29.07.08

Foreign Organizations And Corporate Property Tax
On Residential Property In Russia
Vadim Zagorulko
Senior Accountant, Alinga Consulting Group

Synopsis: This article addresses in detail legislation affecting the registration and taxation of residential property belonging to foreign organizations in Russia. Of primary importance is what type of organizational formation the foreign entity operates through in Russia (whether it is a permanent representative office or not).Variables can also arise based on the purposes for which the property will be used (how the property will be recorded in the foreign organization's financial accounting). Where the property is located (in Moscow, the Moscow region, or elsewhere) is also of legal and tax importance. In general, for companies without a permanent representative office in Russia, it is recommended that residential property be made available solely for the free/gratuitous use of employees and other relevant parties.

A foreign organization which acquires immovable property in Russia is obliged to register the acquisition as specified by the Federal Law on the State Registration of Immovable Property and Transactions (#122 from July 21, 1997). Furthermore, in accordance with Item 1 of Article 83 of Part 1 of Russia's Tax Code (TC), the foreign organization must "register with the tax authorities…where the immovable property belonging to it is located." Registration of a foreign organization that owns immovable property in Russia is carried out in accordance with Items 2.4.1-2.4.6 of the Regulation on the Particularities of Tax Registration for Foreign Organizations, which was approved by Russia's Ministry of Taxes and Levies (Order #AP-3-06/124 from April 7, 2000). A foreign organization registers with the tax authority that has jurisdiction over the territory where the immovable property is located and receives a certificate of registration with a separate tax registration reason code (KPP).

In accordance with Item 1 of Article 4 of the Federal Law on Accounting (#129 from November 21, 1996), branches and representative offices of foreign organizations are obliged to maintain accounting records in accordance with the requirements of the said law, "unless otherwise stipulated by international law ratified by the Russian Federation." Let us assume that a foreign organization has acquired an apartment in a building for the use of its employees. In this case, the accountant will account for the apartment either as a fixed asset or as an investment in tangible assets for the purpose of generating income. The latter case applies if the acquired apartment will subsequently be rented out under a residential lease (Paragraph 3 of Item 5 of Accounting Regulation 6/01). All provisions related to the accounting of fixed assets will apply to the apartment in the primary accounting documents, including assessment, reassessment, calculation of depreciation and reflection of presence and movement. 

In accordance with Items 2 and 3 of Article 374 of Chapter 30 ("Corporate Property Tax") in Part 2 of the TC, "for foreign organizations that do not carry out operations in Russia through permanent representative offices… immovable property in Russia belonging to foreign organizations" is subject to corporate property tax. The tax base with respect to the immovable property of such foreign organizations is recognized as the "inventory value of this property according to technical inventory agencies" (Item 2 of Article 375 of the TC). Consequently, of principal importance for the purposes of calculating corporate property tax is the notion of "permanent representative office."

Item 2 of Article 373 of the TC, for the purposes of defining "permanent representative office," refers to Article 306 of Chapter 25 ("Corporate Profits Tax") of Part 2 of the TC. As a practical commentary to Article 306 of the TC, in order to determine the tax status of foreign organizations operating in Russia, the "Guidelines for Tax Authorities on Individual Provisions of Chapter 25 of the TC Concerning Taxation of Profits (Income) of Foreign Organizations" can be used. These guidelines were approved by Russia's Ministry of Taxes and Levies (Order #BG-3-23/150 from March 28, 2003). There is another important aspect to consider with regard to issues such as the determination of the tax status of foreign organizations in Russia both in general and as related to taxation of organizations' property (capital). At issue here is the application of norms present in international law, which, in accordance with Article 7 of Part 1 of the TC, have priority over the norms present in the TC.

