Finance Ministry and Tax Service agree on deduction of rental for unregistered real estate.


Legal Update No. 175.

Goltsblat BLP informs of publication of letter of the Federal Tax Service of Russia of 27 August 2010 No. ШС-37-3/10187 and issue of letter of the Federal Tax Service of Russia of 14 September 2010 No. ШС-37-3/11158@, advising of letter of the Ministry of Finance of Russia of 30 August 2010 No. 03-03-05/193.

These documents set out the position that costs under a lease agreement for real estate to which the lessor’s rights are not registered may be lawfully deducted from the profit tax base.

Previously, the controlling authorities opposed this because the rental payments were not supported by duly executed documents as defined in article 252 of the Russian Tax Code (see, for example, Finance Ministry letter of 9 July 2008 No. 03-03-06/1/399).

Even so, court practice came down mainly on the side of taxpayers who deducted such costs, no matter whether the lessor held registered title to the real estate when it was handed over for use (see, for example, resolution of the FAC for the Moscow Circuit of 19 August 2010 No. КА-А40/9192-10 and resolution of the FAC for the North-Western Circuit of 11 December 2008 No. А56-55188/2007).

The relevant Finance Ministry and Tax Service letters conclude that the investor is the right-holder of the results of capital investments in the form of completed structures and may possess, use and dispose of them, including by leasing them out to third parties.

The given authorities consider that, taking the above into account,  payments under temporary use agreements for capital investment projects accepted by the relevant state commission but still lacking registered title are tax deductible in the usual manner.

Please note that the letters addressed here concern only registration of the lessor’s rights to real estate obtained thereby as the investor under a construction investment agreement for the given facility. Formally, they do not apply when the lessor acquires a commission-accepted  facility under a sale and purchase or other such agreement but has not yet registered its title.

In general, these two letters provide important testimony that the Finance Ministry and the Tax Service recognise the lawfulness of deducting temporary use costs of property for tax purposes by virtue of their true economic essence, even in the absence of a duly executed lease agreement.

For additional information, please contact:

Andrey Shpak, Partner,
Tax Practice,
Goltsblat BLP;
T: +7 (495) 287 44 44,

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