Non-residential real estate tax in 2015 – point of controversy provoked by the Verkhovna Rada of Ukraine
The Law of Ukraine No. 71-VIII as of December 28, 2014 “On Amendments to the Tax Code of Ukraine and Certain Legislative Acts of Ukraine On Tax Reform” (hereinafter referred to as “the TCU”) has changed taxation rules of real estate other than a land plot:
- The objects of non-residential real estate became subject to taxation on real estate other than a land plot.
Attempts to carry out respective provisions in the part connected to local councils’ authority lead to certain disputes and/or provoke the violation by local councils of general provisions of legislation concerning local councils’ authority and time periods within the scopes of which corresponding decisions made by local councils can be applied. In particular, there a question arises: whether local council can issue a decision on application of non-residential real estate tax already throughout 2015?
A number (however, not all) of local councils have adopted new legislative provisions as carte blanch on taxation, in particular taxation of non-residential real estate objects already in 2015. As an example it is possible to single out:
- The Decision of Local Council in the city of Boryspil from January 30, 2014 No.4885-60-VI “On imposing of local taxes and duties for 2015“;
- The Decision of Local Council in the city of Brovary from December 31, 2014 No.1390-51-06 “On imposing of local taxes and duties in a new version“ (changed by the following decision, please see below);
- The Decision of Local Council in the city of Brovary from January 30, 2015 No.1392-52-06 “On imposing of local taxes and duties, land and excise tax rates on the territory of the city of Brovary on 2015“;
- The Decision of Local Council in the city of Stryy from January 20, 2015 No.577 “On local taxes and duties“;
- The Decision of Local Council in the city of Brody from January 29, 2015 No.962 “On imposing of local taxes and duties, land and excise tax rates on the territory of Brody Local Council and the city of Brody”;
- The Decision of Local Council in the city of Dnipropetrovsk from January 28, 2015 No.7/60 “On amendments to the decision of Local Council from December 27, 2015 No. 5/6 “About local taxes and duties on the city territory“;
- The Decision of Local Council in the city of Kremenets from January 29, 2015 “On imposing of taxes and amendments to the Decision of Local Council session from July 23, 2014 No.3073 “On taxes and duties for 2015“.
And some others.
However, this approach leads to controversies and does not comply with legislation, in particular with respective provisions of the TCU and other laws of Ukraine as mentioned below.
Why non-residential real estate tax cannot be applied throughout 2015
Para. 265.1 of the TCU determines the tax on non-residential real estate other than land plot as a constituent of real estate tax. Real estate tax according to Para. 10.1.1 of the TCU refers to local taxes and, according to Para. 12.3 of the TCU, shall be imposed by local councils.
The TCU and the Law of Ukraine “On Local Self-government in Ukraine” determine such order and peculiarities upon imposing of taxes by the decisions of local councils and further application of such decisions for the purposes of taxation: Article 69 of the Law of Ukraine “On Local Self-government in Ukraine”:
“Self-government authorities according to the Tax Code of Ukraine are authorized to impose local taxes and duties. Local taxes and duties are transferred to corresponding local budgets in the order envisaged by the Fiscal Code of Ukraine taking into account certain peculiarities determined by the Tax Code of Ukraine”.
Abovementioned norm complies with provision of Para. 12.3.1. of the Tax Code of Ukraine according to which: “Imposing of local taxes and duties shall be performed in the order envisaged by this Code”. Therefore, local councils are authorized to impose local taxes and duties inclusively within the power and in the order envisaged by the TCU. In connection therewith, the order of decision making as regards imposing of local taxes is conditioned by Para. 12.3.4 of the TCU, namely:
“The decision as regards imposing of local taxes and duties shall be officially released by corresponding self-government authority till July 15, that precedes budget period in which the application of imposed local taxes and duties or any changes is planned (planning period). Otherwise, the norms of corresponding decisions shall be applied not earlier the beginning of budget period that starts after the planned period”.
Thus, in order to apply norms of corresponding decisions made by local councils as regards imposing of local taxes in 2015, such decisions shall be made and released till July 15, 2014.
