Tax implications

03 May 2018

Use of a land plot in the economic activity of the company without proper registration of ownership: tax consequences

In this practical material we will review a case of using a land plot in the economic activity of the company – a situation in which an enterprise owns non-residential premises and uses it together with the land on which it is located for its own economic activity, but no ownership documents for such land were issued.

The main points of the case:

A limited liability company has status of a unified tax payer (group 3) and uses in its economic activity a recently purchased property that is located on a land plot that is in the municipal property of the territorial community of the city of Kyiv. At the same time, the paradox of the situation is that the cadastral number of the land was not designated, the technical documentation for the land was not executed, and contract for lease of land or other documents regarding its use by the company were not concluded as well. Accordingly, the company does not pay land tax or any lease payments for the use of land, but actually utilizes it in commercial activity. The question is: what are the legal consequences of such use of land?

It should be mentioned that in this case we consider the legal aspects concerning the payment of the land tax, but not the rent, since the company did not enter into the relevant lease agreement, which is the only basis for the calculation and payment of the rent.

Legal conclusions:

According to the rules of the current tax law, the obligation to pay the land tax by a land owner or land user arises from the day the right of ownership or right of use of the corresponding land plot arises (clause 287.1, Article 287 of the Tax Code of Ukraine).

It is important to note that the actual obligation to pay a land tax arises from the fact of ownership of the premises by the company from the date of registration of such property right, as the current legislation (namely Article 120 of the Land Code of Ukraine) presumes that the person that acquired the ownership right on a residential building, facilities or a structures located on a land plot owned by another person, has the ownership right on the land or part of the land on which such buildings are located. This is also consistent with the norms of clause 287.6. Art. 287 of the Tax Code of Ukraine, according to which, upon transfer of ownership for a building, the tax for land on which such building is located, should be paid on the general grounds from the date of state registration of the ownership right on such plot of land.

However, the question of a full transfer to a company’s ownership of a land plot is controversial and not proved, as there is no evidence of such documents, and such ownership is not properly registered in the State Register of Property Rights on Real Estate. And the aforementioned norm of the current tax law links the obligation to pay a land tax with the registration of ownership of a land plot.

However, in our opinion, as well as in accordance with the established judicial practice, the lack of proper registration of ownership for a land plot by the company cannot serve as the ground for exemption from payment of the land tax due to the following.

  1. The current tax law (clause 14.1.73, Article 14, clause 269.1.2, Article 269 of the Tax Code of Ukraine) specifies that the obligation to pay the land tax refers not only to the owners of land plots, but also to legal entities and individuals (residents and non-residents), who, in accordance with the law, have actually been granted the right to use the land plots of state and municipal property – land users. In this context, for the purpose of determining the status of a land user, it is important that the company has the ownership right on the premises located on the land plot and actually uses such premises in its business activity.
  2. The abovementioned conclusion is also confirmed by the judicial practice. As such, in the Resolution of the Supreme Court of Ukraine dated September 12, 2017 in case number 2a-10596/12/2670 the following legal conclusion was made: “Within the meaning of provisions of sub-clauses 14.1.72, 14.1.73, 14.1.72, 14.1.73, 14.1.7, 26.1.1, 269.1.2 of clause 269.1, 269.2 of Article 269, sub-clauses 270.1.1, 270.1.2 of clause 270.1 of Article 270, clause 287.7 of article 287 of the Ukrainian Tax Code, the land tax payer is the owner of the land plot or the land user, which may be an individual or a legal entity. The duty to pay this tax arises from the moment of acquisition (transfer) of the ownership of the land or rights to use it, and lasts until the termination (transfer) of this right. If a certain individual or legal entity acquired the ownership of a building or part thereof located on a leased land, then the right to use the land plot on which they are located, under the same conditions and to the same extent as in the previous one, passes to the purchaser. Similar legal position was already expressed by the Supreme Court of Ukraine in the Resolution as of June 8, 2016 (case number 21-804а16). Thus, the legal duty to pay tax on the land on which the property is located is transferred to the new owner of the property.” According to Part 1 of Art. 244-2 of the Code of Administrative Legal Proceedings of Ukraine, the conclusion of the Supreme Court of Ukraine regarding the application of the norm of law, set forth in its resolution adopted on the results of consideration of the case on the grounds provided in paragraphs 1 and 2 of part one of Article 237 of this Code, is mandatory for all public authorities that apply in their activities a legal act containing the relevant norm of law.

Taking into account the aforementioned, since the company owns the premises, actually uses it, as well as, accordingly, uses the land plot on which the premises are located, the company has a legal duty to pay the land tax from the date of accrual of the ownership for the premises, located on the land plot. In this case, the registration of ownership on a land plot by the company does not relieve it of the specified obligation.

It is also important to note that in accordance with the provisions of subclause 4) of clause 297.1. Art. 297 of the Tax Code of Ukraine, unified tax payers are exempted from the obligation to accrue, pay and submit tax reports on property tax (in terms of land tax), except land tax for land plot not used by the payers of the unified tax of the first-third groups for the conduction of economic activities. Many businesses use this feature of taxation in their business activities.

At the same time, we believe that in this case the company has no right not to charge or pay the land tax on the land plot on the basis of the mentioned norm of the tax law, since in fact the economic activity of the company is to lease the premises, not the land plot. In addition, due to improper filling out of the documentation of the land plot, there is in fact no legal basis for the company’s right to fully use such a plot in its business activities. Legal analysis of the latest individual tax consultations of the State Fiscal Service of Ukraine on similar issues (in particular, Consultation of SFS dated January 23, 2018, N264/6/99-99-12-02-03-15/ІPK; Consultation of SFS dated 11/23/2017. N2697/6/99-99-12-02-03-15/; Consultation of SFS 15.09.2017 N1972/6/99-99-12-02-03-15/IPK; Consultation of SFS dated 07/28/2017 p. N1405/6/99-99-12-02-03-15/IPK) suggests that the position of the tax authority on this issue is unified and corresponds to the above-mentioned conclusions.