Ways to optimise the tax on commercial real estate in 2024

Consul Group held a webinar on "Ways to optimise the tax on commercial real estate in 2024". The speaker was Sergei Pivovarchik, managing partner of Consul Group.

The meeting focused on reducing an organisation's property tax on commercial real estate by having the property excluded from the list of properties taxed on cadastral value, and on resolving the questions of how properties are classified as commercial or non-commercial real estate and of the lawful ways of reducing property tax.

Any method of optimisation has to be considered in two respects: the economic effect of using the tool, and the risks connected with using it. If one is speaking of excluding a property from cadastral value, the risks are claims by the tax authority in relation to the average annual value.

Previously, real estate was depreciated until the residual value was written off in full or reduced to zero. The federal accounting standards (FSBU) now introduce a category, liquidation value, and lay down a general rule that an asset is depreciated until its residual value reaches the liquidation value.

If a taxpayer does not, in its accounting policy, justify the amount of the liquidation value down to which it charges depreciation, that can become a problem and give rise to questions from the tax authority.

In 2022 the Ministry of Finance of Russia noted that an organisation must determine the liquidation value itself, and that the FSBU does not restrict how it is determined.

Classifying properties as commercial or non-commercial real estate

The reform of 2014 laid down criteria. Meeting any one of them led to the property being classified as commercial and, as a consequence, taxed on cadastral value:

• the fact that the property stands on a land plot whose permitted use provides for commercial real estate to be placed there;
• being intended for use for the purposes of trade or business;
• actual use.

These criteria meant that only in isolated cases could owners prove that their properties were not shopping centres or business centres. If one permitted use of the land envisaged retail premises (for example, a small shop at a factory), then all the workshops, warehouses and other non-commercial premises on that land were also taxed on cadastral value. In November 2020 the Constitutional Court held that the permitted-use criterion cannot be treated as the sole and sufficient ground for classifying a property as a shopping centre or a business centre, and the case law changed substantially in favour of taxpayers.

Where previously the courts refused an applicant's administrative claim in 99% of cases, after the Constitutional Court's judgment the courts began to grant such claims in 99% of cases.

In the light of a ruling of the Constitutional Court of the Russian Federation of January 2024, however, the new approach does not give taxpayers the right to recalculate taxes paid into the budget before the judgment was adopted in 2020. There are therefore certain risks connected with the revision of judicial acts that determine the amount of the tax liability, and with refunds already made from the budget, for tax periods before 2020.

The actual use of a building, and in particular the definition of an "office"

Formally, an administrative and business centre is a property of which more than 20% is used to accommodate offices. The status of a technology park, however, in principle rules out classifying the properties as a business centre, even though the premises in the technology park may themselves fully meet the definition of an office. Premises of non-commercial organisations, or of IT organisations, likewise cannot be treated as offices.

Imprecise wording as to what may or may not be recognised as an office, and classified as commercial or non-commercial real estate, forces owners to go to court. Each disputed situation therefore has to be considered individually, and by reference to the approaches that have formed in practice.

Ways of reducing property tax

There are several ways of reducing it:

• challenging the cadastral value by establishing the market value, or by correcting an error resulting from the state valuation,
• applying tax relief,
• exclusion from the list of properties taxed on cadastral value,
• challenging unlawful actions of state bodies, and others.

Sergei Pivovarchik, managing partner:

"In the present conditions it is important to look not only at the amount of the cadastral value, but also at the basis on which it was established and at the period for which it applies, as prescribed by Rosreestr. When deciding on the possible ways of reducing tax, it is also very important to determine the tax base in force correctly, so as to avoid the risks of additional tax assessments, late-payment interest and fines".

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