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In Resolution No. 13640/09 dated 25 February 2010 the Presidium of the Russian Supreme Arbitration Court recognised that the tax base on the sale of property rights to residential and non-residential premises is determined as the difference between the sales price and the acquisition price of the property rights.
Based on the results of the audit, the tax authority accrued additional VAT on the sale of the property rights by the investor of the construction project.
The taxpayer contested the court’s decision on the accrual of additional VAT.
The conclusion of the inspectorate that the taxpayer had understated the tax base on transactions involving the transfer of property rights to non-residential premises (when assigning claims in respect of the developer under investment agreements) served as the grounds for accruing additional VAT.
The taxpayer calculated the VAT base on transactions involving the assignment of rights in respect of the developer as the difference between the income from such assignment and the expenses that had been incurred by the company as an investor within the scope of the investment agreement.
According to the tax authority, when assigning the claims on the transfer of non-residential premises, the tax base for VAT should be determined under the standard procedure stipulated by point 2, article 153 of the Russian Tax Code, in other words, proceeding from all the incomes of the taxpayer from the transfer of property rights.
The courts of three instances upheld this approach of the tax authority and recognised as substantiated the accrual of additional VAT based on the value of the assigned rights without taking into account the taxpayer’s expenses.
However, the Presidium of the Russian Supreme Arbitration Court (Presidium) quashed the legal acts and invalidated the tax office’s decision on the accrual of additional VAT.
When referring the case to the Presidium, the judges of the Russian Supreme Arbitration Court stated in their Ruling No. VAS-13640/09 dated 17 December 2009 that if the assignment of property rights arises from the investment agreement, and not from the agreement on the sale of goods (work, services), there are no grounds for applying articles 154 and 155 of the Tax Code. At the same time, in the above Ruling the judges cited the fact that transactions relating to the assignment of property are not recognised as taxable according to sub-point 1, point 2, article 146 of the Russian Tax Code, if the transfer of property is performed as an investment.
On this basis the judges referring the case to the Presidium for review held that the assignment by an investor of its rights from an investment agreement did not result in an obligation to pay VAT.
The Presidium invalidated the tax office’s decision, but rejected the reasoning presented in the Ruling of the Russian Supreme Arbitration Court that no VAT-able item arises from the assignment of rights to non-residential premises.
The Presidium held that at the time of the sale of property rights to non-residential premises the tax base for VAT should be determined as the difference between the sales price and the acquisition price of property rights.
The Presidium stressed that the procedure for determining the tax base from all the taxpayer’s incomes, prescribed by article 154 of the Russian Tax Code only applies to the sale of goods (work or services) and property, and not to the sale of property rights. Article 155 of the Russian Tax Code does not establish a special procedure to determine the tax base for sales of property rights to non-residential premises. At the same time, as the property rights to residential and non-residential premises are classified as the same type of object of civil rights, their tax treatment should by law be determined in the same manner.
Consequently, the resolution issued by the Presidium changed the arbitration practice that existed previously in respect of the imposition of VAT on transactions involving the assignment of rights to non-residential premises.
Taxpayers that used to determine the tax base for VAT when assigning rights to non-residential premises based on incomes from the sale of such rights may now file adjusted tax returns and reduce the amount of VAT payable to the budget.
For further information, please contact:
in Moscow – Alexandr Kuznetsov, Leading Attorney, at: (495) 967-0007 or by e-mail: info@pgplaw.ru
in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by e-mail: spb@pgplaw.ru
