On 29 September the President signed bill No. 720839-7, approved the previous week by the Federation Council, which makes numerous amendments to the Tax Code of the Russian Federation. What do these amendments mean, and what consequences should be expected for property tax on legal entities?
Properties belonging to legal entities are taxed on cadastral value where they are among the properties specified in paragraph 1 of Article 378.2 of the Tax Code of the Russian Federation. That paragraph distinguishes four groups of properties:
1. shopping centres and premises in them;
2. administrative and business centres (that is, office centres) and premises in them;
3. any properties of foreign organisations that do not carry on activity in the Russian Federation through representative offices;
4. residential houses and residential premises owned by organisations.
Under paragraph 7 of Article 378.2 of the Tax Code, a constituent entity of the Russian Federation approves a list of properties for which the base is calculated from cadastral value only for the first two items: shopping centres and premises in them, and office centres and premises in them. No list is approved for the real estate of foreign organisations or for residential properties. Tax on those is paid on cadastral value by default.
In the law under consideration, signed on 29 September by the President of Russia, the fourth kind of real estate, residential houses and premises (subparagraph 4 of paragraph 1 of Article 378.2 of the Tax Code of the Russian Federation), was changed to "other items of immovable property that are recognised as objects of taxation in accordance with Chapter 32 of this Code and are not provided for in subparagraphs 1-3 of this paragraph". Turning to Chapter 32 of the Tax Code of the Russian Federation, we see that the objects of taxation are: a residential house, a flat, a room, a garage, a parking space, a single immovable complex, an object of unfinished construction, and other buildings, structures, installations and premises. In substance, the constituent entity's list (provided for by paragraph 7 of Article 378.2 of the Tax Code of the Russian Federation) loses its point, because any immovable property that is not specified in the constituent entity's list falls in any event within the wording of Chapter 32 of the Tax Code of the Russian Federation and becomes, by default, an object of taxation on cadastral value. Let me recall that a constituent entity has no duty to draw up a list for the properties specified in subparagraph 3 and subparagraph 4 of paragraph 1 of Article 378.2 of the Tax Code of the Russian Federation. That duty was provided for only in respect of the groups specified in subparagraph 1 and subparagraph 2. It now becomes pointless in light of the new wording of subparagraph 4 of paragraph 1 of Article 378.2 of the Tax Code of the Russian Federation.
The consequences for taxpayers
Let us start with the good news. The innovation will not begin to operate automatically. It can be introduced in a particular constituent entity only if that constituent entity adopts a corresponding law. Until then, it will remain possible to go on playing by the old rules: "on the list, you pay on the cadastral value; off the list, you pay on the average annual value".
Now the bad news. If a constituent entity introduces such changes, organisations will pay tax on cadastral value on all of their immovable property. That means buildings of any purpose, any structures (utility networks, electricity networks, hangars and the like), garages, parking spaces, and so on.
We decided to look at a live example, one of the well-known dairy plants located in Moscow. Property tax at present (on the basis of open sources) is about 5 million roubles. Adding up the cadastral value of all the buildings of this plant and multiplying by the rate for 2020 (1.7%), we find that the plant's property tax will rise to 40 million roubles a year. At the same time, none of the forms of tax relief that exist in Moscow today fits this complex, which means the tax will have to be paid "in full".
That such changes may be fatal for industrial enterprises is entirely realistic. Let us look at the taxation of the owners of office properties, who have been paying on cadastral value since 2014. Already, property tax for the owners of office real estate averages 15% of the rental income. For some, that 15% is the whole of the profit the owner used to receive before taxation on cadastral value was introduced, and which he expected to receive in future. The loss of a single tenant can push such an owner's business into a loss. Ask the owners of office premises for whom letting the premises is the core business, and you will learn that they would gladly sell you the premises.
This is due to stagnation in the commercial property market, on the one hand, and a substantial increase in the tax burden, on the other. In many cases, especially where the business model involved raising borrowed investment from outside, the new challenges become fatal for the business, as the discouraging statistics of the bankruptcy panel of the Arbitration Court of the City of Moscow show. What will become of manufacturing enterprises, whose turnover and profitability are often not comparable with the commercial property segment, if the constituent entities do not provide the corresponding special tax relief, is not hard to imagine.
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