Innovations in legal regulation of taxation by corporate property tax: problems and solutions

In late 2013 Russian President Vladimir Putin signed perhaps one of the most talked about acts in the past year, which radically changed approach to the calculation of corporate property tax and substantially increased tax burden for certain categories of taxpayers.

Representatives of both tax authorities and the press for quite a long time have discussed the matter that the tax base determined for the purposes of calculating corporate property tax in respect of real estate as their annual cost does not correspond to the market value of real estate. In connection with this the procedure for calculating corporate property tax, which was in force until the end of 2013 had been criticized as not meeting the criteria of reasonableness, as the carrying value of property owned by companies under accounting data, in most cases is much lower than its market value (the state considers market value as a value of property determined by its state cadastral valuation by resolution of executive authorities of the Russian Federation).

Corporate property tax refers as it is known to regional taxes. In other words, on the one hand, each entity has sufficient powers to carry out cadastral valuation, on the other - prospect of calculating corporate property tax based on cadastral value allowed to expect a significant increase in tax revenues into regional budget.

Finally on November 2, 2013 Federal Law № 307-FZ fixed a set of rules, which some administrators of regional budgets and taxpayers waited with hope and some with horror.

The new version of the Tax Code of the Russian Federation, which entered into force on January 1, 2014, has actually divided corporate property tax into two types, each of which has its own characteristics for calculation and payment.
Corporate property tax of the first type – is a tax calculated and payable in accordance with the procedure in force in the past, i.e. based on the annual average value of taxation object . The adopted changes did not affect conditions of taxation in respect of all kinds of property, except where specifically stipulated.

Corporate property tax of the second type – is a tax on the following types of property:

• administrative and business centers, under which the legislator understands separate non-resident buildings (structures, facilities), premises which belong to one or several owners and that meet at least one of the following conditions:

- located on land plots, one of the permitted uses of which provides accommodation of office buildings for business, administrative and commercial purpose,
- designated for use or are actually used for business, administrative or commercial purposes, i.e. not less than 20 % of their total area provides accommodation or is used for accommodation of offices and related office infrastructure (including centralized reception areas, meetings rooms, office equipment, parking),

as well as premises therein;

• shopping centers (complexes), which are defined as stand-alone non-residential buildings (structures, facilities), premises which belong to one or several owners and that meet at least one of the following conditions:

- located on land plots, one of the permitted uses of which provides accommodation of shopping facilities, catering facilities and (or) consumer service,
- designated for use or are actually used for accommodation of shopping facilities, catering facilities and (or) consumer service, i.e. not less than 20 % of their total area provides accommodation or is used for accommodation of these objects,

as well as premises therein;

• non-residential premises, the purpose of which in accordance with cadastral passport of real estate objects or technical recording documents (inventory) of real estate objects provides accommodation of offices, shopping facilities, catering facilities and consumer service or which are actually used for accommodation of offices, shopping facilities, catering facilities and consumer service, which are defined as objects and not less than 20 % of their total area provides accommodation or is used for the designated purposes;

• immovable property of foreign companies not operating in the Russian Federation through permanent representative offices as well as immovable property of foreign companies not related to the activities of these companies in the Russian Federation through permanent representative offices .

The amount of corporate property tax of the second type is calculated based on tax base, which is cadastral value of the corresponding object as of January 1 of the tax period.

However, granting regions the right to obtain additional source of financing the legislator has provided for them some commitment as well. In particular, in order to establish a procedure to determine the amount of corporate property tax based on cadastral value a subject of the Russian Federation is obliged to hold inventory valuation and approve results of determining cadastral value of immovable property.

