In cases involving individuals and individual entrepreneurs, courts generally accept that the principle of reasonable expectations should be protected. One example is the ruling of the Judicial Panel for Economic Disputes of the Supreme Court of 6 March 2018, No. 308-KG17-14457. In cases involving legal entities, the position is much more difficult.
How judges reason can be seen from a real case, No. A07-38529/2019 (Lasselsberger, a limited liability company).
Why the case matters
In 2015 and 2016 the Ministry of Land and Property Relations of the Republic of Bashkortostan approved lists of real estate for which the tax base in 2016 and 2017 was to be the cadastral value. Industrial premises owned by Lasselsberger were on those lists, and on that basis the company calculated and paid property tax on cadastral value.
On 2 April 2018 the ministry amended the orders of 2015 and 2016 and removed the property from the lists. The tax authority then carried out an on-site audit for the period from 1 January 2015 to 31 December 2017, and recalculated the property tax for 2016-2017 on the net book value of the property. It proceeded on the basis that:
- the property is industrial premises, and it does not have the characteristics of a business centre or a shopping centre set out in Article 378.2 of the Tax Code;
- the lists on which it had previously been included conflict with paragraph 1 of Article 378.2 of the Tax Code.
Lasselsberger was assessed additional property tax, but was released from liability under Article 122 of the Tax Code and from penalty interest. The taxpayer did not dispute that the property in fact failed to meet Article 378.2 of the Tax Code. It did dispute the additional assessment.
The company's representatives argued that two tax periods on the lists had given them a settled expectation that it was lawful to calculate property tax on the cadastral value of the building.
The court of first instance upheld the taxpayer and declared the tax authority's decision invalid. The higher courts took a different view. They held that tax must follow the objectively correct tax base, which is the average annual value of the property, not its cadastral value.
Reasonable expectations proved unreasonable
The appellate and cassation courts rejected the argument that the company had a reasonable expectation of calculating the tax on the cadastral value. They relied on the ruling of the Supreme Court of 12 October 2021, No. 305-ES21-11708, in case No. A40-68620/2020 (the public joint-stock company Tatneft named after V.D. Shashin).
The judges noted that the principle can apply where a person's expectations rest on a clear, unconditional and consistent confirmation by the state that the person's conduct was lawful. A prudent and reasonable participant in economic activity, who should have expected the state to take the corresponding measures, cannot rely on the principle.
The principle of legitimate expectations therefore takes account of the nature of the mistake made by the state. Courts have to weigh how reasonable the participant's own conduct was, so that private and public interests stay in balance.
The courts concluded that Lasselsberger, as a professional participant in economic turnover, could see that the executive authorities had put the property on the cadastral lists by mistake. Any other approach would breach the principle that taxpayers are equal before the law.
Lasselsberger disagreed with the appellate and cassation courts and filed a cassation appeal with the Supreme Court. The Supreme Court saw no grounds to refer the appeal to a hearing of the Judicial Panel for Economic Disputes (ruling of 16 June 2022, No. 309-ES22-4685). The ruling stresses that the company, as a participant in economic turnover, and given how obvious the executive authorities' mistake was, could not have failed to expect the state to take the corresponding measures.
What the Supreme Court's conclusions mean for taxpayers
The Supreme Court has been consistent: a taxpayer's call to protect its reasonable expectations about calculating and paying tax is not made out where the taxpayer cannot have been unaware of mistakes by public authorities that cause a loss to the budget.
The open question is whether, in each case, the courts will look closely at whether such a mistake was "obvious" or "not obvious" to the taxpayer. Only that will protect legitimate expectations where there are grounds to do so.
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