Cadastral value determines what property tax its owner must pay. If the owner considers it overstated, it can be challenged, but that is not always easy.
In one case, for example, the Moscow City Court refused the owners of elite Moscow real estate who were challenging the setting of a price for the properties "retrospectively". In another case the court allowed value added tax (VAT) to be included in the cadastral value of a shopping centre. The Supreme Court set both decisions aside and explained what was wrong with them.
In 2017 cadastral value was challenged almost 25% more often than in the previous year, and in 97% of cases the applications were granted. The Supreme Court cited that statistic at the beginning of 2018. Property tax rose significantly from 2015-2016, because it began to be calculated on the basis of the property's cadastral value. But if that value is higher than the market price, that is a reason to have it reviewed and to reduce the amount of tax. The cadastral value of residential properties (flats and houses) usually corresponds to the market, says Angela Poltorak, head of the real estate and construction practice at the law firm Cliff.
In her observation, speaking of commercial real estate and the land under it in the city of Moscow, the cadastral value is overstated in more than half of cases.
That is advantageous to the city, because the tax is a regional one, but disadvantageous to entrepreneurs, who go to challenge the valuation figures.
Nine companies reached the Supreme Court. They had challenged the setting of the cadastral value of their properties, in effect "retrospectively". Dissatisfied with the increase in property tax were the research and production association (NPO) "Tsentr", NPO "Tekhnologiya-Tsentr", NPO "Tekhnologiya-Zapad", NPO "Tekhnologiya", NPO "Zapad", "Moskovsky Shyolk", "Pereval", NPO "Tekhnologiya-Vostok" and "Business Centre Zamoskvorechye". At the end of 2016, namely on 26 December, the Government of Moscow approved Resolution No. 937-PP, which changed the cadastral value for the whole of the previous year, 2016. A representative of the City Property Department explained this as a technical error by Rosreestr. Because of it, elite office and retail properties in the centre of the capital (for example, the Evropeisky shopping centre, or Nautilus on Lubyanka Square) were recorded as social facilities or as properties of unknown purpose, and their cadastral value was understated many times over and stood at 18,000 roubles per 1 sq. m, Vedomosti reported.
The authorities "came to their senses" and corrected the figures for 2016 on 26 December. The cadastral value of the Evropeisky shopping centre, for example, rose from 3 to 24 billion roubles, which increased the tax by 277 million roubles in 2016,
says the companies' representative, managing partner of Consul Group Sergei Pivovarchik.
The nine companies decided to challenge in court Resolution No. 937-PP of 26 December 2016, which set the cadastral value for 2016. The Moscow City Court refused to consider their application, because it took the view that the companies' rights had not been infringed. The point is that the December act soon ceased to have effect, because the November act, which set the cadastral value for 2017 (Resolution No. 790-PP of 29 November 2016), had come into force.
The Supreme Court took a different view. It noted that the December resolution increased the companies' property tax for 2016, and that a desk tax audit found an understatement of the tax base. The December resolution therefore affects the claimants' rights, and the court was wrong to refuse to consider their claims. As for the November resolution, it sets the cadastral value for a different period (2017), and so has nothing to do with the subject of the claim, as follows from Ruling No. 5-KP 8-159.
The Moscow City Court refused on formal grounds. But the companies had no other way to challenge the cadastral value.
The opponents began to say that they had taken the cadastral value from a decision of the commission, but the Supreme Court recalled the resolution of the Government of Moscow and indicated that it infringes the claimants' rights,
says S. Pivovarchik.
At the same time, the decision of the Supreme Court is purely procedural: it did not touch the substance of the dispute. The last word therefore remains with the Moscow City Court, to which the case was sent for reconsideration. If one looks at the practice of the commercial courts in disputes over the resolution of 26 December 2016, it is not developing in the taxpayers' favour, says Anton Shamatov, a partner at the law firm Mozgo and Partners.
VAT and cadastral value
Cadastral value is set at the level of market value. Quite often VAT is included in it, says Poltorak of Cliff. But calculating cadastral value inclusive of VAT is unlawful if the owner intends to go on using the property rather than sell it. The Supreme Court gave that clarification recently, in case No. 5-KG18-96. In it, the limited liability company "Aksioma" challenged the cadastral value of a shopping centre on the outskirts of Moscow, which stood at 275.2 million roubles. The company insisted that VAT should be excluded, in which case the figure would be 233.2 million roubles. The Moscow City Court rejected the claims of "Aksioma". In its view the tax had to be taken into account, because market value is the most probable price at which the property can be sold. In that case VAT will be included in it. And that does not mean double taxation, the Moscow City Court considered. Property tax is paid when the property is used, and value added tax is charged on a sale.
VAT is indeed paid on a sale, but not when the real estate continues to be used, the Supreme Court recalled. Taking VAT into account in the cadastral value is therefore unlawful and has no basis in law. The case was sent back for reconsideration.
VAT must be excluded from the cadastral value if the real estate is not to be sold, the Supreme Court held.
The Supreme Court had come to a similar conclusion back in February 2018 (Ruling No. 5-KG17-258), but the Moscow City Court still refuses to reduce the cadastral value by the amount of the tax, says Ksenia Socheeva, a senior lawyer at the "Commonwealth of Land Lawyers". In her words, the judges of the Moscow City Court understand the February position of the Supreme Court as follows: "The finding of the forensic examination in a case challenging cadastral value must not contain the phrases 'inclusive of VAT' or 'exclusive of VAT'." Shamatov fears that forensic experts will continue to take the tax into account, but will not mention it in the opinion. "But the Supreme Court made it clear: the decision will be set aside if it is proved that VAT is included in the cadastral value," Shamatov concludes.
When it makes sense to call in the lawyers
Cadastral value rarely coincides with market value to the kopeck, so, formally speaking, it is easy to obtain a review, but that is not always worthwhile, says Socheeva. Lawyers therefore recommend first commissioning an initial audit (an express valuation) of the property. It makes sense to take a case on where there is a chance of reducing the value by at least 20%, says Nikita Kulikov, executive director of Heads Consulting. He also recommends challenging the cadastral value of expensive properties, where the saving can cover the valuers' fees. The legal costs will most likely not be recovered, so one must be prepared to pay not only for a costly pre-trial report but also for the forensic examination, Socheeva warns. According to Kulikov, one valuation without representation in court costs 80,000-100,000 roubles.
Cadastral value can be challenged before the Commission for the Consideration of Disputes on the Results of Determining Cadastral Value (such commissions are established under Rosreestr) and in court. Individuals may go straight to court, but for organisations the pre-trial stage is mandatory. In Moscow it is most often a formality, since the Commission refuses to review the cadastral value, Poltorak observes. In her words, the court as a rule approaches the case in more detail and with more reasoning.
The main shortcoming in the determination of cadastral value is that it is too subjective and relative, Poltorak complains. Concepts such as "market value" do not lend themselves to precise analysis, she explains. One and the same property can be worth different amounts under the cost, comparative and income methods of valuation, Kulikov confirms. "The outcome of the case depends on the expert, and it is quite hard to predict. Often he names a figure lower than the one the client originally asked for. The reverse is also common," he says.
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