In August 2024, the Supreme Court of the Russian Federation (SC RF) considered a complaint filed by Lukoil Oil Company PJSC and concluded that it was lawful to recognize expenses for the creation of construction in progress. 

The subject of the dispute considered in this case attracted the attention not only of the Supreme Court of the Russian Federation. Thus, it became known that the Constitutional Court of the Russian Federation (CC RF) accepted for consideration the request of the Moscow Arbitration Court to check the constitutionality of the provisions of the Tax Code of the Russian Federation concerning the accounting of expenses for the creation of written-off construction in progress. 

The request was sent by the court in late July as part of the case of JSC Gazpromneft-Moscow Refinery (No. A40-95914/2020), which has been pending since 2020. The courts of the first and appellate instances supported the taxpayer arguments, indicating that it is entitled to take into account in expenses the cost of written-off construction in progress. 

The cassation instance overturned the acts of the lower courts and turned the case around for a new review, agreeing with the inspectorate position that the relevant costs are involved in the formation of the initial cost of fixed assets not put into operation and not taken into account as fixed assets, and therefore cannot be included in expenses. 

In the course of the second round of the case, the company filed a petition for a request to the Constitutional Court of the Russian Federation to check the constitutionality of the provisions of Article 270 and Article 265 of the Tax Code, pointing out that the taxpayer lack of the right to take into account in income tax expenses the amounts of the cost of written-off construction in progress leads to the deformation of the tax on financial result into a tax on commercial failure. 

The court considered this request reasonable, finding that the taxpayer;s lack of the right to account for these costs is not justified by the constitutionally significant purposes of limiting the following rights: 

• The taxpayer property right

The absence of a taxpayer right to account for the relevant costs directly affecting the financial result of economic activity in income tax expenses leads to an increase in the taxpayers; property exemption. 

• Freedom of economic activity

The inspectorate approach, supported by the court of cassation instance, encourages taxpayers not to invest in business projects that may later turn out to be unprofitable (including due to changes in external circumstances). 

• Principle of equality of taxpayers

Taxpayers who incur expenses for the creation and construction of various capital construction projects for profit will be able to take them into account in expenses only if the business project is actually successful. 

For taxpayers who suffer a loss in the realization of a business project, the lack of the right to include in expenses the costs incurred for its realization will become a punishment for failure in conducting entrepreneurial activity. 

• Interests of the Russian Federation

This approach leads to discouragement of investment activity, economic activity of business entities and, ultimately, to a decrease in revenues to the budget system. 

What does this mean for business? 

Recognition by the Constitutional Court of the Russian Federation of the relevant provisions of the tax legislation as unconstitutional may lead to the revision of all similar cases under new circumstances if the possibility of revision of cases against other persons is directly indicated by the Constitutional Court of the Russian Federation. 

However, even if such instruction is not reflected in the act of the Constitutional Court of the Russian Federation, it will in any case mean a final turn in court practice on the issue of the legality of accounting for expenses on construction in progress, since the courts will be obliged to take into account the position not only of the Supreme Court of the Russian Federation, but also of the Constitutional Court of the Russian Federation when considering the relevant disputes. 

At the same time, businesses can already now consider filing a revised tax return if the relevant expenses were incurred by the taxpayer but were not taken into account for one reason or another. This may be done within three years from the date of filing the initial declaration for the tax period in which the expenses in question were incurred.