Reclassification of movable property into immovable property

Reclassification of movable property into immovable property


For a long time both movable and immovable property were recognized as objects of taxation for corporate property tax. At the same time, there were certain exceptions for movable property.

Thus, since 2013 according to subpara. No object of taxation was considered to be movable property registered after January 1, 2013 as fixed assets[1]. The Constitutional Court later disclosed the content of the above norm of the Tax Code of the Russian Federation in the Ruling of 21.12.2018 № 47-P: "Incentives for organizations to invest in means of production, to modernize them, to acquire new and develop existing means of production, as well as to increase the demand for them"[2].

Further by the Federal law from 24.11.2014 № 366-FZ[3] sub. 8 п. 4 of Article 374 of the Tax Code was amended: after the amendments introduced, the objects of fixed assets included in the first or second depreciation group in accordance with the Classification of Fixed Assets approved by the Government of the Russian Federation were not recognized as objects of taxation[4].

However, Article 381 of the Code has been supplemented with Clause 25, which provides for a tax exemption in the form of exemption from taxation of movable property recorded as fixed assets from January 1, 2013, except for movable property recorded as a result of reorganization or liquidation of legal entities, as well as transfer, including acquisition of property between related parties. 

The said legal regulation, as the Constitutional Court of the Russian Federation noted in the said Decision No. 47-P, was intended to limit the application of tax incentives to the formal transfer of previously acquired property through reorganization or liquidation of legal entities, as well as through the transfer of property between interdependent persons without any economic results, equipment of production.

Emergence of the problem

The problem of reclassification of movable property as immovable has arisen since the amendments to the Tax Code of the Russian Federation in 2019, according to which the object of taxation was already recognized only real estate[5].  After the amendments came into force, the tax authorities reclassified equipment or a machine tool from movable property to immovable property for the purpose of additional tax assessment.

The courts have supported the position of the tax authorities. Thus, transformers that could be dismantled, exchanged, rearranged - that is, perform actions that could not be performed in relation to immovable property without causing substantial damage to it - were not considered movable property[6]. The gas equipment in the boiler room was also not considered movable property because the courts found that it could not function outside the building in the open air[7].

Such an approach prevailed, but after the Ruling of July 12, 2019 in the case of CJSC Lesozavod-25[8], the vector of judicial practice has changed in favor of the taxpayer. The Determination established the following important principles considered in distinguishing between movable and immovable property:

  • independence of the production process of machinery and equipment;
  • the dismantling of a building during the relocation of fixed assets is not a reason to classify them as real estate;
  • inadmissibility of the tax authorities' application of the principle of economic feasibility with the following arguments: it is not reasonable to use the disputed object outside the main immovable property;
  • machinery and equipment are independent inventory objects accepted by the taxpayer for accounting as such;
  • specially erected buildings to accommodate equipment are not grounds for classifying property as immovable property.

At the same time, even after the establishment of these criteria, the issue of taxpayers' right to apply the exemption was not clearly resolved, because these criteria do not allow to distinguish 1) investments in the renewal of production equipment and creation of non-capital structures from 2) investments in the creation (improvement) of real estate - buildings and capital constructions.

Since 2019, movable property is completely exempt from taxation[9]. The intention of lawmakers was to encourage companies to invest in new equipment in order to ensure the efficiency of production and increase the competitiveness of the Russian economy. However, there are solutions that do not comply with the above approach and have adverse consequences for the taxpayer.

Distinguishing between movable and immovable property

To avoid possible negative consequences, the taxpayer must be aware of the criteria for correctly distinguishing between movable property and real estate. There is no concept of "immovable property" in the tax legislation, the tax authorities are guided by the norms of the Civil Code of the Russian Federation[10], emphasizing the following signs of immovable property:

