MIF property subject to payment of property and land tax by management companies.


Legal Update No. 201

Goltsblat BLP advises that Federal Law No. 308-FZ of 27 November 2010 “On Amendments to Chapters 30 and 31 of Part II of the Tax Code of the Russian Federation” (the Federal Law) will come into effect on 1 January 2011.

According to the Federal Law, from 1 January 2011 onwards, the property and land tax on mutual investment fund property (including land plots) will be paid by the management company. The taxes will be paid out of the property making up the mutual investment fund (MIF).

According to the Russian Tax Code, management companies do not currently pay tax on MIF property. 

Before the draft Federal Law, which changes dramatically the tax treatment of collective investment vehicles, was adopted, it came in for strong criticism from the business community for being inconsistent with the current tax law and other related branches. 

The Federal Law runs counter to the Russian Tax Code, which states expressly that only legal entities and individuals may be qualified as taxpayers and that their tax obligations will be met by the taxpayers themselves.   

As a management company does not own the property constituting the MIF and the fund itself is not classed as a legal entity, the legality of the tax obligations imposed on the management company is dubious. Furthermore, the Federal Law does not impose taxpayer obligations on a management company (whereas, for example, article 174.1 of the Russian Tax Code requires a management company to act as a VAT payer with respect to operations with properties transferred to a trust).

If management companies are classed as tax agents, given the description of property tax and land tax payers, the tax agent function may be exercised only with respect to property belonging to legal entities. 

MIF participants may also change on a daily basis, whereas tax rates set at the regional level depend on the location (registration) of the taxpayer, so there are many technical issues regarding how management companies, as a tax agent, will compute the tax . 

Finally, Clause 1, Article 374 of the Russian Tax Code dictates that, for tax base purposes, property classed as taxable should be posted at its residual value according to the prescribed accounting procedure approved in the company’s accounting policy. So, pursuant to the Federal Law on Investment Funds, MIF assets are appraised not according to the accounting rules, but special rules prescribed by the Federal Financial Markets Service, which do not provide for determining the residual value of assets. 

The above suggests that the Federal Law will cause a significant number of disputes between management companies and tax authorities.

For additional information, please contact:

Andrey Shpak, Partner, Tax Practice, Goltsblat BLP;
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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