At the beginning of 2024, pursuant to the Resolution of the Constitutional Court of the Russian Federation No. 28-P of May 31, 2023, the State Duma received draft law No. 532703-8 aimed at settling issues related to the priority of satisfaction of claims for payment of taxes and other obligatory payments in bankruptcy proceedings, including payment of taxes, the object of taxation of which is the debtor's property, including pledged property.

However, the consideration was suspended after the recommendation of the relevant committees to finalize the draft law, since its provisions do not fully comply with the legal position of the Constitutional Court of the Russian Federation and level the value of the institution of pledge in bankruptcy cases, namely, they do not take into account that the purpose of the realization of bankruptcy property is to satisfy creditors' claims as a priority, and not to satisfy tax claims in connection with the realization of pledged property.

Meanwhile, in June, the Supreme Court of the Russian Federation considered a series of cases on the topic, namely Park Podvyaznovo LLC, Altai Meat and Dairy Plant Ugrinich LLC, NPP Soybean Processing Plant Binaka LLC, REMZ LLC, and Angstrem-T JSC, in which it resolved issues of priority of satisfaction of tax claims arising in connection with the realization of property in bankruptcy."[1]

Thus, the Supreme Court has explained and systematized approaches as to the order in which payment claims are satisfied:

1. Current property taxes owed related to the operation of the mortgaged property;
2. Amounts of recovered VAT and income tax in case of sale of debtor's property.

1. Property, land and transportation taxes, as well as penalties accrued on them, related to the subject of the pledge

The existing judicial practice of application of paragraph 6 of Art. 138 of the Bankruptcy Law proceeds from the fact that property taxes accrued in connection with the operation of the pledged property of the bankrupt within the framework of bankruptcy proceedings are payable in the regime of repayment of expenses for the security of the subject of pledge, that is, at the expense of funds received from the use and sale of such property, before the beginning of settlements with the pledge creditor. [2]

This interpretation was also supported by the Constitutional Court of the Russian Federation in its Resolution No. 16-P of 09. 04. 2024.

At the same time, the burden of paying property taxes falls on the lien creditor only with respect to the period when he enjoys the advantages of his position and gets a real opportunity to influence the future fate of the mortgaged property, just as the owner bears the burden of maintaining the property belonging to him, namely from one of the following dates:

1. from the day of announcement of the resolution on the opening of bankruptcy proceedings, if the claims of a pledge creditor were established in the register before that day;
2. from the date of inclusion of the pledge creditor's claims in the register, if such establishment falls within the period of bankruptcy proceedings;
3. for the entire period from the initiation of bankruptcy proceedings, if the proceeds from the lease (other exploitation) of the property were transferred exclusively to the pledge creditor and not distributed among all creditors.

At the same time, the Supreme Court also notes the following rule developed by the Constitutional Court of the Russian Federation: if the payment of a significant amount of property taxes will actually lead to the loss of the pledge creditor's ability to satisfy its claims, and thus deprive it of the economic sense of pledge as a security instrument, the arbitration court within its discretionary powers has the right to distribute the proceeds from the sale of the pledge item proportionately between the tax authorities and the pledge creditor.

2. VAT and income tax arising from the realization of the pledged item are payable

With regard to the amounts of corporate income tax and restored VAT, the emergence of the claim for which is due to the sale of the debtor organization's property, the Supreme Court, with reference to the legal position of the Constitutional Court of the Russian Federation, set out in Resolution No. 28-P of 31. 05. 2023, indicated the following.

Although such claims arise after the initiation of bankruptcy proceedings and there are prerequisites for attributing these amounts to current debts, the formal approach in this matter has been questioned by the Constitutional Court.

At the same time, such mandatory payments:

• are formed in connection with the taxpayer's participation in civil turnover and economic transactions, as opposed to property taxes, which are levied on the taxpayer due to the possession of certain property;
• arise as a result of the realization of the entire array of property that constitutes the bankruptcy estate, while the realization of property is inextricably linked to prior economic activity;
• may materially affect the actual access of creditors to participate in the distribution of proceeds.

Since bankruptcy creditors took part in the formation of the debtor's bankruptcy estate and obligations to them should be fulfilled on the basis of the principles of priority and proportionality, tax obligations arising as a result of civil law transactions executed should be subject to a similar regime of satisfaction.

Thus, the Supreme Court, following the Constitutional Court of the Russian Federation, has indicated that until the federal legislator introduces changes in the legal regulation, the expenses on the payment of income tax from the sale of property both being and not being the subject of pledge are subject to satisfaction as part of the third turn of the register of creditors' claims.[3]

Similarly, the classification of a debt in the form of recovered VAT as register or current VAT depends on the period in which the transaction that gave rise to the tax base for a VAT deduction (for example, the receipt of an advance payment) took place:

• Where a deduction is taken in respect of a transaction carried out before bankruptcy proceedings were initiated, the recovered VAT is repaid in the 3rd queue of register claims;
• If after - the recovered VAT is repaid in the 5th queue of current payments.

Satisfaction of tax claims in bankruptcy cases is definitely an acute issue directly affecting budget interests, since granting tax preferences to bankrupts may lead to an increase in sham bankruptcy proceedings for the purpose of asset withdrawal and tax evasion.

Therefore, the Supreme Court also draws attention to the need for the debtor and its controlling persons to comply with the principle [4] of good faith and the right of the court, in exceptional cases (in case of detection of abuses, the burden of proof of which rests with the authorized body), to consider changing the priority of the claim of the authorized body by raising it to current payments of the fifth priority.

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[1] Decisions of the Supreme Court of the Russian Federation of June 3, 2024, No. 305-ES23-1992 in case No. A41-63047/2017, of June 13, 2024, No. 305-ES20-4777 (4) in case No. A40-323/2019, of June 13, 2024, No. 304-ES22-29762 in case No. A03-11042/2017, of June 13, 2024, No. 304-ES16-19840 (4) in case No. A03-1592/2014, of June 13, 2024, No. 308-ES18-21050 (87, 90) in case No. A53-32531/2016. 

[2] Paragraph 14 of the Review of judicial practice of the Supreme Court of the Russian Federation No. 3 (2021), approved by the Presidium of the Supreme Court of the Russian Federation 10. 11. 2021

[3] Determination of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation of 29. 06. 2023 № 310-ES19-11382 (2). 

[4] Paragraphs 3, 4 of Article 1, paragraphs 1, 2 of Article 10 of the Civil Code of the Russian Federation