Russian Supreme Court: Taxation of the Residual Value of Integral Improvements to Leased Property


Legal Update No 829

Bryan Cave Leighton Paisner, formerly Goltsblat BLP in Russia, advises that, on 1 February 2021, the Russian Supreme Court Judicial Board for Economic Disputes issued a ruling on case A76-8895/2019 (the “Ruling”) which is instrumental in taxation of the residual value of integral improvements to leased properties when leases are terminated.

Case Summary

For several years, a taxpayer rented industrial premises to which it made certain integral improvements, depreciated the value of the improvements during the term of the leases and booked these costs as deductible for profit tax purposes. Once the leases were terminated, the taxpayer transferred the improvements to the owner for no consideration, simultaneously writing off their residual value to non-operating expenses.

Profit Tax

According to the Supreme Court, the lack of any legal certainty as to the future of the leased property capital expenditures not fully booked for taxation purposes during the term of the leases (the Russian Tax Code does not give a direct answer to this question) triggers a presumption that costs incurred in improving someone else’s property have “no economic rationale” if such improvements are of economic value not only to the tenant but also the landlord and have been made without any compensation paid by the latter.

So, in the Supreme Court’s opinion, clause 1, article 252 of the Russian Tax Code prohibits deducting such costs unless the tenant can prove that they are economically feasible.


The Ruling also points out that, since the leased property was returned to its owner in a significantly improved condition for no consideration, this also requires the tenant to restore VAT on the residual value of the integral improvements under sub-clause 2, clause 3, article 170 of the Russian Tax Code.

Bottom line

It follows from the Ruling that, fearing improvement works made for the benefit of landlords might be returned thereto on a tax-free basis, the Supreme Court recognised the anti-abuse sense of the depreciation rules.

So the taxpayer may not book the residual value of the improvements as deductible costs unless it proves (applying the “without doubt” standard) that, at the time the lease was signed, it planned and was able to recoup its investment during the lease term and that it terminated the lease before the improvements were completely depreciated, for good economic reasons. Furthermore, the taxpayer must also adjust the VAT tax base for the residual value of the improvements through restoration.

We recommend that you assess how the Supreme Court’s views in the Ruling affect your business and we are ready to provide you with any necessary support and assistance in this matter.

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