The Russian State Duma is going to consider amendments to the Tax Code, which are to affect the tax burden of real estate companies. The changes would bring in a new base for tax calculation: which would be changed to cadastral value from the previously used book value. Recently similar changes to property tax of individuals have passed the first reading of the State Duma. Those changes will affect all Russian property owners who will be subject to higher taxes.

The current approach uses the book value that takes into account the depreciation of a building which can result in a very low or zero book value. The new approach expected to start in 2020 is expected to increase regional budget revenues, which is positive for the country’s budget but may be less beneficial to owners of large property portfolios.

The cadastral valuation of real estate, both of private individuals and corporates, has been conducted across the whole country recently. Albeit, nobody knows the difference between the book and cadastral value of commercial real estate, as there is no information on the former available yet. Two people lobbying for the change, Sergey Katasonov (the member of Liberal Democratic Party) and Evgeny Fedorov (the member of United Russia), expect a 50% increase in property tax revenue.

Although the amendments to the tax code for Russian corporates are scheduled to begin in 2020, for foreign companies it is due to be applied much sooner – from 2014. It will be steeper for those that do not have legal entities in Russia because their property taxes are calculated based on even lower assessed property value than of other corporates.

The resulting higher property tax could have a negative effect on the Russian real estate capital values when they come in by reducing net income. This is especially true for older properties. Some office and retail properties constructed before or in early 90s could be affected, as their book value should significantly differ with the cadastral value. Whereas newer have their book value very close to cadastral, so will be less influenced by the change, we think.