Alexey Stanchin, Senior Tax Consultant at Tax Compliance, commented on the decision of the Russian Supreme Court for Kommersant.

On February 27, the Supreme Court of the Russian Federation published a decision on a dispute over the land tax rate that ZPIFs are entitled to apply to their constituent plots. The standard rate is 1.5% of the cadastral value of land, while the preferential rate is 0.3%. It may be applied, in particular, to plots of land for residential housing.

The Supreme Court of the Russian Federation ruled that a mutual investment fund cannot pay land tax on its plots for individual residential construction at a rate five times less than the standard rate. In essence, the panel actually equated the activities of mutual funds with entrepreneurial activities, and it is not possible to apply a reduced rate of land tax when they are carried out. Thus, emphasis was placed on the economic meaning of the creation of a unit investment fund, deduced from the provisions of Law No. 156-FZ: the possibility of attracting a large number of investors for the implementation of large projects, as well as for the effective management of property in order to maximize profits.

However, there is no direct mention in the legislation that mutual funds carry out entrepreneurial activities or are commercial legal entities. The Board merely referred to the Closed Unit Investment Fund Trust Management Rules [1], according to which the purpose of the investment policy of the management company is to receive income when investing the property constituting the fund in the objects provided for in these Rules, in accordance with the investment policy of the management company.

According to Law No. 156-FZ a unit investment fund is not a legal entity [2]. Therefore, it cannot be said that the Supreme Court does not support the application of the reduced rate for all legal entities in principle.

When disputes arise in terms of land tax, the question of the presence of signs of entrepreneurial activity is considered by tax authorities and courts necessarily in conjunction with such facts as: the type of land plot, its intended purpose, nature of use, and so on. To apply a reduced rate on land tax, the taxpayer must actually use the land plot in accordance with the meaning established by the legislator [3].

Consequences of this decision of the Supreme Court of the Russian Federation for taxpayers

The trend has become more distinct. As we can see, for the Board, the Company's argument about the legitimacy of applying the reduced rate to the disputed plots because they are not being developed and there is no entrepreneurial activity on them was insufficient.

This is not the first case of refusal to apply the reduced rate of land tax. Thus, earlier the Supreme Court pointed out that the fact of belonging of residential housing land to a commercial organization excludes the possibility of applying a reduced rate [4]. Later this practice was further developed. In particular, the practice of checking the actual use of the land plot became widespread [5]. Tax authorities have previously studied this issue. So in their letter collected approaches on the order of taxation of land plots.[6].

There is direct practice confirming the possibility of applying the reduced rate. Courts note that reduced rates of land tax on this basis are established for non-profit organizations and individuals who directly use land to meet personal needs in dacha farming or dacha construction, and not for profit [7]. Separately, it should be taken into account that there is a possible situation when it is necessary to calculate tax at two rates. Such a case has already been considered by the Supreme Court of the Russian Federation [8], where the court concluded that the land tax should be calculated at two rates: in proportion to the area.

In addition, the Ministry of Finance of the Russian Federation and the Federal Tax Service of the Russian Federation are in solidarity in the position that in respect of general purpose land plots provided for by the Federal Law dated 29.07.2017 N 217-FZ "On the conduct by citizens of gardening and horticulture for their own needs and on amendments to certain legislative acts of the Russian Federation" general purpose land plots provided for by the Federal Law dated 29.07.2017 N 217-FZ "On the conduct by citizens of gardening and horticulture for their own needs and on amendments to certain legislative acts of the Russian Federation" should be subject to the rate of

In addition, when selecting the applicable rate, it should be taken into account that a reduced tax rate of 0.3% applies to the following types of land plots:

• Not used in entrepreneurial activity, purchased/provided for personal subsidiary farming, gardening or horticulture, as well as in relation to general purpose plots provided for by Federal Law No. 217-FZ dated 29.07.2017;
• Relating to the lands of agricultural purpose or to the lands within the zones of agricultural use in settlements and used for agricultural production;
• Occupied by the housing stock and engineering infrastructure facilities of the housing and communal complex (except for the share in the right to the plot attributable to the object not related to the housing stock and engineering infrastructure facilities);
• Acquired/provided for housing construction (except for land plots acquired/provided for individual housing construction used in entrepreneurial activities);
• Restricted in turnover in accordance with the legislation of the Russian Federation, provided to ensure defense, security and customs needs.

All other categories of land plots are subject to a maximum tax rate of 1.5%. That is, anything that does not directly fit these rules can be reassessed at a rate of 1.5%

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[1] Rules of Trust Management of Closed Unit Investment Fund 10 Real Estate "Mikhailovsky-Investment" registered with the Central Bank of the Russian Federation on 27.05.2014 No. 2821

[2] See Art. 10 Federal Law of 29.11.2001 N 156-FZ (ed. of 19.12.2023) "On Investment Funds" (with amendments and additions, effective from 01.02.2024).

[3] see cases No. A44-8188/2019, No. A41-40455/2020, Definition of the Supreme Court of the Russian Federation of 20.06.2018 N 301-KG18-7425.

[4] Definition of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation of 28.03.2023 № 305-ES22-27530

[5] see cases No. A44-8188/2019, No. A41-40455/2020, Definition of the Supreme Court of the Russian Federation of 20.06.2018 N 301-KG18-7425.

[6] Letter of the Federal Tax Service of Russia from 18.02.2022 N BS-4-21/1989@ "On the order of taxation of land plots in case of detection in the implementation of municipal land control of violations of the requirements of land legislation" (together with Letter of the Ministry of Finance of Russia from 17.02.2022 N 03-05-04-02/11500)

[7] see Cases Nos. A41-63325/13, A41-8191/2014, A41-18574/2016, A41-90821/2016, A66-16992/2017

[8] determination of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation of 21.03.2023 No. 305-ES22-24825 in case No. A41-88082/2021