SAC Plenum on agreements about future real estate.

12.08.2011

Legal Update No. 261

Goltsblat BLP advises that, on 11 July 2011, the Plenum of the Supreme Arbitration Court of the Russian Federation (SAC) adopted resolution No. 54 “On certain aspects of resolving disputes arising from agreements about real estate to be created or acquired in the future” (the Resolution). Here we comment on the key provisions of this Resolution.

  • The SAC confirms the possibility of concluding a sale and purchase agreement for real estate to be created or acquired by the seller in the future. Similarly, the Resolution envisages the possibility of concluding a sale and purchase agreement for a land plot yet to be formed. In the process, in order to identify the real estate items to be created, such details may be provided as location, approximate area and other characteristics. Let us note that, previously, in most cases judges held that sale of real estate yet to be created was not permissible.
  • Disputes over preliminary agreements under which the seller undertakes to hand over real estate to the buyer in the future but the buyer is required, before the main agreement is concluded, to pay the full price of the property or a substantial part of it, are subject to consideration by courts in accordance with the provisions of the Russian Civil Code on sale and purchase agreements envisaging advance payment.
  • The SAC states that the seller under a sale and purchase agreement for real estate to be created in the future may not be obliged to create such real estate. If, however, it is created and the title thereto is registered in the seller’s name, its transfer to the buyer may be claimed, as well as registration of transfer of the title to the given real estate.
  • According to the Resolution, unless it is established otherwise, judges should treat agreements connected with investment in financing real estate construction and renovation as sale and purchase agreements for future real estate items. It should be noted that the given provision may have a substantial impact on the procedure for taxing participants in investment activities. Let us recall that, previously, depending on the specific circumstances of the transaction and the wording of the investment contract, funds received from participants in investment activities (co-investors) were booked by the construction organiser either as targeted funds and not included in the VAT and profit tax base, or as payment for sold property rights to residential/non-residential premises. In the latter case, the tax base was determined as difference between the acquisition cost of the relevant property rights and proceeds from selling these. Considering the classification proposed by the SAC of agreements connected with investment in financing construction, the tax authorities are highly likely, when determining the construction organiser’s VAT and corporate tax base, to disregard the target nature of the funds received by the construction organiser (under arrangements other than contracts concluded in compliance with the Federal Law on participation in shared construction) or consider these funds as payment for the sold property rights. This means that the tax authorities will determine the construction organiser’s VAT and corporate profit tax base as including all funds received from other co-investors whenever the VAT benefit for sale of residential premises is inapplicable. Although the SAC obviously suggests that, in the event of any doubt, the courts should classify agreements connected with investment in financing construction as sale and purchase agreements for future real estate items, it still does not expressly preclude other civil law classifications of such agreements. The possibility of mitigating the above adverse tax implications will depend on the extent to which the courts actually use the provision regarding the possibility of other classifications in practice.
  • The SAC Plenum also clarifies that, when the agreement stipulates that each of the parties make contributions (hand over a land plot, contribute monetary funds, perform work, provide construction materials, etc.) for the purpose of attaining the common objective, specifically creation of a real estate item, the relevant agreement must be classed as a simple partnership agreement. In practice, such contractual relations have been drawn up by the parties by concluding a simple partnership agreement and an investment contract (i.e., a mixed agreement or an agreement no envisaged by the Civil Code of the Russian Federation). Please note that the tax implications of a simple partnership agreement are potentially more onerous than those of an investment contract.
  • The SAC also notes that the provisions of the Resolutions are not applicable for considering disputes relating to creation of real estate in accordance with the Federal Law on participation in shared construction. The methods permitted for raising monetary funds of individuals for real estate construction are limited to those specified in the given law.

For additional information, please contact:

Vitaly Mozharowski
Partner, Real Estate and Construction, Goltsblat BLP
T: +7 (495) 287 44 44,
E: info@gblplaw.com

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

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