  1. A strong connection of the object with the land, possibly indirectly, through other real estate. Thus, pipelines that are designed and installed on a specially erected foundation (trestles, pedestals, supports), the existence of which provides a firm connection with the land, are considered real estate[11].
  2. The connection of things into a complex thing for use for a common purpose. Hence the so-called "functional" criterion for recognizing an object as immovable for tax purposes. That is, the objects must be so closely intertwined in a single chain of production and be an integral technological (functional) part of the process that they cannot operate separately[12]. For example, floating deck cranes installed on a self-elevating floating drilling rig or wastewater treatment and drainage system designed for treatment of storm and melt water are recognized as real property[13].
  3. Inability to move, separate without causing disproportionate damage to property. In other words, it must fall under the signs of a constituent part of an "indivisible thing," thereby not being able to act as a separate object in civil turnover, and its separation would cause disproportionate harm. The courts also take into account the damage to the integrity and functional purpose of the property, which is related to the above criterion[14]. But we should not forget that "disproportionality" is an evaluative criterion.
  4. An object must have its own useful properties, independent of the land plot where it is located. This position is confirmed by the Ruling of the Supreme Court of the Russian Federation in the case of Gazpromneft-Khantos LLC. Thus, various improvements to a land plot cannot be recognized as independent property, for example, paving of well pads, which "does not have independent useful properties, but only improves the useful properties of the land plot. The court also concluded that under the accounting rules the cost of improvements is not included in the cost of structures of a capital nature erected on the land plot. Accordingly, if a building or structure is erected or operated on the plot, such use of the land plot may not constitute grounds for levying property tax on the cost of improvement work[15].

These criteria are not exhaustive, the tax authorities also identify additional criteria:

  1. Information on the object of fixed assets must be reflected in the Unified State Register of Legal Entities. However, this condition does not automatically lead to the recognition of the property as immovable[16]. This fact can be confirmed by construction and commissioning permits, technical certificates[17].
  2. If according to the OKOF (All-Russian Classifier of Fixed Assets) the object of fixed assets has a code of "Machinery and Equipment" group, then this object is not immovable. However, there are exceptions to this rule. Equipment can relate to buildings and constructions, i.e. it can be recognized as real estate in the following cases:
  • when separate objects are recognized as an integral part of buildings (communications within buildings);
  • combining several items of fixed assets into one inventory object is allowed if each item included in the complex can perform its functions only as part of the complex and not independently, but provided that the useful lives of these items are not significantly different.

Summary of judicial practice of the tax authority

On August 16, 2022 the Federal Tax Service issued a Letter to which there is a review of the legal positions of the Supreme Soviet of the RF[18], concerning the definition of the type of property. Summarizing the conclusions of the courts, we can point out that the tax authority is guided by the following theses:

  • Land plot improvements are not recognized as immovable property with independent useful properties. They are only recognized as an integral part of a land plot, which enhances its useful properties. Positions in favor of the taxpayer in the light of this thesis rendered in cases № A40-176960/2020, A40-85181/2021, A40-95326/2020/
  • Equipment does not relate to buildings and constructions (according to OKOF classification), but there are exceptions in the form of communication inside buildings (they are recognized as an integral part of it); possibility of objects performing their functions only as part of a complex, not on their own (terms of useful use of objects in this case should not differ significantly). If the taxpayer, on the acquisition of movable property, correctly accepted for accounting as separate inventory objects, it can and should be excluded from the object of taxation. This approach is formulated in the Decisions of the Supreme Court in the cases of LLC "Mineral Water "Achaluki", LLC "Yug-Novy vek"[19].
  • Pipelines are now recognized as movable property[20], despite the initial tendency of tax authorities and courts to qualify them as real estate[21].
  • Disputable objects are recognized to be power lines, transformer substations - things that are connected with electric power transmission. On the one hand, there are quite a few decisions in favor of taxpayers[22]. On the other hand, courts sometimes take the side of the tax authority, qualifying power lines, transformer and distribution substations as real estate[23]. In this case, the arguments are focused on the technological, production criterion of connection of objects.

Thus, the generalization of the tax authority shows that some of the arguments on which it previously insisted, if not completely eliminated, then will go into additional. In general, the cases presented in the review continue the trend of supplementing the list of generally accepted civil law criteria with additional ones, which should also be taken into account when considering the distinction between movable and immovable property for taxation purposes.

To summarize. According to the provisions of the Letter of the Federal Tax Service considered, the exemption can be defended in the following cases:

  • When the property is acquired, it is properly accounted for as a separate inventory object.
  • When an item of fixed assets, according to OKOF, has a group code "Machinery and Equipment" (if the object does not fall under the exceptions in which it may be recognized as immovable property).
  • If the object is a building or construction, it is necessary to determine whether it is capital or non-capital from the point of view of the Civil Code of the RF, since it is non-capital structures which may be recognized as movable.
  • The object does not meet the signs of immovable property mentioned in the Civil Code of the RF[24] and supplemented by the court practice cited above.

Legislative changes

It is impossible to distinguish between the qualification of property as movable or immovable in isolation from legislative changes.

