The Ministry of Finance will spare business a threatened tax rise

It has agreed to clarify the conditions for taxing real estate on cadastral value

The Ministry of Finance has prepared a draft of amendments to the new rules for taxing companies' property, approved only a month ago. The amendments are to limit the list of real estate on which the tax will be calculated on cadastral value. In the amendments to the Tax Code adopted earlier, business and lawyers saw a risk of an unpredictable rise in the tax burden.

Since 2014, business has paid tax on cadastral value, which is substantially higher than book value, on shopping centres, offices and the residential buildings it owns. At the end of September the president signed amendments to the Tax Code requiring the tax to be calculated on cadastral value for "other objects" on which individuals already pay that tax. The list thus became open-ended.

The Ministry of Finance explained that there had been no intention of charging tax on all of an organisation's real estate by reference to cadastral value. The point of the rule, said Ilya Trunin, deputy minister of finance, is that if an individual's property tax was calculated on cadastral value, that principle does not change when the property passes to a company.

What worried business was not so much the appearance of new objects on the list as the fact that the list was becoming open-ended, and that tax on cadastral value would also be calculated on industrial property. At a meeting of the board of the Russian Union of Industrialists and Entrepreneurs (RSPP) on 9 October, Anton Siluanov, First Deputy Prime Minister and Minister of Finance, said that the Ministry of Finance would prepare amendments to the Tax Code so as to avoid the risks that had alarmed business. In a letter to the Federal Tax Service and the RSPP, the Ministry of Finance confirmed that it was discussing the drafting of the amendments with the relevant committee of the State Duma.

The ministry has now published new amendments to the Tax Code. The bill introduces a closed list of objects on which business will pay tax calculated on cadastral value. They are residential premises, unfinished buildings, garages, and residential and utility structures on plots intended for personal use.

That was the wording the government originally introduced in the State Duma, a representative of the Ministry of Finance says. It rules out divergent readings, and also the risk of charging tax on cadastral value on large production facilities: pipelines, wells and production shops, he notes. The wording, he says, was supported by the RSPP.

It is much clearer and reduces the risks for business, says Alexey Artyukh, a partner at Taxology. At a minimum, the Ministry of Finance introduces an important criterion, the purpose of the land plot, for personal subsidiary farming and for individual housing construction. That will substantially limit the number of situations in which companies have to pay tax on cadastral value on such objects, he explains. Companies do not often become the owners of such objects. The owner may be a developer, a creditor who has received the collateral, or an organisation that bought such an object from an individual. If a company has built housing for its employees, then, for as long as that housing remains in its ownership, the tax will be charged on cadastral value, says Alexey Kaminsky, chairman of the council of the national association of self-regulatory organisations of valuers, Soyuz OOO. There are now no risks for business, an employee of a large international company agrees.

But the problem has not been solved in full. It remains possible to charge property tax on cadastral value on unfinished buildings. At present no tax is paid on such objects, but under the new amendments it will have to be paid if the regions make the same changes to their laws. This may affect companies that build real estate on credit and whose security at the start is a land plot. If the company applies for credit again, the bank may also ask for the unfinished building as security. The company will then have to place the unfinished building on the cadastral register and pay tax from that moment. Another case is where a company decides to sell an unfinished building: the buyer will have to pay tax on it,

- says Sergei Pivovarchik, managing partner of Consul Group.

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