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When determining the market value of a real estate item for the purposes of establishing the cadastral value, VAT is not recorded and not separately accounted for

05.03.2020
3 min read
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The Supreme Court has confirmed that it is unlawful to record and separately account for VAT within the market value when the cadastral value is challenged [1].

The Supreme Court has adopted an important judicial act which may draw a line under the issue of whether to record VAT when challenging the cadastral value of real estate. Taking into account the legal position of the Supreme Court, when determining the market value, VAT should neither be recorded nor accounted for separately within the market value.

Background

A company filed with the Moscow City Court an administrative statement of claim for the cadastral value of non-residential premises to be set in the amount of their market value. By the resolution of the first-instance court, which stood in the court of appeal, the cadastral value was set in the amount of the market value based on an expert’s opinion, with VAT included. The cassation court set aside these decisions and sent the case back to be reconsidered by the court of appeal. The latter court modified the decision of the first-instance court and set the cadastral value in the amount of the market value net of VAT; however, during an additional examination, the expert had established the market value with VAT being accounted for separately. The Supreme Court did not agree with this approach and sent the case back to be reconsidered by the court of appeal, stating that neither legislation on valuation activities nor tax legislation provide for VAT to be a pricing factor which increases the market value of a real estate item when determining such value for the purposes of establishing the cadastral value. It also stated that the cadastral value being set in the amount of the market value, with VAT being recorded or accounted for separately, is at odds with legislation on valuation activities.

The meaning of the judicial act adopted

It is still controversial whether VAT should be included in the market value in cases when the cadastral value is set in the amount of the market value, although the Supreme Court has articulated a position according to which VAT should not be accounted for separately (Rulings of the Russian Supreme Court dated 15 February 2017 in case No. 5-KG17-258, dated 9 August 2018 in case No. 5-KG18-96, and dated 29 November 2018 in case No. 5-KG18-276). Unfortunately, this legal position has not been fully taken up by general jurisdiction courts in their decisions in the context of cases concerning challenges of the cadastral value.

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The new ruling of the Supreme Court adds more clarity to the issue: when setting the cadastral value in the amount of the market value, VAT being accounted for separately should not affect the ultimate value of the real estate item. However, the Supreme Court has elaborated this position by pointing out that, when assessing the market value for such purpose, VAT should not be mentioned at all. This means that such market value should not reflect whether VAT has been included in it or excluded from it. Therefore, the results of the valuation of the real estate items for the purpose of setting their cadastral value in the amount of the market value should not include VAT accounted for separately and may not be decreased by the amount of VAT accounted for separately within the prices used for the valuation.

What to think about and what to do

We recommend that companies acquaint themselves with the above judicial act and make sure that the cadastral value of real estate that they own does not exceed the market value.

Help from your adviser

Pepeliaev Group’s experts are ready to provide legal assistance in issues connected with the relationship between the cadastral value and VAT as well as in any other issues which emerge in relation to the ownership, use and disposal of real estate, including in connection with the cadastral value being challenged.



[1] Cassation Ruling of the Judicial Board for Administrative Cases of the Russian Supreme Court dated 5 February 2020 No. 5-KA19-66

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