According to the portal on the preparation of normative legal acts, the Rosreestr proposed a draft law on introducing amendments to improve the legislation on immovable property[25]. The Federation Council supported the initiative[26], pointing to the problems of tax on movable property and uncertainty as to what is considered to be movable property and what is considered to be immovable property[27]. However, despite the urgency of the problems, the draft law received a negative decision following the regulatory impact assessment procedure due to "lack of clarity and logic, which may contribute to legal uncertainty, and contradictions in its application".

Without going into the details of all the innovations, we note that the concept of "unified real estate complex (UPC)" in the draft law deserves special attention. In particular, the definition lacks the criterion of a single purpose. Recall that the current version of the law contains the following wording, which the tax authority often uses in its arguments: "inseparably linked physically or technologically, including linear objects (railroads, power lines, pipelines, and others).

Thus, given that the final version of the text of the bill will be finalized, it is necessary to actively monitor the changes. Obviously, given the current uncertainty about the final version of the bill, the risk of recharacterization of facilities may change both upwards and downwards, as the tax authority will rely on civil law criteria.


[1] Federal Law "On Amendments to Part Two of the Tax Code of the Russian Federation" of 29.11.2012 № 202-FZ

[2] See Ruling of the Constitutional Court of the Russian Federation of 21.12.2018 No. 47-P

[3] Federal Law "On Amendments to Part Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation" from 24.11.2014 N 366-FZ

[4] Decree of the Government of the Russian Federation from 01.01.2002 № 1 (red. from 18.11.2022) "On the Classification of Fixed Assets Included in Depreciation Groups".

[5] Federal Law "On Amendments to Part One and Part Two of the Tax Code of the Russian Federation" from 03.08.2018 № 302-FZ

[6] See Decision of the Arbitration Court of the Arkhangelsk region from 13.07.2020 in case No. A05-15361/2019

[7] See Decision of the Arbitration Court of the Volga District of 28.05.2019 in case No. A12-14902/2018

[8] See Decision of the Supreme Court of 12.07.2019 № 307-ES19-5241 in case № A05-879/2018 CJSC "Lesozavod-25"

[9] See Federal Law of 03.08.2018 No. 302-FZ "On Amendments to Part One and Part Two of the Tax Code of the Russian Federation".

[10] See Letter of the Federal Tax Service of 28.08.2019 No. BS-4-21/17216@ "On recommendations for determining the type of certain property objects (movable/non-movable) for the purposes of administration of organization property tax".

[11] See Determination of 16.07.2021 № 305-ES21-10787 in case № A40-318087/2019

[12] See Determination of 23.03.2021 № 307-ES21-1843 in case № A42-9322/2018

[13] See Determination of 28.06.2021 № 308-ES21-9321 in case № A53-22059/2020

[14] See the Decision of the Volga District Arbitration Court of 04.03.2022 in case № A65-10705/2021

[15] See the Ruling of the SKES of the Supreme Court of the RF of 13.12.2021 in the case № A40-95182/2020 of LLC "Gazpromneft-Khantos

[16] See para. 38 of the Resolution of the Plenum of the Supreme Soviet of 23.06.2015 № 25

[17] See the Decision of the Arbitration Court of the Volga-Vyatka District of 03.08.2021 № A11-5904/2019

[18] See Letter of the Federal Tax Service of the Russian Federation of 16.08.2022 № SD-4-21/10747@

[19] See the Ruling of the Supreme Court of the Russian Federation of 28.07.2021 in case No. A18-1531/2019; Ruling of the Supreme Court of the Russian Federation of 17.05.2021 in case No. A32-56709/2019

[20] See Rulings of the 9th AAS of 16.09.2022 in case No. A40-244883/2018; of 22.09.2022 in case No. A40-95914/2020; of 18.08.2022 in case No. A40-85181/2021; of 17.10.2022 in case No. A40-111087/2021

[21] See, for example, Cases Nos. A40-98958/2016, A40-85398/2019, A40-318087/2019

[22] Cases Nos. A40-1615/2019, A40-102666/2020, A40-255623/2018, A40-317545/2018, A40-15775/2019, A40-62230/2019, A40-14350/2020, A40-549/2019

[23] Decision of the ArC MO of 27.07.2022 in case No. A40-14554/2019; Decision of the ArC PO of 28.09.2022 in case No. A12-15847/2021

[24] Item 10.2 of article 1 of the Civil Code of the RF

[25] Normative legal acts - Official site for placing information on the preparation of normative legal acts and the results of their discussion

[26] See commentary of the First Deputy Chairman of the Budget Committee of the House of Regions Sergey Ryabukhin. Read more in PG.

[27] See the commentary of the Head of the Federation Council Committee on Budget and Financial Markets Anatoly Artamonov. Read more in PG