The Constitutional Court has explained the conditions for collecting corporate property tax based on cadastral value
Pepeliaev Group advises that the Russian Constitutional Court has adopted Resolution No. 46-P dated 12 November 2020. This Resolution specifies in what cases a real estate facility can be treated as a shopping mall with the tax base calculated based on the cadastral value.
The Constitutional Court reviewed article 378(4)(1)2 of the Russian Tax Code (the “Tax Code”). According to the above provision, for the purposes of determining the tax base of corporate property tax taking into account the cadastral value of a property, the following can be recognised as a shopping mall (complex): a detached non-residential building (facility, structure) located on a land plot, whose type of permitted use provides for the hosting of retail facilities, public catering facilities and/or utility services facilities. When applying to the Constitutional Court the applicant specified that such wording allows for corporate property tax to be collected based on the cadastral value of real estate facilities solely based on the designation of the land plot on which they are located irrespective of the facilities' designation and their actual use.
Having analysed the provision of article 378(4)(1)2 of the Tax Code, the Constitutional Court noted that in its literal meaning, if such a type of permitted use is present (among the types of permitted use of the land plot) so as to allow retail facilities, public catering facilities and/or utility services facilities to be hosted, this results in buildings located on the plot gaining the status of a shopping mall as a corporate profit tax item with the tax base calculated based on the cadastral value. Thus, the assessment of the tax base and amount of tax depend solely on town-planning and land use decisions.
The Constitutional Court concluded that there is no justification from the constitutional law standpoint for withholding corporate property tax based on the cadastral value of real estate facilities exclusively proceeding from the types of permitted use of the land plot on which the taxable item is located and irrespective of its designation and actual use of the facility. Such regulation would allow the imposition of an increased tax burden on the taxpayer without economic grounds for doing so and would unjustifiably deprive the taxpayer of its right to determine the tax base based on the average annual value of the property. This specifically refers to those taxpayers whose property is located on rented land plots, since the tenant is significantly limited in the ability to initiate a change of the type of permitted use of the land plot.
Accordingly, article 378(4)(1)2 of the Tax Code in its constitutional law meaning cannot serve as a ground for imposing an obligation on the taxpayer to determine the tax base for corporate property tax based on the cadastral value of the building (facility, structure) solely in connection with the fact that the land plot rented by the taxpayer on which real estate owned by the taxpayer is located has a type of permitted use that provides for the hosting of retail facilities, public catering facilities and/or utility services facilities, irrespective of the designation and actual use of the building (facility, structure).
The provision of article 378(4)(1)2of the Tax Code is recognised as being in line with the Constitution in the interpretation which the Constitutional Court put forward in the resolution.
The Constitutional Court reviewed article 378(4)(1)2 of the Russian Tax Code (the “Tax Code”). According to the above provision, for the purposes of determining the tax base of corporate property tax taking into account the cadastral value of a property, the following can be recognised as a shopping mall (complex): a detached non-residential building (facility, structure) located on a land plot, whose type of permitted use provides for the hosting of retail facilities, public catering facilities and/or utility services facilities. When applying to the Constitutional Court the applicant specified that such wording allows for corporate property tax to be collected based on the cadastral value of real estate facilities solely based on the designation of the land plot on which they are located irrespective of the facilities' designation and their actual use.
Having analysed the provision of article 378(4)(1)2 of the Tax Code, the Constitutional Court noted that in its literal meaning, if such a type of permitted use is present (among the types of permitted use of the land plot) so as to allow retail facilities, public catering facilities and/or utility services facilities to be hosted, this results in buildings located on the plot gaining the status of a shopping mall as a corporate profit tax item with the tax base calculated based on the cadastral value. Thus, the assessment of the tax base and amount of tax depend solely on town-planning and land use decisions.
The Constitutional Court concluded that there is no justification from the constitutional law standpoint for withholding corporate property tax based on the cadastral value of real estate facilities exclusively proceeding from the types of permitted use of the land plot on which the taxable item is located and irrespective of its designation and actual use of the facility. Such regulation would allow the imposition of an increased tax burden on the taxpayer without economic grounds for doing so and would unjustifiably deprive the taxpayer of its right to determine the tax base based on the average annual value of the property. This specifically refers to those taxpayers whose property is located on rented land plots, since the tenant is significantly limited in the ability to initiate a change of the type of permitted use of the land plot.
Accordingly, article 378(4)(1)2 of the Tax Code in its constitutional law meaning cannot serve as a ground for imposing an obligation on the taxpayer to determine the tax base for corporate property tax based on the cadastral value of the building (facility, structure) solely in connection with the fact that the land plot rented by the taxpayer on which real estate owned by the taxpayer is located has a type of permitted use that provides for the hosting of retail facilities, public catering facilities and/or utility services facilities, irrespective of the designation and actual use of the building (facility, structure).
The provision of article 378(4)(1)2of the Tax Code is recognised as being in line with the Constitution in the interpretation which the Constitutional Court put forward in the resolution.
What to think about and what to do
Companies owning real estate facilities should take into account the position of the Constitutional Court when assessing their tax obligations. The conclusions made in the resolution can be used for challenging regional lists of real estate facilities with respect to which the tax base is determined as the cadastral value, and for excluding from such lists those facilities that do not meet the established criteria.