, and certificates of return of premises with the fixed assets installed in them);
  • The lease agreement did not provide for the landlord to reimburse the cost of inseparable improvements.

The court’s decision on this dispute is generally consistent with the arbitration practice of recent years on this category of cases. However, it should be borne in mind that it is not always obvious that improvements made to a leased property should be treated as inseparable improvements and the same work could be treated differently in practice.