Development of court practice regarding regional tax incentive application regarding real estate fixed assets in Moscow Region

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On 5 February 2018, the Arbitration Court of Moscow Region delivered its decision (hereinafter, the “Decision”) on ZKK VODOKANAL (the “Company”) (case No. А41-50945/17). The case considered the issue of determining the moment when the right to apply Moscow regional property tax incentive arises (hereinafter, the “Incentive”).

According to the Decision, the Company declared its right to apply for the Incentive for 2015 regarding real estate fixed assets, that are part of the treatment facilities (hereinafter, the “Assets”), as all required conditions for the Incentive application were met.

Nevertheless, the tax authority argued that the Company has no right to apply the Incentive as the Assets were put into accounting in March 2014, whereas the law introducing the Incentive became effective only after their putting into accounting (hereinafter, the “Law”). The tax authority contended that the Law extends to relations arising from 1 January 2015, and that the right for Incentive application occurs from the month following the month in which the fixed asset is put into accounting; consequently, the Incentive may only be applied regarding fixed assets put into accounting no earlier than the month prior to January 2015 (i.e., December 2014 or later).

At the same time, the court of the first instance upheld the Company’s position, noting that the date when fixed asset put into accounting cannot be used as a means of determining the effective start of the Incentive, since the procedure and timeframe for putting asset into accounting is regulated by accounting standards. In this connection, the issue of putting asset into accounting cannot be included within the scope of relations regulated by the Law. That said, the court also noted that these relations cannot occur prior to the date when the Incentive becomes effective (i.e., before 1 January 2015), that nevertheless does not imply the need to fulfill all of the conditions for the Incentive application only after the Law enters into force, inter alia –putting asset into accounting.

It should be noted that similar conclusions were drew in cases №№ А41-42230/16, А41-8938/17, А41-8938/2017, А41-88440/16. At the same time, current court practice on determining the moment when the right to apply regional tax incentives in similar circumstances is ambiguous.

For example, in Resolution as of 26.04.2017 № F10-1366/2017 the Arbitration Court for the Central District considered that the Tula Region property tax incentive application was illegitimately as the incentive’s implementing law became effective only after putting asset into accounting. Meanwhile, a significant difference between the Tula region law and the Law is the absence of direct provisions providing the possibility for extension of the abovementioned law to the relations that occur prior to its entry into force.

Thus, the tax incentive application requires not only an attentive analysis of the specific circumstances and documents underlying their application, but also a thorough review and detailed analysis of the legislation regulated their application. Members of Dentons’ tax practice, based on the their considerable advisory and litigation experience, would be happy to provide comprehensive support to commercial and manufacturing companies, as well as commercial real estate developers and owners in the area of property taxation, including analysis of the accuracy of the calculation of a company’s current tax liabilities, evaluation of the tax incentives applicability, and assistance with respect to obtaining the necessary supporting documentation.