Thus, as of January 1, 2014 in order to determine tax base on property tax cadastral value of the property objects mentioned above may apply in the following subjects of the Russian Federation:




In addition a reduced tax rate is set in respect of immovable property, tax base on which corresponds to its cadastral value. If a standard tax rate defined by a subject of the Russian Federation may not exceed 2.2 % , then maximum rate in relation to objects of taxation based on cadastral value is:

• for the federal city Moscow: in 2014 - 1.5%, in 2015 - 1.7%, in 2016 and subsequent years - 2%;
• for other subjects of the Russian Federation in 2014 - 1.0%, in 2015 - 1.5%, in 2016 and subsequent years - 2%.

However, given that cadastral value of real estate objects may hundreds of times exceed their average annual value it is unreasonable to talk about lowering tax rates.

No doubt taxpayers seek a way out of the situation unscathed. Perhaps in some cases the best option for tax savings for owners of real estate objects, towards which from January 1, 2014 cadastral value is fixed as tax base, would be change of functional purpose of real estate objects or their reconstruction in order to reduce the area; but these methods can be called the most radical. It seems there are other, more affordable but less costly ways. Let us consider some of them:

1. Transfer of real estate objects subject to taxation on corporate property tax under their cadastral value into ownership of companies or individual entrepreneurs, which are exempt from this tax. It means special tax regimes. The table below summarizes the options:




As we can see from the above data application of special tax regimes currently allows to optimize taxation by corporate property tax, but this method has several disadvantages, which can not be kept silent:

• if application of special tax regimes is not possible in respect of company or individual entrepreneur, who owns immovable property, its transfer in favor of another subject will be very difficult and cost implications;
• application of special tax regimes imposes on company or individual entrepreneur significant restrictions, in particular relating to the residual value of fixed assets. Furthermore, it is impossible to say with certainty that the legislator in the nearest future will not make changes into the Tax Code of the Russian Federation, which will establishes requirements regarding calculation of maximum value of fixed assets being immovable property as well as on the basis of their cadastral value.

2. Disputing results of cadastral valuation. This method is not in bringing taxpayer or property object from the category of corporate property tax taxpayers or objects of taxation, but in establishing cadastral value corresponding to reality if it was not made during the process of state valuation. The point in this case is, if I may say so, of “restoring justice”, i.e. reducing cadastral value down to the real market level.

The law allows to dispute results of cadastral valuation of real estate objects both judicially and extrajudicially.

Extrajudicial procedure of appeal implies application of individuals and legal entities in cases, if the results of determining cadastral value affect their rights and responsibilities, as well as state authorities and local self-government in respect of real estate objects owned by the state or municipality, to commissions on resolution of disputes about the results of determining cadastral value created on the territory of subject of the Russian Federation where a relevant object is situated. Results for determining cadastral value may be disputed in the said commission within six months from the date of their entry into the state real estate cadastre.

At the same the interested parties have no obligation to apply non-judicial appeal – it is allowed to apply to court and avoiding the commission; however, the law does not provide for a possibility to submit application to reconsider the results of cadastral valuation in both bodies simultaneously .

Results of cadastral valuation can be disputed only in court upon six months.

The authority which examines disputes about results of cadastral valuation of real estate objects in the court is the arbitration court . The existing judicial practice in effect says that appeal against the results of cadastral valuation should be made not by disputing non-legislative acts, decisions and actions (omission) of state authorities but by general rules of action proceedings. This conclusion of law enforcer by which the courts are currently guided when considering relevant cases suggests that:

1. When applying for disputing results of cadastral valuation the claimant is the plaintiff and appropriate department of Rosreestr (the Russian registration authority) is the defendant.

2. Jurisdiction for disputing results of cadastral valuation is determined in general manner by location of the defendant .

3. General limitation period of three years shall apply to legal relations arising in connection with approval of results of state cadastral valuation of real estate objects from the date when the claimant knew or should have known of approval of results of cadastral valuation . We believe that because such information is subject to publication beginning of limitation period should be release of such publication upon results of previously performed cadastral valuation .

Unfortunately universal solution can not be developed. Optimization methods of taxation of corporate property tax in respect of each property object should be developed individually based on comprehensive research of business processes and taking into account objectives of company or individual entrepreneur.