Russian State Tax Service recently took steps to clear up a sticking point for foreign companies whose only involvement in the country is property investment -- how to pay their property taxes.


The issue reaches back to a 1991 law, under which foreign legal entities did not have to pay property taxes. But things became confused in April 1995, when the rules were changed and every foreign property owner found itself liable for this tax.


The amendments, however, failed to elaborate on exactly how a foreign legal entity involved solely in real-estate investment -- such as a Cyprus company buying property for development -- should handle payment of this new tax.


Adding to this confusion, many foreign legal entities found that in dealing with the sale of nonresidential property, both the Notary Public and the Moscow Property Management Committee started to require proof that the buyer had a registered representative office in Moscow.


A further instruction from the federal tax inspectorate only increased the need for property investors to know where they stood with the tax laws. Dated June 16, 1995, the instruction titled, "Concerning Taxation of the Profit and Income of Foreign Legal Entities," stated that any foreign legal entity with income in Russia must notify both the area tax inspectorate and the State Tax Service as to the source of their funds. In both instances, the information must be conveyed in the manner in the instruction.


The June 16 instruction was, however, unclear on the question of property acquired by a foreign legal entity which is not intended to provide a source of income -- for example, the acquisition of offices by a corporation for its own occupation.


A resolution to this issue was not forthcoming until Oct. 24, 1995, when the Justice Ministry registered Instruction No. 38. It states that foreign legal entities which conduct no activities in Russia but which have property located in the country must send notification to the local tax inspectorate and a copy to the State Tax Service of the Russian Federation.


Such notification must be sent by foreign entities or their representatives within one month of obtaining either the right of ownership to the property or a lease which contains a right or an option to purchase the leased assets.


This notification must include a range of information, including the full name of the owner or lessee, residential address and its country of registration or incorporation.


Also, the owner must give the property's location and its value, supply the date of acquisition, the name of the seller or the lessor, its address and, finally, include the number of the sale-purchase agreement or the lease.


On the basis of such notification, a foreign legal entity will be registered as a taxpayer for the purpose of property tax with the tax inspectorate.


Such foreign legal entities also must file an annual report with the tax inspectorate denoting the property's value using the standard form approved by the instruction.


A foreign legal entity which is not carrying out activity in Russia but is a taxpayer for property tax purposes may make its property tax payments from its foreign bank account, doing away with the need to open an account in Russia.





Valentina Glukhovskaya is an attorney with Norton Rose.