However, since non-residential real estate was not the object of taxation throughout 2014, and the Law No. 71-VIII, according to which amendments on this issue are made to the TCU, became effective only on January 1, 2015, so local councils could not make decisions as regards imposing of tax on non-residential real estate in 2014.
Therefore, non-residential real estate tax could not be imposed for application in 2015 and be allocated for such period. Such imposing and allocation are invalid.
All the abovementioned is also confirmed by a number of other provisions of the TCU. In particular, subpara. 12.5 of the TCU states that:
“Officially released decision as regards imposing of local taxes and duties is legislative act on imposing of local taxes and duties that comes into force taking into account terms envisaged by Para. 12.3.4 of this Article”. The regarded above subpara. 12.3.4. of the TCU, to which refers the abovementioned Para. 12.5 of the TCU, states that decisions, which were not released till July 15 of previous year, shall be applied only in the next year. Besides, Para. 12.4.3 of the TCU also establishes respective authorities of local councils and order of its implementation in the following way:
“… till the beginning of the next budget period decision making on imposing local taxes and duties, changes of their rates, taxation object, order of collection or provision of tax benefits that implicates change of tax payers’ obligations and comes into force from the beginning of budget period”.
Thus, according to the abovementioned norms the decision made by local council as regards imposing of local taxes comes into force only in budget year that follows the year in which it was made.
Abovementioned agrees also with general principle of tax stability (Para. 4.1.9 of the TCU), according to which changes to any elements of taxes and duties cannot be made later than six months till the beginning of a new budget period in which new rules and rates will be valid.
Taxes and duties, their rates and tax benefits cannot be changed throughout one budget period.
In this case this principle is supported by the act of higher legal force (the TCU) compared to decisions of local councils as regards tax issues.
For the sake of completeness we shall also mention that imposing of tax on real estate other than land plot is left exclusively to the discretion of local councils (Para. 10.3 Article 10 of the TCU). Thus, subpara. 12.3.5 Article 12 of the TCU concerning application of local taxes mandatory for imposing even without the decision of local council for their application does not apply to the tax on real estate.
The fault for existent and possible future disputes regarding tax on real estate for 2015 to a great extent lies on the Verkhovna Rada of Ukraine
The fault for existent and possible future disputes regarding tax under discussion for 2015 to a great extent lies on the Verkhovna Rada of Ukraine due to negligence upon adoption of laws and their inconsistency, provocativity of respective provisions. Thus, the Law 71-VIII to subpara. 10 “Other Transitional Provisions” Article ХХ “Transitional Provisions” adds Para. 33 of the following wording:
“To determine that for 2015 tax rates for non-residential real estate objects owned by physical and legal entities defined by subpara. 266.5.1. Para. 266.5 Article 266 of this Code cannot exceed 1 percent of minimal wages set by the law as per January 1 of accounting (tax) year for 1 square meter for non-residential real estate objects”.
This provision is difficult to interpret otherwise than the Verkhovna Rada of Ukraine considered such tax to be applied in 2015. Since it is either fault or provocation to make a decision on imposing tax rate in 2015 which cannot technically be applied this year.
It shall also be noted that Para. 4 of final provisions of the Law 71-VIIІ that states the following:
“Para. 4. To recommend to local self-government authorities:
in a month term from the date of promulgation of such Law to review the decision as regards imposing for 2015 real estate tax (in the part of the tax on real estate other than land plot) for residential objects, and also to adopt and promulgate the decision as regards imposing for 2015 real estate tax (in the part of the tax on real estate other than land plot) for non-residential objects, tax on real estate (in the part of transport tax) and excise tax from realization of excisable goods by subjects of retail trading“.
To determine that in 2015 the requirement conditioned by the Law of Ukraine “On fundaments of state regulatory policy in the field of economic activity” does not apply to the decisions made by local councils as regards imposing of local taxes for 2015. Although the abovementioned provision does not amend current provisions of the TCU, does not oblige local councils to certain actions (but only recommend that is not an obligation) and does not allow directly to extend the effect of decisions made by local councils as regards imposing of local taxes for 2015, but it is rather provocative for those local councils that may not have enough resource for detailed analysis of tax legislation norms as stated above.
The above commentary presents the general statement for information purposes only and as such may not be practically used in specific cases without professional advice.
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