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The Russian Supreme Court has confirmed the right to deduct VAT amounts in relation to transactions exempted from taxation

Pepeliaev Group advises that the Russian Supreme Court has confirmed the right of taxpayers to deduct VAT amounts charged by contractors when work on cultural heritage sites is performed.

The Court considered two similar cases. Two companies (Nikolskiye Ryady JSC and New Holland Development LLC) implemented projects for restoring buildings located in St. Petersburg that were classified as cultural heritage sites. This was done by refurbishing the buildings and re-purposing them for modern use.

To this end, the companies purchased from contractors work and services in relation to which the contractors issued VAT invoices specifying VAT at a rate of 18%. The taxpayers deducted these VAT amounts.

The tax authority disallowed the VAT deductions and pointed out that deducting VAT assessed in VAT invoices that were issued by counterparties violates articles 149, 169, 171, 172, and 173(2) of the Russian Tax Code. This is because work performed by a counterparty and aimed at preserving cultural heritage sites, including refurbishing and re-purposing them for modern use, is not subject to VAT by virtue of article 149(2)(15) of the Tax Code. At the same time, article 149(5) of the Tax Code does not authorise counterparties to waive the exemption in relation to the transactions mentioned in article 149(2) of the Tax Code.

The court of first instance and the court of cassation came down on the side of the tax authority and concluded that taxpayers may not apply tax deductions in this situation.

The courts presumed that the companies could not have been unaware that the buildings had been classified as cultural heritage sites and entered into the relevant register; therefore, the VAT invoices issued by the counterparties stating VAT amounts in relation to work that should be performed exempt from VAT were executed in violation of the Tax Code.

The Judicial Board for Economic Disputes of the Russian Supreme Court set aside the judgements for both cases and held that the decisions of the tax authority were invalid.[1]

The Judicial Board cited the position of the Russian Constitutional Court as set out in Resolution No. 17-P dated 3 June 2014. According to that position, the discretionary nature in the regulation of tax relations is reflected, among other things, in the fact that persons/entities who are not payers of VAT, or taxpayers who are exempt from their obligations as taxpayers in relation to the calculation and payment of VAT, have the right to enter into a legal relationship to pay VAT. This, in turn, by virtue of article 173(5) of the Russian Tax Code, obliges such persons/entities to issue a VAT invoice to a buyer, with the tax amount stated separately, and, accordingly, obliges them to assess the VAT amount to be paid to the budget. On the other hand, the VAT invoice issued to the buyer serves as a ground for the buyer to subsequently deduct the VAT amounts stated in it (pursuant to article 169(1) of the Russian Tax Code).

This means that the Supreme Court has articulated a clear-cut and explicit position, namely, that a taxpayer that has bought from contracting entities work (services) aimed at preserving and refurbishing a cultural heritage site and re-purposing it for modern use, and that has received from the contractors VAT invoices with the VAT amount stated separately, did have the right to apply the relevant tax deductions, whereas the contractors, on their part, are obliged to pay the VAT to the state budget.

Previously, the Judicial Board for Economic Disputes of the Russian Supreme Court, when considering cases featuring Kogalymavia air company (Ruling of the Supreme Court No. 305-KG16-6640 in case No. А40-79255/2014, Ruling No. 305-KG16-8642 in case No. А40-58056/15, and Ruling No. 305-KG16-7096 in case No. А40-58052/2015, all dated 24 October 2016), already confirmed the right of a buyer of work or services to deduct VAT amounts invoiced by the contractor in relation to the servicing of aircraft, since such work or services is exempt from VAT by virtue of article 149(2)(22) of the Russian Tax Code. The Presidium of the Russian Supreme Court has included that position in the “Russian Supreme Court’s Overview of Judicial Practice” No. 4 (2016) (as approved on 20 December 2016), in the following wording: “any person/entity buying goods (work, or services) in relation to transactions exempt from tax, if such person/entity has received from its counterparty VAT invoices with the VAT amount stated separately, shall not be deprived of their right to deduct the charged tax amount since the counterparty is obliged to pay it to the state budget”.

Although the Russian Supreme Court’s Overview sets out the above position as a general one, courts continued to refuse to allow VAT deductions to be applied by taxpayers buying refurbishment work (services).

The rulings of the Judicial Board for Economic Disputes of the Russian Supreme Court have shed light on this issue, encouraging private investors to make investments in the renovation and restoration of architectural monuments. It will also help to harmonise relations between contracting parties and ensure an adequate tax burden by excluding a break in the chain of claiming VAT.

This means that, for the time being, the judicial acts of the Russian Constitutional Court and the Russian Supreme Court directly confirm the right of taxpayers to have VAT amounts deducted:

  • when buying goods (work, or services) from persons/entities which are exempt from the obligations of a payer of VAT owing to a special tax regime being implemented (either unified tax on imputed income, or the simplified taxation system) (Resolution of the Russian Constitutional Court No. 17-P dated 3 June 2014, and Ruling of the Russian Constitutional Court No. 460-O dated 29 March 2016);
  • when buying work (services) in relation to transactions referred to in article 149(2)(15) of the Russian Tax Code; and
  • when buying services in relation to transactions referred to in article 149(2)(22) of the Russian Tax Code.

Help from your adviser

Pepeliaev Group’s experts are ready to analyse the details of your business operations and provide you with comprehensive assistance in issues relating to the implementation of the legal positions of the Supreme Court and the Constitutional Court regarding the consequences of issuing VAT invoices in relation to transactions for which no VAT should be charged.



[1] Rulings of the Judicial Board for Economic Disputes of the Russian Supreme Court No. 307-KG17-9857 in case No. А56-35772/2016 and No. 307-KG17-12461 in case No. А56-42572/2016 dated 27 November 2017.

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