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Taxes

Inevitably, there are taxes considerations to be taken into account in the acquisition of real estate in Russia. The extent of these tax implications depends upon whether the real estate was acquired by a foreign legal entity (“FLE”) itself. through a foreign legal entity’s local permanent
establishment (representative offce or branch) or through a registered Russian legal entity (ie a subsidiary of the foreign legal entity) (“RLE”).

7.1 Profits taxes – rules

Profits taxes is a tax on the operating income of the relevant legal entity. The taxes base is defned as the total “income” received by a taxpayer, which includes sales income (total proceeds from the sale of goods, works, services and property rights) and non-sales income, less any related expenses and allowable deductions.
The Russian Tax Code lists the expenses that are deductible for tax purposes. Expenses are generally considered to be deductible if they meet the following criteria:

  • they must be incurred in the course of a taxpayer’s
    income-generating activity;
  • they must be economically justifable;
  • they must be supported by relevant documentation; and
  • they must not be listed as one of the specifcally nondeductible expenses provided by law.

In practice, the taxes authorities apply these criteria very strictly, and may challenge any expense which is not directly related to the generation of income. There are also strict documentary requirements that the taxpayer must satisfy regarding contracts, invoices, VAT invoices and other
supporting material. Certain expenses, such as interest on a loan and insurance, may be deducted for tax purposes with partial limitations or
restrictions.

7.1.1 Tax depreciation

Depreciable property is property (excluding land), both tangible (such as buildings, plants and equipment) and intangible, which has:

  • a useful life of at least one year; and
  • a value of not less than RUB 20,000.

All depreciable assets must be allocated to their relevant depreciation group and amortised over their useful lives.The taxpayer determines the relevant depreciation group by using the Classifcation of Fixed Assets issued by the Russian government. The tax depreciation may be calculated using either the straight-line method or reducing balance method (subject to certain restrictions).
From 2006 onwards, taxpayers have been entitled to deduct a one-off depreciation allowance equal to 10 per cent of the historic cost of fxed assets purchased or capital improvements made. The regular depreciation expense is then computed on the reduced tax base.

7.1.2 Tax rate

The maximum rate for profits tax is 20 per cent, attributed as follows:

  • 2 per cent is payable to the Federal budget; and
  • 18 per cent is payable to the Regional budget. Regional authorities may reduce their portion of profit tax by 4.5 per cent.

7.1.3 Losses

Enterprises may carry forward tax losses for up to ten years.

7.1.4 Profits tax – fles

Different tax rates are applied depending on the source of income derived from a real estate asset (ie. whether it is from a direct purchase, lease or share deal).
Rental income from real estate is subject to Russian withholding income tax at a rate of 20 per cent. No double tax treaty protection is available for income related to the sale or lease of real estate. Russian-sourced income of an FLE which is not attributable to a local permanent establishment may be subject to withholding tax. The responsibility for the withholding tax lies with the RLE who is making the payment (known as the
“tax agent”).
The statutory withholding tax rates are as follows:

  • 15 per cent on dividends and other profit distributions received by FLEs;
  • 20 per cent on all types of income subject to withholding tax. This may include the proceeds of sale received from the sale of shares in an RLE where more than 50 per cent of the company’s assets consist of real estate in Russia or the proceeds from the sale of real estate in Russia, if documents supporting the related expenses have not been provided, or the recipient of the income has elected not to deduct the related expenses (note that there may be an exemption according to provisions of a relevant double tax treaty); and
  • 20 per cent on profit from the sale of shares in RLEs, where more than 50 per cent of the company’s assets consist of real estate in Russia, or from the sale of real estate in Russia, provided that the recipient of the income submits documents supporting deductible expenses to the tax agent prior to receiving the same; A relevant double tax treaty may provide for a reduction in or exemption from withholding tax (typically of 5 to 10 per cent on dividends and of 0 per cent on other types of remitted income) and may, with the exception of the US and UK treaties, override the 50 per cent real estate company capital gains tax provision noted above to facilitate a tax-free sale.

7.2 VAT

VAT is charged at a standard rate of 18 per cent on the sale of goods and services (including rental income from a building) supplied in Russia. VAT is also applied when goods and services are supplied free of charge and is also imposed on most imports into Russia. The transfer of property rights
are also subject to VAT. The sale of shares and land plots are however exempt from VAT.
The VAT actually payable to the Federal budget is the difference between the VAT receivable on transactions subject to VAT (“output VAT”) and the VAT incurred on purchases subject to VAT (“income VAT”). Since 1 January 2006, taxpayers have been entitled to offset their VAT before paying their suppliers. VAT invoiced by contractors for capital construction and installation work may generally be offset when such work has been recorded in their accounts, rather than when the construction project has been completed.
VAT incurred on construction for a company’s own use may be offset once it has been charged and paid to the Federal budget. The accrual and payment of VAT on this type of work must be recorded and accounted for in every tax period.
Input VAT incurred on the purchase of fxed assets can be offset only once the assets have been recorded in the company’s accounts.

7.3 Property taxes

Property tax is levied on both moveable and immoveable fxed assets. In the case of FLEs which do not carry out commercial activities in Russia through a local permanent establishment, it will be the real estate located in Russia and owned by the FLE which is subject to property tax.
Land, water and other natural resources are not subject to property tax, but buildings located on land are subject to property tax.
From 1 January 2014, the basis for property tax for commercial property has been the cadastral value of the real estate asset. The taxes base is the average annual residual value of the property (ie the historical cost less depreciation) calculated in accordance with Russian accounting standards.
The maximum rate set by the Russian Tax Code is 2.2 per cent. However, a reduced tax rate or even exemption may be offered by some regional authorities, although this is often conditional on investment in the region.

7.4 Land taxes

Land tax is a local tax, and therefore its application is administered by local regulations as well as the Russian Tax Code. Land tax applies to legal entities and individuals which own land or have the permanent right to the use of land. Legal entities and individuals which occupy land under
a lease or free of charge are not liable to pay land tax. The tax base is the cadastral value of the land as determined on 1 January of the reporting year. The cadastral value for a specifc plot is determined in accordance with the Russian Land Code. Local authorities set the land tax rate which,
under the Russian Tax Code, may not exceed 0.3 per cent of the cadastral value of land for land which is:

  • used for agricultural purposes, or
  • occupied by residential properties, or
  • occupied by utilities;

and may not exceed 1.5 per cent of the cadastral value for anyother land.