As a general rule, the tax base for the tax on property of organizations is the average annual value of the property that is recognized as an object of taxation. However, as we know, with regard to certain objects of immovable property the tax base is determined as their cadastral value entered in the Unified State Register of Real Estate. The types of such objects are defined in Article 378.2 of the Tax Code of the RF and, since the corporate property tax is a regional one, they may be specified by the laws of the subjects of the RF. For example, on the territory of Moscow the categories of real estate taxable at cadastral value are specified in Article 1.1 of the Law of Moscow "On corporate property tax".

By virtue of Article 378.2.7 of the Tax Code, a list of objects in respect of which the tax base is determined as cadastral value (hereinafter the List, Resolution 700-PP) was approved by Decree of the Government of Moscow dated 28 November 2014. This list is updated annually and is freely available on the website www.mos.ru.

Having found[1] his object in the List, the owner will reasonably wonder what he can do to reduce the tax burden, because the cadastral value, as a rule, significantly exceeds the average annual value. In such a situation, the first thing that comes to mind is the mechanism of contesting the results of determining the cadastral value, which has long proved itself as an effective way of legal tax optimization. But in this article, we will talk about another, no less effective solution - the invalidation of Decree 700-PP in part.

What objects are subject to inclusion in the List?

To begin with, let's look at what objects are included in the List. Of those listed in Article 378.2 of the Tax Code and Article 1.1 of the Law of Moscow "On Corporate Property Tax" objects are:

• оffice and shopping centers, premises therein, if the respective objects are located on land plots, one of the types of permitted use of which provides for office buildings of business, administrative and commercial purpose, retail facilities, public catering and (or) consumer services;
  
• free-standing non-residential buildings with the total area exceeding 1000 sq.m. and premises therein, which are actually used for placement of offices, trade facilities, public catering facilities or consumer service facilities;
• non-residential premises located in apartment buildings that are actually used for offices, trade facilities, public catering facilities or consumer service facilities, if the total area of non-residential premises in the apartment building exceeds 3,000 square meters.

Of particular interest from this list are administrative-business and commercial objects, since it is with them that the vast majority of disputes arise in practice. 

In accordance with Article 378.2 of the Tax Code, an administrative and business center is an individual non-residential building subject to one of the following conditions:

1) the building is located on a land plot, one of the permitted uses of which provides for the placement of office buildings of business, administrative purposes;

2) the building is intended for use or is actually used for the placement of offices. 

The criterion of actual use shall be deemed satisfied in case not less than 20% of the total area of the building is used for placement of offices and the accompanying office infrastructure (including parking lots).

Similar rules apply to the qualification of commercial premises, as well as public catering and consumer services premises.

The actual use of the facility is established by the State Inspectorate for Control over the Use of Real Estate of the City of Moscow based on the results of an on-site inspection[2] of the building, which is documented by an act. Unfortunately, in practice the employees of the State Inspectorate often limit themselves to an external inspection of the building and, based on what they see, draw a conclusion about its actual use. Often the State Inspectorate recognizes the content of signs placed on the facade as sufficient grounds for recognizing a building as an office or shopping center. Of course, such an approach leads to the inclusion of objects that do not have the characteristics listed in Article 378.2 of the Tax Code and Article 1.1 of the Law of Moscow "On Property Tax".

What to do if the object is included in the List by mistake?

Unjustified inclusion of objects in the List is a quite common situation. As we have already noted, this is often due to an incorrect determination of the method of actual use of an object, but there are other situations as well.

Regardless of the reasons for the unjustified inclusion of an object in the List, this violation leads to the infringement of taxpayers' rights - the incorrect determination of the tax base for corporate property tax.

In such a case, the owner of a real estate object is entitled to apply to a court with an administrative claim to recognize the Decree 700-PP as invalid insofar as it concerns the disputed object. Such administrative claims are considered by the Moscow City Court as the court of first instance in accordance with the rules of Chapter 21 of APC RF.

In the course of the case the administrative plaintiff will have to prove whether his rights, freedoms and legitimate interests are violated by the contested provision of the List. And despite the fact that the burden of proving the compliance of the List with the normative acts of greater force is vested in the Government of Moscow by law, in practice the success of the challenge directly depends on the elaboration of the legal position of the administrative claimant and his activity in the process. It would be reasonable to analyze all possible grounds for including an object in the List and refute them in an administrative claim.