Let us assume that in accordance with international law concluded between Russia and the country where a company is incorporated, the owner of the residential premises, a foreign organization whose operations in Russia do not constitute the formation of a permanent representative office, acts as a corporate property taxpayer with respect to the residential premises it owns. As we have already noted, the inventory value of the immovable property as of January 1 of the reporting (tax) period must be known in order to determine the tax base. In accordance with Paragraph 2 of Item 5 of Article 376 of the TC, "authorized agencies and specialized organizations that handle accounting and technical inventory of immovable property are required to report information concerning the inventory value of each property to the tax authority where the property is located." The procedure for presentation of the results of inventory is established by the Government Resolution on State Technical Accounting and Technical Inventory of Capital Construction Projects (#921 from December 4, 2000). A technical passport is then issued based on the results of the inventory. The Federal Immovable property Cadastre Agency (Rosnedvizhimost) and its territorial bodies are authorized to carry out these procedures (Order #147 of Russia's Ministry of Economic Development from April 26, 2007).

With respect to the calculation of corporate property tax, the subject of greatest interest is the tax benefits defined by Article 381 of the TC, in particular, the benefits established by the laws of Russia's constituent territories. According to an analysis of regional legislation -- Law of Moscow on Corporate Property Tax (#64 from November 5, 2003), Law of the Moscow Region on Tax Benefits in the Moscow Region (#151/2004 from November 24, 2007), Law of St. Petersburg on Tax Benefits (#81-11 from July 14, 1995) and Law of the Leningrad Region on Corporate Property Tax (#98 from November 25, 2003) – several conclusions can be drawn. First, corporate property tax benefits for foreign organizations that own apartments are not available in St. Petersburg and the Leningrad Region. Second, in the Moscow Region, it is only theoretically possible to receive such benefits. Finally, such benefits are available as a matter of practice only in Moscow. In order to receive benefits in Moscow, the apartment must either be made available for rent or for gratuitous use (Sub-item 10 of Item 1 of Article 4 of the Law of Moscow #64 from November 5, 2003).

In accordance with Article 671 of Part 2 of Russia's Civil Code (CC), a rental agreement is compensatory by definition. Consequently, a foreign organization, whose activities in Russia do not constitute the formation of a permanent representative office and which offers an apartment belonging to it for rent, begins to receive revenue from the systematic use of the property and is considered to be conducting commercial operations, thereby losing its tax status. In light of these conditions, the conclusion of a rent agreement cannot be recommended.

Item 1 of Chapter 689 of the CC states that "according to a contract for gratuitous use…one party (the lender)…transfers an item for temporary use by the other party (the borrower), and the latter agrees to return the same item in the condition in which it was received, subject to normal wear and tear, or in a condition according to the contract." Specific terms of contracts for gratuitous use are indicated in Articles 690-701 of Chapter 36 ("Gratuitous Use") of Part 2 of the CC. The borrower, having received an apartment, is obliged to keep it "in good condition, including the performance of repairs and overhaul, and bear all the costs of its maintenance unless otherwise stipulated by the contract for gratuitous use" (Article 695 of the CC). The lender is responsible for damage caused by a third party as a result of use of the apartment, "unless he can prove that the damage was caused by intent or gross negligence on the part of the borrower" (Article 697 of the CC). As we can see in these articles, if a foreign organization, whose activities in Russia do not constitute the formation of a permanent representative office and which owns an apartment, definitely decides to take advantage of the corporate property tax benefits in Moscow while maintaining its tax status, the said organization should carefully conclude a contract for gratuitous use. Such a contract could be concluded with one of its employees, for example.

A final question to consider is: "Is it necessary for a foreign organization whose activities do not constitute the formation of a permanent representative office in Russia to present a 'zero' tax liability with respect to corporate property tax in the event that it does not own immovable property?" Article 373 of Chapter 30 of the TC states that "foreign organizations…which own immovable property in Russia… are recognized as taxpayers." In other words, such foreign organizations are not recognized as payers of corporate property tax, and tax accounting with respect to corporate property taxes does not need to be presented to tax authorities.

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