Tax legislative initiatives in the aviation sector

Pepeliaev Group advises on the most significant draft laws on taxation in the aviation industry.

1. Draft Federal Law No. 352949-5 “On Amendments to Article 170, Part Two of the Russian Tax Code” (which adds to the list of cases where taxpayers are not obliged to restore value-added tax previously filed for deduction) [1].

According to the explanatory note, the draft law was prepared to enhance the competitiveness of Russian airlines in respect of cooperation with the UN within the scope of peacekeeping and humanitarian programmes.

Pursuant to the Russian Tax Code, all VAT payers shall follow a unform procedure to restore the tax filed for deduction on products used to perform work (provide services), where the Russian Federation is not recognised as the place of sales.

The draft law proposes that Russian airlines should not have to recover VAT filed for deduction on the acquisition of aircraft, engines and corresponding spare parts, if said aircraft are used to perform work (provide services) within the scope of the peacekeeping and humanitarian programmes of the UN outside the Russian Federation.

According to the proposed amendment, para 1, sub-clause 2, clause 3, article 170 of the Russian Tax Code should be amended to read as follows: “further use of such products (work, services), including fixed and intangible assets and property rights to perform transactions specified in clause 2 of this article, with the exception of the transaction specified in sub-clause 1 of this clause; perform work (provide services), where the Russian Federation is not recognised as the place of sale, by Russian air companies within the scope of peacekeeping and humanitarian programmes of the United Nations Organisation (in respect of aircraft, engines and spare parts thereto); to transfer fixed and intangible assets and/or other property and property rights to the legal successor(s) in the event of the restructuring of legal entities; to transfer property to a participant in a partnership agreement (joint operation agreement) or its legal successor, if its share is separated fr om the property jointly owned by the participants in the agreement or if such property is divided”.

2.Draft Federal Law No. 305257-5 “On Amendment to Article 376, Part Two of the Russian Tax Code” (on a corporate property tax concession in respect of transport infrastructure assets)[2].

As specified in the explanatory note, corporate property tax has a material impact on the financial performance of companies operating in the transport sector, inter alia, the cost of transportation services and their competitiveness, implementation of investment projects for the reconstruction, modernisation and construction of airports, sea and river ports stipulated by federal target programmes, and also the commissioning of new transport infrastructure assets.

Accordingly, the draft law proposes exempting taxpayers from corporate property tax for 15 years in respect of transport infrastructure assets recognised on their balance sheets (inter alia, air transport facilities (with the exception of pressure refueling systems and cosmodromes)) in respect of an increase in their book value due to allocated capital investments on construction, reconstruction and modernisation.

The draft law stipulates that the exemption applies to completed capital investments included in the book value of the aforementioned assets from 2010.

Moreover, the draft law stipulates the entry into force of this regulation from 1 January 2010 (as it was submitted by the Government at the end of 2009); however, it is highly likely that this provision will be adjusted. The draft law additionally stipulates that the amended clause 6, article 376 of the Russian Tax Code will be effective until 1 January 2025.

Currently, the proposed amendments to clause 6, article 376 of the Russian Tax Code adopted by the State Duma in the first reading read as follows:

“The tax base shall be reduced by the amount of the completed capital investments in construction, reconstruction and/or modernisation of new, reconstructed and/or modernised navigation hydraulic facilities located on Russian internal water routes, port hydraulic facilities and air transport facilities (with the exception of pressure refueling systems and cosmodromes) included in the book value of these facilities.

This clause shall not apply to completed capital investments included in the book value of the aforementioned facilities before 1 January 2010”.

3. Draft Federal Law No. 248357-5 “On Amendments to Article 251, Part Two of the Russian Tax Code” (on updating the effective version of article 251 of the Russian Tax Code in respect of income in the form of fees for air navigation services in respect of aircraft)[3].

According to the explanatory note, the draft law was prepared to overcome the current situation, wh ere sub-clause 14, clause 1, article 251 of the Russian Tax Code is actually ineffective. The author of the draft law notes that at present the designated areas of expenditure of fees for air navigation services[4] are stipulated by Resolution No. 424 of the Russian Government dated 3 May 1994 and also documents (recommended practice) of the International Civil Aviation Organisation, rather than by federal law as required by the Russian Tax Code. Moreover, article 69 of the Russian Air Code stipulates that the expenses of state agencies on air navigation services in respect of the flights of state aircraft should be reimbursed from the budget.

Therefore, the following amendments are proposed:

· Invalidate para 16, sub-clause 14, clause 1, article 251 of the Russian Tax Code;

· Add sub-clause 41 to clause 1, article 251 of the Russian Tax Code: “in the form of fees for air navigation services in respect of aircraft flights in Russian airspace, and also in the form of funds received from the federal budget as compensation for expenses on air navigation servicing for the flights of state aircraft, exempted in accordance with Russian legislation from fees for air navigation servicing”.

The main amendments, compared to the effective provision, include not only the added reference to funds received from the budget as reimbursement of expenses for air navigation services, but also a formal expansion of the scope of air navigation fees covered by this provision (as it does not indicate that the fees should be “collected pursuant to the procedure established by the competent authority for the use of airspace”[5]).

The Russian Government issued a negative opinion on this draft law[6]. The main objections of the opinion can be summed up as follows:

· Adoption of the draft law on the income from air navigation services in respect of aircraft flights would violate the matching principle for incomes and expenses stipulated by the Russian Tax Code for targeted financing.

· If a company provides services, the funds received by such company from the budget constitute some of the proceeds from the provision of services according to their economic substance and may be used by the recipient at its own discretion. Funds received by the company from the federal budget as reimbursement for expenses on the air navigation services in respect of the flights of state aircraft should be included in non-sales income for corporate profit tax purposes.

· Adoption of the draft law could result in a significant expansion in the scope of profit tax exemptions, compared to effective legislation on taxes and levies and, consequently, reduce remittances to the federal budget.

Lawyers from Pepeliaev Group will monitor the progress of these draft laws and keep you posted on the decisions adopted by lawmakers on these laws.

For further information, please contact:

 
in Moscow – Andrey Nikonov, Senior Partner, at: (495) 967-0007 or by a.nikonov@pgplaw.ru; Daniil Krymskiy, Junior associate, at: (495) 967-0007 or by d.krymskiy@pgplaw.ru

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 333-07-17 or by s.sosnovsky@pgplaw.ru