Inclusion of new registered buildings in need of fit-out in the property tax base.


Legal Update No. 207

Goltsblat BLP advises that Resolution No. 4451/10 of the Presidium of the Supreme Arbitration Court (the “SAC”) of the Russian Federation of 16 November 2010 has been published regarding inclusion in the property tax base of freshly built buildings being fitted out.

The matter of dispute here is the appropriate time for booking these properties for property tax purposes, since only property, plant and equipment reported in accounts are to be considered in determining the relevant tax base.

Previously, in one of its judicial acts (resolution No. 8464/07 of 17 October 2007), the Russian SAC sustained the opinion of the Russian Ministry of Finance that a building is to be included in PP&E and, consequently, taxed by property tax if investments in the building have been completed and the building is actually operated by the taxpayer. Whether the taxpayer has obtained a certificate of title to the building is irrelevant, since the title certificate is obtained at the discretion of the taxpayer itself.

In the case concerned, a commissioning permit was issued for the constructed building and a title thereto was duly registered by the owner, but the building was not actually used because of external and internal finishing under way. The order on putting the building into operation was only issued almost six month after state registration of title thereto.

The Presidium of the Russian SAC stated that in the case concerned there were no grounds for including the building in PP&E and accruing property tax, since construction of the building and its subsequent fit-out must be seen as a continuous process, the completion of which makes the property capable of generating economic benefits (income) further on and satisfying the indicia of a capital asset. In its decision, the court also considered the substantial cost of the fit-out (RUB 275 mn, while the entire building before fit-out cost RUB 1,383 mn).

The Presidium of the Russian SAC thus believes that there are no grounds for charging property tax on a property that has been accepted by the state acceptance commission with title thereto registered, but in which capital-intensive fit-out is under way making the building unfit for generating income.

The pursue of this approach might give rise to disputes with tax authorities, their outcome depending on whether the taxpayer is able to prove that a substantial fit-out is performed and the property is not used to derive economic benefits.

It is still unclear how constructed buildings in which premises are handed over to tenants for fit-out purposes at their own expense are to be treated.

For additional information, please contact:

Andrey Shpak, Partner, Tax consulting/ tax litigation, Goltsblat BLP;
T: +7 (495) 287 44 44,

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