Supreme Arbitrazh Court Rules on Land Tax Liability

Investments by foreign companies in Russia often involve capital expenditure and the acquisition of extensive plots of land for construction and other purposes. However, Russian legislation is silent on certain issues relating to payment of land tax, leaving lawyers and companies reliant on decisions of the arbitrazh (ie, commercial) courts. A significant change has been made to court practice in this area, reversing the basis on which the courts will consider disputes over land tax payments.

When a company acquires land, its title to the plot must be registered in the Unified State Register of Real Estate Rights. However, acquirers often omit to register such plots or do so only after a considerable delay. This may be because certain relevant documents are unavailable or incorrect; such an omission may be the fault of the seller or the buyer. As a result, companies often develop plots despite having no state-issued documents to confirm their title to the property. Article 388 of the Tax Code states that landowners are liable for land tax. All titles are subject to state registration and a registration certificate is the only legally binding proof of title.

The Supreme Arbitrazh Court had long upheld the tax authorities' position that land tax liability arises not when a buyer registers its title with the state, but when it acquires the plot for practical purposes and has the use thereof. The court had previously ruled that a lack of documents establishing a company's title to real estate does not exempt the company fr om tax, as the formalization of such documents depends on the buyer's declaration of intent.(1) This position was stated in a number of court resolutions(2) and lower state arbitrazh courts have followed the same approach. However, on October 25 2008 the Supreme Arbitrazh Court issued Resolution 7297/08, which changed its position on land tax disputes.(3) The resolution proposes that only the company named in the register as the owner of a plot be liable for land tax. Under this rule, a landowner is liable for tax from the date on which it registers its acquisition of the land.

The change will not reduce the state's tax revenue, as the seller remains liable for tax until the new owner completes the registration process. However, it reflects a practical problem in bringing such cases before the courts. State arbitrazh courts have often found it difficult to establish the date of actual transfer of a plot, as transacting parties do not always document the transfer of a plot in a statement of transfer and acceptance.

The court's resolution means that corporate entities are exempt from land tax until they register their title. Moreover, such entities may contemplate claiming a rebate from the state in respect of previous land tax payments.

Endnotes

(1) Exceptions may apply (eg, in cases wh ere land is acquired from the municipal authorities).

(2) See Resolutions 11991/05 and 11403/05 of July 12 2006, Resolution 5378/02 of December 10 2002, Resolution 7644/03 of October 14 2003 and Resolution 7486/01 of January 9 2002.

(3) The court has also referred to the change in its draft Resolution on Certain Issues Arising with Respect to the Application of Chapter 31 of the Tax Code.