Ministry real estate tax proposal shifts focus

A Ministry of Economic Development proposal on a new property tax regime will ease the tax burden for those owning apartments smaller than 55 square metres or undeveloped landowners with less than 6 hectares, but could lead to increases for others.

­By 2013 a real estate tax will replace the existing land and property taxation. Additionally, it is currently proposed to calculate the tax figure based on average market values, reducing tax rates. Currently property tax is less than 2.2 % of the average annual value of the property.

Vitaly Mozharovsky Partner of Goltsblat BLP says aggregate taxation should prompt a solution for taxation independent from cost while the final decision should lead to a relevant and fair scheme.

“The Government is looking to equalize the taxation on old real estate assets, which have low rates of tax, with the rest of the market. The idea is to create a single tax system based on market price. The new tax will replace three existing taxes on property, land and real estate. That could lead to an increase of tax base on one hand, and make it dependent on market price and number of square meters. Current evaluation is irrelevant and does not provide a market price for an asset.”

Mikhail Mishustin, The head of the Federal Tax Service, said recently that the concept of real estate taxation, which combines a tax on land and property calculated from market prices has been prepared for approval. The new tax is currently planned to come into force in 2013.

Vitaly Mozharovsky, Partner of Goltsblat BLP, noted that a stable real estate market and a fair assessment framework is needed.

“It would be unfair to rely on current market prices while evaluating the cost of the object due to overestimated market costs. Moreover, groundless tax may become an additional obstacle for the mortgage market. And the process of housing privatization could become protracted due to fears and tax uncertainty.”

A universal tax deduction on property has not been ever practiced in Russia says Dmitry Kostalgin, partner at Taxadvisor, who doesn’t believe the proposal will come to fruition as is. He also says that it may lead to issues surrounding the prestige end of the property market.

“It looks to be a tough effort from the Ministry, which has a very low grade of possibility of realization. Nevertheless, the impact on elite property owners remains latent, and may cause an outflow of the average population from prestige living areas.”

Sergei Shatalov, First Deputy Minister of Finance, expects the tax burden for elite property owners to increase significantly.  

“The tax rate will be much lower than the existing, assuming that the government has no plans to increase the total tax burden. The tax burden will be reduced to 0.1% of the market real estate value. It is proposed to eliminate taxation of apartments or land area equal to 55 square meters – these are typical one room apartments. On the other hand, owners of expensive property could face an increase of tax expenses.”