Legal entities risk losing the right to a reduced land tax rate

The Supreme Court of the Russian Federation (SC) decided that a closed mutual fund cannot pay land tax on its plots for individual housing construction (IHC) at a rate that is five times less than the standard one. The economic panel of the court recognized that the fund was created for commercial purposes and aimed at making a profit, and this excludes the right to benefits. In addition, the Supreme Court considered that any organizations that “use plots as assets” to make a profit from their sale or use as collateral are not entitled to use the benefit. Lawyers note that now the issue for mutual funds is completely closed. A number of experts believe that the position of the Supreme Court entails the risk of refusal to apply benefits to all legal entities, including non-profit organizations (NPOs).

On February 27, the Supreme Court published a decision on the dispute over the land tax rate that closed mutual funds have the right to apply for the plots included in them. The standard rate is 1.5% of the cadastral value of the land, the preferential rate is 0.3%. It can be used, in particular, for plots provided for individual housing construction.

Since 2020, amendments to the Tax Code of the Russian Federation have abolished the reduced tax rate for land under individual housing construction if they are used in business activities. After this, companies had disputes with tax authorities about the conditions for applying benefits. The Federal Tax Service and the Ministry of Finance in letters dated November 2023 explained that from the entry into force of the amendments, commercial organizations must pay a tax at a rate of 1.5%. A similar opinion was expressed by the Supreme Court in March 2023 in the case of Tishina LLC.

Lawyers called this position controversial, believing that it was necessary to proceed from the actual use of the land, which is not necessarily for the purpose of making a profit. In addition, it was unclear whether the rule applies to closed-end mutual funds, which formally is not even a legal entity, but only its management company (MC) is a commercial organization.

Now the Supreme Court has put an end to the issue by considering the dispute between the closed mutual fund “Mikhailovsky-Investment” and the tax authorities. The closed-end mutual fund includes land near Moscow intended for individual housing construction, and the fund is managed by LLC “Management Company “Universal Investments””. Having paid 27 million rubles. tax for 2020 at a rate of 1.5%, the management company later considered the correct rate to be 0.3% and asked the Federal Tax Service to return 20 million rubles.

After the tax authorities refused, the management company went to court to recover this amount. The arbitration courts of the Moscow District upheld the claim, indicating that the lands remain the property of citizen shareholders, the type of permitted use of the site allows the application of a reduced rate, and the tax authorities did not prove that the fund’s lands are used for commercial purposes. But following a complaint from the tax inspectorate (see Kommersant on January 25), the case was transferred to the economic board, which ultimately rejected the claim of the management company of the closed mutual fund.

The Supreme Court explained that in relation to lands included in mutual funds, their management companies are recognized as taxpayers, and the tax is paid at the expense of the fund’s property. The purpose of establishing benefits for plots for individual housing construction, the Supreme Court noted, was to “encourage the construction of housing by creating more favorable financial conditions for construction.” Moreover, the decision clarifies, “the will of the legislator is aimed at providing state support directly to citizens” who own land plots and conduct “housing construction to meet their own needs related to living.”

“Consequently, taxpayers-organizations using land plots as assets, counting on making a profit from their sale or using land plots as collateral, do not have the right to apply a reduced tax rate,” the Supreme Court concluded. The actual use of the site for individual housing construction is essential for the benefit, the panel noted, therefore the argument of the Criminal Code that “the sites are not being developed and business activities are not conducted there” does not confirm the right to a reduced rate.

In addition, according to the law “On Investment Funds”, the property of a mutual fund is in the common shared ownership of shareholders, who bear the risk of losses associated with changes in its market value. This means, the Supreme Court decided, “the economic meaning of creating a mutual fund is the ability to attract a large number of investors for the implementation of large projects, as well as for the effective management of property in order to obtain maximum profit.”

In addition, the fund management rules state that the goal of the investment policy of the management company is “to obtain income when investing property.” Thus, the Supreme Court believes, the very fact of including plots in a mutual fund “implies use for profit-making purposes, which excludes taxation of these land plots at a rate of 0.3%.”

“In my opinion, the position of the board is formulated in such a way that now not a single mutual fund (more precisely, a management company for plots included in the mutual fund) will be able to apply for a preferential rate,” says Pepeliaev Group partner Sergei Sosnovsky. “In essence, the board actually equated the activities of mutual funds to entrepreneurial ones, and when implementing it, it is impossible to apply a reduced rate for land tax,” explains senior tax consultant at Tax Compliance Alexey Stanchin, adding that “the emphasis was placed on the economic sense of creating a mutual fund.”

From the decision of the Supreme Court it follows that “all management companies of mutual funds had to pay tax on land plots for individual housing construction at a general rate of 1.5%,” clarifies Mr. Sosnovsky. “This gives the Federal Tax Service the opportunity, including based on the results of on-site inspections within the three previous years (starting from 2021), to assess additional tax to those who used the benefit,” adds Taxology partner Alexey Artyukh.

Deputy General Director of KSP Capital Asset Management Dmitry Yartsev previously explained to Kommersant that an increase in tax payments “will reduce the profitability of projects implemented through closed-end mutual funds,” but in general these costs “can be leveled,” although, most likely, this will affect the cost of ready-made objects and will lead to higher prices.

Lawyers stipulate that from the position of the Supreme Court it follows that it is commercial legal entities and mutual funds represented by their management companies that are not entitled to land tax benefits in relation to plots for individual housing construction. Individuals and non-profit organizations, Alexey Stanchin believes, can continue to apply a reduced rate “when using land to satisfy personal needs when running a dacha farm or dacha construction, and not for the purpose of making a profit.” However, it is impossible to guarantee the absence of claims against NPOs, Mr. Artyukh believes, since they also receive profit, but “pass it on for statutory purposes, and not for dividends.”

“The door is almost closed for legal entities, but a narrow gap seems to remain. If there is an NPO that does not use the plots as assets, the right to the benefit can probably be confirmed, for example, in the case of building a cottage on a plot for individual housing construction and transferring the house and land for free use to its wards,” notes Mr. Sosnovsky.

However, according to Alexey Artyukh, in order not to take risks, it is better for NPOs to transfer the tax at the full rate, and then ask to return the overpayment, proving that the purpose of using the land is not entrepreneurial. Moreover, Mr. Artyukh warns, based on the position of the Supreme Court, even individuals who “actually use land for business” have a “potential risk” of losing benefits.

Anna Zanina