On 1 January 2014 significant changes related to corporate property tax will
come into force.
On 2 November 2013 the President of the Russian Federation signed Federal
Law No. 307-FZ “On Amending Article 12 of Part I and Chapter 30 of Part II of
the Tax Code” (the “Law No. 307-FZ”). According to Law 307-FZ, the tax base
of certain types of real property shall be calculated based on their cadastral
value. Currently the tax base is calculated based on the annual average net
book value of real estate.
Implications for taxpayers
According to Law No. 307-FZ, real estate used as office or trade premises as
well as certain property owned by foreign legal entities will be taxed based on
its cadastral value, which will be determined by a state cadastral assessment.
However, corporate property tax of industrial facilities will still be determined
based on annual average net book value.
New rules are applicable to business and shopping centers, offices, trade
objects, catering and consumer services objects as well as to property owned
by foreign entities with no permanent establishment in Russia or properties that
are not used for activities of such permanent establishments. Currently foreign
entities calculate tax based on the inventory value of property, which is usually
significantly lower than cadastral value.
What the Law says
Property will be taxed under the new rules if it is located on a land plot
designated for construction of office or trade objects or if it is itself designated
or used for business, administrative, commercial or trade purposes. A property
is considered to be designated or used for these purposes if at least 20 percent
of the building’s total space is used for offices (including office infrastructure),
trade objects, catering objects or objects of consumer services.
The maximum tax rate for 2014 calculated under the new rules should not
exceed 1.5 percent for property located in the Moscow region and 1 percent for
objects located in all other regions of the Russian Federation. In 2015 the tax
rate will be increased to 1.7 and 1.5 percent, respectively. Starting from 2016
the maximum tax rate will become equal for all Russian regions and will not
exceed 2 percent.
In order to apply the new tax rules in 2014, the regions of the Russian
Federation were required to approve assessment results of cadastral value of
property located on their territory. Also, they were required to adopt and
promulgate the relevant regional law establishing the new tax rates before
30 November 2013. The regions of the Russian Federation shall establish prior
to the following tax period a list of objects of real property (except for property
owned by foreign entities without permanent establishment status in Russia or
properties not used for activities of such permanent establishments) which tax
base is determined as cadastral value.
According to the changes introduced to the Law of Moscow No. 64 “On
Taxation of Corporate Property” dated 5 November 2003 by Law of Moscow
No. 63 dated 20 November 2013, the new tax rules will be applicable in the
starting from 1 January 2014 — to business and shopping centers (and
the premises inside of them) the space of which exceeds 5,000 sq. m.,
as well as to real property owned by foreign entities with no permanent
establishment in Russia or that are not used for activities of such
starting from 1 January 2015 — to other real property provided for by
Article 378.2 of the Russian Tax Code.
There are also several exemptions that could be further used by taxpayers.
The cadastral value of objects of real property was established by Order of the
Government of Moscow No. 752-PP “On Approval of the Results of Cadastral
Assessment of Capital Facilities in Moscow” dated 26 November 2013. The
results of the cadastral value assessment could be challenged in a court or at
the commission for consideration of disputes regarding the results of the
cadastral value assessment organized with the local subdivisions of the
Federal Service for State Registration, Cadastre and Cartography. The
cadastral value can be disputed at the commission within 6 months starting
from the date when the data on the cadastral value of an object was introduced
into the State Immovable Property Cadaster, and in court within 3 years
starting from the day when the person becomes aware (or ought to have
become aware) of the infringement of its rights.
Order of the Government of Moscow No. 772-PP established the List which
includes 1,842 objects of real property; in case of a disagreement with the List,
concerned parties are entitled to apply by 18 December 2013 to the State
Inspectorate for Control of Use of Real Property in the City of Moscow with a
request to revise whether the actual use of the real property complies with the
permitted use of the relevant land plot.
The executive authorities of St. Petersburg decided to postpone the
introduction of new rules. As a result, in regard to the objects of real property
located in St. Petersburg, in 2014 the “old” tax rules will be effective (i.e., tax
shall be paid at a rate equal to 2.2 percent of the net book value of property
according to accounting records).
As an exception, Law of St. Petersburg No. 658-103, dated 29 November 2013
changed rules for objects of real property owned by foreign entities without
permanent establishment in Russia or properties that are not used for activities
of such permanent establishments. Starting from 1 January 2014 the tax base
in regard to such property shall be determined by its cadastral value. The tax
rate shall be equal to 0.7 percent. Tax | Real Estate
3 Legal Alert December 2013
Actions to consider
The taxpayers shall determine in advance which objects of real property are
subject to the new rules to determine the tax base and include additional
expenses in the budget for 2014 and the following years. The owners
(landlords) of the relevant real property shall revise the terms of the lease
contracts regarding possible inclusion of additional expenses on corporate
property tax in the rent payments and/or operational expenses and perform
preparatory work with the tenants. In addition, the taxpayers should check the
validity of inclusion of real property in the List, as well as to analyze the
cadastral value of real property and consider the practicality of challenging the
cadastral value assessment in administrative or judicial proceedings.
This LEGAL ALERT is issued to inform Baker & McKenzie clients and
other interested parties of legal developments that may affect or
otherwise be of interest to them. The comments above do not constitute
legal or other advice and should not be regarded as a substitute
for specific advice in individual cases.