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In Russia, international leasing activity is regulated by the Law #164-ФЗ. Article 4 of the abovementioned law defines a lessor as a physical or legal entity that purchases a property with its own or raised funds and offers it for lease to a lessee for a specified period of time on predetermined conditions with a specified financial compensation for temporary possession. A lease may or may not include a transfer of ownership for the subject of the lease.

Which party of an international leasing contract is liable for the real estate tax in relation to property owned by a lessor? Can a foreign company without a permanent representation in Russia be liable, if the leased property appears on the balance sheet of a Russian company?

Prior to offering the answer, we would like to clarify the problem that led to this question.

Article 373 of the Tax Code (TC) recognizes as property taxpayers, Russian or foreign organizations that have property being subject to property tax according to Article 374 of the TC.

For Russian organizations, the object of taxation is the movable and real property included in the balance sheet as fixed assets according to established accounting procedures, unless otherwise stipulated by Articles 378 and 378.1 of the TC. It also notes that the abovementioned property includes property delivered into temporary possession, for use, disposition, management, trust management, or contributed for joint venture or received through a concessionary agreement (Article 374 Paragraph 1 of the TC).

For foreign organizations without a permanent representation in Russia, the object of taxation is a real estate property located in Russia owned or received through a concessionary agreement (Article 374 Paragraph 3 of the TC).

According to Article 31 paragraph 1 of the Law #164-ФЗ, an object of a lease transferred to a lessee according to a leasing agreement is included in the balance sheet of the lessor or the lessee by mutual agreement.

Thus, following the above-mentioned regulations, in cases when property is included in the balance sheet of the lessee, both a foreign company (lessor) and a Russian organization (lessee) are recognized as taxpayers for the real estate located in Russia, in other words, it is a case of dual taxation.

According to Russia’s Ministry of Finance, to avoid this situation of double taxation regardless of whether a real estate property is included in lessee’s accounting records, the foreign company (lessor) without a permanent representation in Russia is recognized as the liable party for property tax. In such event, the taxable base is calculated according to Article 375 Paragraph 2 of the TC based on assessed value, and starting on January 1, 2014, - according to Article 378.2 Paragraph 1 Subparagraph 3 of the TC, based on cadastral value.

If the real estate owned by a foreign company does not have a cadastral value, then, according to Article 378.2 Paragraph 14, in respect to these objects, the property tax base is accepted as zero (according to Letter of the Ministry of Finance #03-05-05-01/54342 from December 11, 2013).

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