Russian Supreme Arbitration Court has explained the rules for paying VAT when an insolvent debtor’s property is disposed of

Pepeliaev Group advises of the publication, on 13 February 2013, of Resolution No. 11 of the Plenum of the Russian Supreme Arbitration Court (SAC) dated 25 January 2013 “On paying value added tax when the property of an insolvent debtor is disposed of”. This resolves,  to the benefit of creditors and buyers of bankrupt companies’ property, issues relating to the procedure and regime for paying VAT.

Federal Law No. 245-FZ dated 19 July 2011 added to article 161 of the Russian Tax Code (the “Tax Code”) clause 4.1. This stipulates that when insolvent debtor’s property is disposed of in Russia, tax agents must pay VAT. In this case the tax agents are deemed to be companies and individual entrepreneurs who buy the property or rights in question. The new provisions of the Tax Code gave tax authorities advantages in collecting VAT which were detrimental to the general order of priority of creditors in insolvency proceedings and created difficulties for buyers of insolvent debtors’ property owing to penalties imposed by tax authorities under article 123 of the Tax Code for failing to withhold and pay taxes.

The decree by the Plenum of the SAC has removed these discrepancies; its main regulations are provided below.

VAT received as a part of the profit from disposing of a bankrupt’s property (excluding lending institutions) will be paid only after all current payments of the first three priorities have been settled. 

Article 2 of the Federal Law No. 127-FZ dated 26 October 2002 “On insolvency (bankruptcy)” (the “Bankruptcy Law”) provides that to declare a debtor bankrupt means to establish that the debtor is unable to perform its obligations in the ordinary course of business and to satisfy all creditors’ claims in full, including claims regarding compulsory payments. For this reason bankruptcy proceedings are regulated by special rules for distributing the debtor’s property, including the rules establishing the priority of creditors’ claims (articles 134 and 138 of the Bankruptcy Law and article 50.36 of the law “On the bankruptcy of banks”). These rules are treated as special by both civil and tax legislation.

Based on the above, the Plenum of the SAC has explained that VAT applicable to disposal of property (including the pledged property) of a debtor declared bankrupt must be calculated by the debtor as a taxpayer  after the tax period and shall be paid by the due dates prescribed in article 174.1 of the Tax Code. Article 134.2(5) of the Bankruptcy Law provides for such a claim regarding payment of VAT to be treated as a fourth priority current claim. The amount for which the debtor’s property was disposed of should be paid by the buyer of the property to the debtor or to the auctioneer in full (without any VAT being withheld). This amount should be distributed under the rules stipulated in articles 134 and 138 of the Bankruptcy Law.

VAT received as a part of the profit from the disposal of the property of a bankrupt lending institution shall not be treated as a current payment and shall be paid from the debtor’s property remaining after the claims by registered creditors have been settled. 

As provided in articles 50.26, 50.27 and 50.40.5 of Federal Law No. 40-FZ dated 25 February 1999 “On the insolvency (bankruptcy) of lending institutions” (the “Bank Bankruptcy Law”), VAT obligations arising from the disposal of a lending institution’s property during insolvency proceedings are not treated as current payments. They should therefore be paid from the lending institution’s property remaining after all creditors’ claims have been satisfied, provided that such claims were submitted by the prescribed deadline and entered in the register of creditors’ claims. This payment must be made in full (without any VAT being withheld), in the same way as for lenders that are not lending institutions.

From the date when a commercial (arbitration) court declares an individual with the status of an individual entrepreneur bankrupt and initiates bankruptcy proceedings, this person ceases to be a VAT taxpayer.

The Plenum of SAC has clarified that provisions of the Tax Code may not be interpreted as meaning that VAT should always be paid on a disposal of the debtor’s property during insolvency proceedings. This is irrespective of whether tax is applicable to the debtor or to the disposal of the property in question.

Article 143.1 of the Tax Code provides that VAT taxpayers are companies and individual entrepreneurs. Individuals who are not individual entrepreneurs are not treated as taxpayers of this tax. It follows from article 216 of the Bankruptcy Law that an individual’s state registration becomes void when a commercial (arbitration) court has declared the individual entrepreneur bankrupt. Having lost the status of an individual entrepreneur, the debtor ceases to be a VAT taxpayer, and therefore no VAT may be applied to any transactions entered into by the receiver or auctioneer  disposing of its property during insolvency proceedings.

The Plenum of the SAC also noted the provisions of section 21 “Value-added tax” and other sections of the Tax Code that deal with situations when companies are not VAT taxpayers. These provisions apply to transactions entered into by the receiver or auctioneer disposing of the debtor’s property during insolvency proceedings. Examples are selling land plots (article 146.2 of the Tax Code) or securities including shares of a joint-stock company created by replacing assets under article 141.4 of the Bankruptcy Law (article 149.2.12 of the Tax Code).

Our lawyers’ involvement in insolvency (bankruptcy) proceedings shows that when discrepancies exist between the legislation and bankruptcy legislation, it is best to follow the special rules provided by the Federal Law “On insolvency (bankruptcy)” and the Federal Law “On the insolvency (bankruptcy) of lending institutions”.

To this end, we recommend that the persons and companies obtain professional advice in the area of bankruptcy when they are involved in bankruptcy proceedings or they buy property from debtors who face claims from tax authorities relating to the disposal (acquisition) of debtors’ property.

Pepeliaev Group lawyers have a vast experience in defending all categories of individuals and organisations in bankruptcy procedures and those involved in buying debtors’ property. Our experts are available to provide qualified legal support across the board, including in disputes with tax authorities.

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