It is important to note that the List may be challenged not only in the current version, but also in the editions that were in effect earlier and have lost force by the time of consideration of a case. This possibility is confirmed by the explanations given in paragraph 25 of the Decision of the Plenum of the Supreme Court of the Russian Federation of December 25, 2018 № 50[3]: "in cases where the contested normative legal act prior to the court's decision in accordance with the established procedure has been cancelled, as well as when its action has been terminated, proceedings on the case cannot be terminated, if during the validity of such act the rights and legitimate interests of the administrative plaintiff, applicant, public interests or rights and (or) legitimate interests of citizens, organizations, other persons were violated."

Accordingly, the fact that the previously valid versions of the List are no longer in force due to the introduction of changes in it, cannot serve as an obstacle to its challenge. This circumstance makes challenging of the List a very powerful tool to protect the rights of taxpayers.

The court was won, what next?

If a court ruling invalidates the current version of the List, then in the current year the owner will be entitled to pay property tax on the property excluded from the List, calculated on its average annual rather than cadastral value.

If in addition to the current version challenged the wording of the List for previous years, then after the entry into force of the court decision recognizing them invalid the owner also receives the right to offset or refund overpaid amounts of property tax in accordance with Article 78 of the Tax Code.

Trends in practice

Unfortunately, it should be noted that recently there have been trends in judicial practice that complicate the protection of the interests of administrative claims in this category of cases.

For example, if previously the court found that an object was included in the List by the criterion of actual use, the corresponding act of inspection by the State Inspectorate was considered to be the only evidence confirming the legitimacy of including an object in the List. Accordingly, if during the consideration of the case the act was found to be improper, the object was excluded from the List.

However, recently the courts have taken the approach that the acts of the State Inspectorate cannot be the only possible evidence of actual use in the case, and even if the act is deemed inappropriate, the court will request and examine other evidence of the way of actual use of the object (lease agreements; premises itemizations; information on legal entities registered at the address of the object, etc.). Sometimes the court is not limited to the evidence presented by the parties. Here is a fragment of one of the decisions[4] of the Moscow City Court on the category of cases under consideration:

"Materials of administrative cases ... were requested from the archive of the Moscow City Court and examined at the court session. The materials of these administrative cases contain assessment reports and forensic examinations, which show that the disputed object is a car service center, which provides services for car washing, tire fitting, tinting, gluing, there is a store of spare parts. Appraisal reports and forensic reports are accompanied by a detailed photographic report of appraisers and experts, from which the purpose and actual use of the building can be seen.

As can be seen, in order to determine the actual use of the object the court even demanded and analyzed the materials of several other cases related to the disputed building. And this is not an isolated example.

Given this change in practice vector, when initiating these cases, we recommend that property owners seek the assistance of professional representatives who will help them develop the most reasonable legal position.

How we can help

The procedure of challenging Decree 700-PP has many nuances, which cannot be discussed in detail in a short article. Nevertheless, our lawyers have quite extensive experience in such projects, are familiar with all their specifics and, if necessary, can:

• аnalyze documents and information on real estate objects owned by an organization to determine the validity of their inclusion in the List;
• evaluate the economic effect from the possible exclusion of an object from the List;
• evaluate the prospects of the case for exclusion of an object from the List;
• collect evidence necessary for the exclusion of an object from the List in court, including accompanying extrajudicial examination of the type of actual use;
• provide full support of the case for exclusion of an object from the List, as well as further interaction with the tax authority on the issue of crediting or refunding overpaid tax amounts.

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[1] You can also check whether an object is included in the List by using the online service on the Moscow Government website

[2] To find out if an object was inspected by the State Inspectorate, follow this link

[3] Decision of the Plenum of the Supreme Court of the Russian Federation of December 25, 2018 № 50 "On the practice of consideration by the courts of cases on contesting normative legal acts and acts containing explanations of legislation and having normative properties"

[4] Decision of the Moscow City Court of October 19, 2022 in case No. 3a-3679/2022