A new ruling of the Supreme Court on whether VAT is included in cadastral value was given in the case of Art Format, a limited liability company, the owner of five premises in a Moscow business centre. Initially, in 2017, the Moscow City Court determined the value of the properties belonging to the company taking VAT into account. The company disagreed with that approach and took the case to cassation. The judicial collegium of the appellate instance of the Moscow City Court ordered an additional expert examination, and VAT was excluded from the cadastral value. The Government of Moscow in turn filed a cassation appeal asking that the value including VAT be left in force. The Supreme Court ruled on that appeal and sent the case back to the appellate instance.
Cadastral value has been the base for calculating property tax since 2014. As a rule it ought to correspond to market value, but often, because of the poor quality of the valuation, the figures can differ several times over, Evgeny Neiman, vice-president of the Russian Society of Appraisers, told RBC.
Several Moscow companies had already taken such cases to the Supreme Court. In 2018, in its decisions in the cases of the Zelenograd trading house and of Aksioma, a limited liability company, the Supreme Court indicated that VAT cannot be included in cadastral value, since that value is used as the base of property tax rather than for a sale. Those decisions did not, however, become a turning point in cases on the valuation of real estate for tax purposes. In 2019 the courts again began, on a wide scale, to increase the value by VAT, Anton Stepanov, director of the dispute resolution practice at KPMG, told RBC.
The new decision of the Supreme Court brought no clarity
In its ruling in the case of Art Format, a limited liability company, the Supreme Court stated that "a court's setting of the cadastral value of real estate in an amount equal to its market value taking VAT into account conflicts with the legislation on valuation activity". At the same time the Supreme Court stated that it is unlawful to determine market value while singling VAT out.
Lawyers read the wording of the Supreme Court's ruling in different ways. At KPMG they hope for a new turn in the practice and a move away from the inclusion of VAT in market value. The other part of the decision, however, the direction not to mention VAT, carries a risk that the confusion will continue: in practice some valuers will still include VAT in the value and simply will not state that in their reports, warns Anton Stepanov of KPMG. Because of that, owners of real estate will have to study the expert reports more carefully in order to get at the truth, and will have to prove that such a calculation is defective, the lawyer warns.
Sergei Pivovarchik, managing partner of Consul Group, read the Supreme Court's decision differently. In his view, the wording means that VAT must be taken into account, but that the tax may not be singled out from the value.
A value "without VAT being singled out" is still a value that includes VAT. In plain words, the final figure should not contain the words "VAT" at all. Just a figure,
The need to include VAT is also confirmed, he says, by the fact that on 19 February the Supreme Court set aside a decision that left VAT out of account in the similar case of TD Zelenograd.
The problem of including VAT in cadastral value is characteristic of Moscow, experts say. In many regions there is no such problem, for example in St Petersburg, the Moscow Region, Tatarstan, Krasnodar Territory, the Penza, Chelyabinsk, Novosibirsk and Sverdlovsk Regions, and a number of others, Stepanov lists. "And the Moscow authorities have always insisted that the right way to calculate the value of real estate is to take VAT into account," he explained. Over 2014-2019, by including VAT in the value of real estate, Moscow collected an extra 50 billion roubles, Consul Group estimated on the basis of Federal Tax Service data. RBC sent requests to the government and to the City Property Department of Moscow.
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