Russian Developers Given VAT Exemptions on Shared-Equity Construction

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May 19 – The Russian State Duma is exempting all developers operating under the law regulating shared-equity construction from value-added tax. All housing deals using private capital and creating property rights will now be made under shared equity law.

Although deputies believe that the VAT exemption opportunity will motivate developers to operate under the law, construction industry representatives doubt this will boost legal real estate sales. The Federal “Law on Shared Participation Construction,” which was implemented in April 2005, defined the rights of investors in shared-equity construction projects — building projects in which future apartment owners finance the complex’s construction. In reality, many companies developed alternative “gray” schemes that limited investors’ rights. Developers’ bankruptcies have caused a number of prospective homebuyers involved in such schemes to invest their money in vain, without obtaining housing or the chance to be defended in court.

Developers selling apartments under “gray” schemes are already let off from VAT, which is “not obligatory on housing purchases and sale agreements according to tax legislation,” Andrei Pankovsky, deputy director of developer DSK-1, said to Vedomosti.

Those who sell apartments under the law mentioned above do have to pay VAT. Usually, companies pay VAT on the difference between the funds it raises from future homebuyers and the construction costs, and the VAT is imposed quarterly on the developer’s services, as listed in the contract.

New legislation will not solve the problem, says Baker & McKenzie partner Maxim Kuznechenkov. “VAT liberation doesn’t cover all the money received under the shared participation construction agreement, but only the developer’s services,” he said. “It is hard to estimate these services, and contracts with investors usually don’t specify the developer’s costs and services.”

Kuznechenkov believes that making all costs free from VAT would be fairer, because taxpayers are supposed to have a choice. “Sometimes it’s more profitable to get budget compensation on the ‘incoming’ VAT materials and construction work than to use the VAT liberation. The proposed relief does not allow us to present incoming VAT for subtraction,” he said. At the same time, he agrees that the new regulatory act will decrease the total taxation.

The legislation update will allow developers to save on VAT only on the margin, said Galina Akchurina, an employee of FBK-Pravo. Suppliers will continue to include value-added tax in construction work and building material costs.

“VAT canceling will lower expenses of private investors, not developers, motivating them to participate in share participation construction,” deputy department head of City-XXI Century Vasily Sharapov said.

According to experts, about 60 percent of new buildings in the construction stage in Russia are on sale under the law, and only about 5 percent in Moscow. All others are “gray.”

The new regulatory act offers to increase the fine for law evasion to 0.5-1 million rubles for each deal, 5 to 10 times more than the current fine which varies from 100 to 200 thousand rubles.