Administrative and civil legislation

According to the provisions of the current Russian urban planning legislation, a construction permit is a document that gives the developer the right to carry out construction and reconstruction of a capital construction project. [1]

The construction permit confirms the compliance of the design documentation with the established requirements, as well as the permissibility of placement of the capital construction facility on a land plot in accordance with the permitted use of such land plot and restrictions established in accordance with the land and other legislation of the Russian Federation.

A building permit is not required in the following cases: [2]

• construction of a garage on a land plot granted to an individual for purposes not related to entrepreneurial activity, construction on a land plot granted for gardening, dacha farming, as well as construction, reconstruction of individual housing construction objects;
• construction, reconstruction of facilities that are not capital construction objects; [3]
• construction of buildings and structures of auxiliary use on the land plot;
• changes to capital construction objects and (or) parts thereof, if such changes do not affect the structural and other characteristics of their reliability and safety, do not violate the rights of third parties and do not exceed the maximum parameters of permitted construction and reconstruction established by the town-planning regulations;
• in other cases, if in accordance with the State Planning Committee of the Russian Federation, legislation of the constituent entities of the Russian Federation on town-planning activities, obtaining a construction permit is not required.

Depending on the territory on which it is planned to carry out construction of the facility, the permit may be issued by an authorized federal executive authority, an executive authority of a constituent entity of the Russian Federation or a local government body of a municipal district. [4]

In case of construction or reconstruction of a capital construction facility carried out without a mandatory permit, the developer may face negative legal consequences provided for by administrative and civil legislation.

Thus, a person who violated the established procedure for construction, reconstruction, capital repair of a capital construction object may be brought to administrative responsibility provided for by article 9.5 of the CAO RF.

In its turn, a capital construction object built without obtaining the relevant permit for its construction is recognized as an unauthorized construction in accordance with Article 222 of the Civil Code of the Russian Federation (hereinafter - the Civil Code of the Russian Federation). A person who has carried out an unauthorized construction does not acquire ownership rights to it. It has no right to dispose of the construction - to sell, give, lease, make other transactions. [5]

At the same time, judicial practice proceeds from the fact that the mere fact that there is no permit for the construction (reconstruction) of a building is not a basis for recognizing the construction as unauthorized.

Thus, in its ruling of 13.05.2015 No. 25-KG15-2, the Supreme Court of the Russian Federation proceeded from the fact that, despite the absence of a construction permit for the building prior to the commencement of work on its reconstruction, the developer submitted a full and proper set of documents required to obtain a construction permit.

In addition to the legal consequences stipulated by administrative and civil legislation, the construction of a building without a permit may entail the risk of claims against the developer by the tax authorities.

VAT

As a rule, the tax authorities refuse to recognize VAT deductions for taxpayers in the absence of a construction permit.

In the opinion of the tax authorities, where taxpayers do not have a construction permit, transactions relating to the creation of an object are not legally formalized and, consequently, cannot be considered to be subject to VAT.

However, the courts, for the most part, take the side of taxpayers in such disputes, noting that the presence of a building permit is not provided for by Chapter 21 of the Tax Code of the Russian Federation as a condition for VAT deductibility, so the lack of a permit cannot prevent the right to claim tax deductions. [6]

In paragraph 11 of the Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation of 30.05.2014 № 33 "On Certain Issues Arising for Arbitration Courts in Consideration of Cases Related to the Collection of Value Added Tax" the court came to the following conclusion: "... the failure of the taxpayer in the implementation of economic activities of certain regulations established by both public law and civil law norms (e.g., failure to obtain a license, other permits or approvals as required; failure to register the contract, etc.) entails adverse tax consequences (e.g., the inability to use exemption from taxation of specific transactions to apply tax deductions, to declare the tax to be reimbursed from the budget, etc.) only.etc.) entails unfavorable tax consequences for it (e.g., inability to use exemption from taxation of specific operations, apply tax deductions, claim tax for reimbursement from the budget, etc.) only if it is expressly provided for by the provisions of Part Two of the Code".

