The Russian Supreme Arbitration Court: VAT on assignment of title to non-residential property and cancellation fee profit tax.
Legal Update No. 137.
Goltsblat BLP advises that Resolution No. 13640/09 of the Presidium of the Supreme Arbitration Court of the Russian Federation of 25 February 2010 (the “Resolution”) was adopted that covers determination of VAT in title assignment agreements with respect to non-residential property and deductibility of cancellation fees paid on abrogation of title assignment agreements.
1. Summary of a Dispute Considered by the Supreme Arbitration Court.
Under a number of investment agreements, an investor transferred funds to a developer that undertook to hand over relevant non-residential premises to the investor once construction was completed. Subsequently, having obtained the developer’s consent, the investor entered into agreements for assignment of receivables to third parties.
Upon assignment of the receivables, the investor calculated the VAT on the basis of the difference between the value of the assigned property rights as stated in the receivables assignment agreements and the costs incurred by the investor in acquiring these rights under the investment agreements.
When some of the assignment agreements were abrogated, the investor paid relevant cancellation fees not envisaged by the underlying agreements and exceeding the value of the assigned receivables. The investor included the cancellation fees paid in deductible costs for profit tax purposes.
During a subsequent tax audit, the tax authorities assessed the investor’s VAT on the basis of the total value of the property rights assigned, disregarding the costs previously incurred in acquiring them, and also recognised the investor’s cancellation fees under receivables assignment agreements as economically unjustified costs to the extent that these exceeded the value of the assigned rights.
The position of the tax authorities has been upheld by courts of three instances.
2. Conclusions Drawn by the Supreme Arbitration Court.
The Supreme Arbitration Court of the Russian Federation disagreed with the tax authorities and inferior courts, putting forward the following arguments in support of its position.
The Russian Tax Code envisages a specific procedure for determining the tax base in the event of transfer of residential premises property rights (article 155 of the Tax Code), but fails to provide one for arriving at the tax base in the event of disposal of property rights to non-residential premises.
Property rights to non-residential and residential premises are, however, the same type of civil law subject. Consequently, their legal treatment in the context of VAT calculation should be identical where the legislation on taxes and levies prescribes no specific procedures.
The Supreme Arbitration Court thus concluded that, in the event of disposal of property rights to non-residential premises, the tax base should be determined as the difference between the disposal price and the acquisition cost of the property rights.
With regard to cancellation fees paid by the investor upon abrogation of the agreements, the Supreme Arbitration Court stated that these costs were economically justified even though the initial agreements contained no cancellation fee provisions and no legal process was initiated for collecting the fees. The Court also held that payment of cancellation fees in an amount exceeding the value of the assigned receivables was justified since the fees were calculated on the basis of the increased market value of the relevant property.
3. Applicability of the Supreme Arbitration Court’s Position.
By this Resolution, the Supreme Arbitration Court of Russia eliminates the persistent ambiguity in the legislation and court practice with respect to VAT base calculation in the event of disposal of property rights to non-residential premises.
Importantly, the Supreme Arbitration Court quite manifestly employs legal analogy by indicating that, where there are no specific provisions regulating relevant relations, the taxation procedure prescribed for similar legal relations should apply.
Taxpayers that used to calculate and pay VAT upon assignment of rights to non-residential property on the basis of the total value of the rights, disregarding the costs incurred in acquiring them, may now file adjusted tax returns for the relevant reporting periods.
The stance of the Supreme Arbitration Court with regard to the lawfulness of deducting cancellation fees for profit tax purposes, even if the relevant provisions were not included in the initial agreement, is also a positive development for taxpayers.
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