However, there is judicial practice that recognizes the arguments of the tax authorities as well-founded. For example, in the decision of the Arbitration Court of the Altai Territory dated 04.12.2018 in case No. A03-11541/2017, the court found the following: "The applicant's argument that the absence of a construction permit is not a ground for refusing to deduct VAT is rejected by the court, since in the absence of a construction permit the person who carried out the construction has no opportunity to put the object into operation, and also has no right to dispose of this object, i.e. has no right to legally use it, including in carrying out activities subject to VAT".

Corporate income tax

The tax authorities refuse to allow taxpayers to take into account costs associated with the erection of a capital construction project in the absence of a relevant permit as part of expenses for profits tax on organizations.

Since a capital construction project built without the relevant permit may be recognized as an unauthorized construction, the tax authorities believe that the taxpayer's expenses relating to the construction of a capital construction project in the absence of the relevant permit are economically unjustified and may not be taken into account in calculating profits tax.

Judicial practice supports these conclusions of the tax authorities. Thus, in the decision of FAS East Siberian District on 03.05.2012 № F02-1688/2012 in the case № F02-1688/2012, the court stated the following: "...costs associated with the erection of a facility in the absence of the relevant permits, without approved design and estimate documentation, as well as recognized as an unauthorized construction and subject to demolition, are economically unjustified...".

Expenses related to the construction of an unauthorized building may be taken into account by a taxpayer as non-operating expenses on the basis of subpar. 20 p. 1 of Art. 265 of the Tax Code ("other reasonable expenses") only if the said expenses were reimbursed to the taxpayer by the person for whom the title to the unauthorized construction is recognized. [7]

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Based on the above, it can be concluded that in addition to the occurrence of negative legal consequences provided for by administrative and civil legislation, when carrying out construction works before obtaining a construction permit, there is a risk of claims from the tax authorities.

Taxpayers should be prepared for the fact that the tax authorities, as a rule, refuse to recognize VAT deductions, as well as to take into account the relevant costs as part of corporate income tax expenses. Whereas in disputes relating to additional VAT assessments the prospect of an appeal in the event of a correct position is significant, the courts side with the tax authorities on the issue of the lawfulness of including in corporate profits tax expenses the costs associated with the construction of an object in the absence of the relevant permit.

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Tax Compliance provides services in terms of support of tax audits, including consulting, representation of the client's interests in tax authorities during tax control activities, as well as other measures aimed at forming a legal position on identified tax offenses.

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[1] п. 1 of Art. 51 of the Urban Planning Code of the Russian Federation (hereinafter - the Urban Planning Code of the Russian Federation).

[2] п. 17 of Art. 51 of the RF Civil Code.

[3] For example, the list of structures that are not capital construction objects on the territory of the city of Moscow can be found in Annex 1 to the Resolution of the Moscow City Government No. 636-PP dated 13.11.2012.

[4] п. 6 of Art. 51 of the Russian Federation Urban Development Code.

[5] п. 2 of Article 222 of the Civil Code of the Russian Federation.

[6] For example, the rulings of the Arbitration Court of the West Siberian District dated 26.09.2018 No. F04-4046/2018 in the case of

No. A67-7865/2017, of 24.02.2016 No. F04-148/2016 in case No. A70-6377/2015 and of 18.08.2015

No. F04-22451/2015 on case No. A45-16524/2014, ruling of the Arbitration Court of the Ural District of 25.03.2021

No. F09-698/21 in case No. A60-16459/2020, of 04.04.2016 No. F09-1638/16 in case No. A47-4692/2015, ruling of the Moscow District Arbitration Court of 09.04.2015 No. F05-3390/2015 in case No. A40-167361/2013.

[7] Letter of the Ministry of Finance of Russia dated 04.06.2009 No. 03-03-06/1/337.