After the lease term termination, the lessee continues using the property unless the lessor disagrees based on the Russian Civil Code 621.2.
- Can the lessee continue to amortise inseparable improvements to the leased property which the lessee had made with the lessor's consent before the basic lease term expired and which will not be covered by the lessor?
We advise to enter into an additional agreement to prolong the lease term in order to eliminate tax risks.
In the stated situation, the lease agreement is deemed valid in accordance with the Russian Civil Code 621.2 which runs that if the lessee continues to make use of property after the expiry of the validity term of the agreement in the absence of objections from the lessor, the agreement shall be deemed to be resumed on the same conditions for an indefinite period of time. Beside that, an agreement entered into for an indefinite period of time is not subject to registration (par. 11 of Information Letter from Supreme Arbitration Court of the Russian Federation of 16 February 2001 No 59 Review of Dispute Resolution Practice Related to Application of Federation Law On State Registration of Title for Real Estate and Transactions with it. Thus, a tax body does not have a possibility to refuse accepting the rent expense due to absence of registration of the lease agreement.
Under Russian Tax Code 258.1 par. 6, capital investments which have been made by the lessee with the lessor's consent and for which reimbursement is not made by the lessor shall be amortised by the lessee during the term of the lease agreement on the basis of amortisation amounts calculated with account taken of the useful life which is determined for the leased fixed assets or for capital investments in those assets in accordance with the classification of fixed assets which is approved by the Government of the Russian Federation.
Thus, this is a question whether the resumed lease agreement for an indefinite period of time is a new agreement or whether it is a prolonged previous lease agreement. Letters from the Russian Finance Ministry of 3 May 2011 No 03-03-06/2/75, of 20 October 2009 No 03-03-06/1/677 and Letter from the Russian Federal Tax Service Department for Moscow of 13 August 2009 No 16-15/083987 say that if a lessee continues to make use of property after the lease term expires and there are no objections from the lessor, the agreement continues to be value and is deemed entered into for an indefinite period of time and the lessee continues to amortise the capital investments in the leased property until any party declares that the lease agreement is terminated. However, earlier letters from the Russian Finance Ministry of 18 September 2009 No 03-03-06/2/174, from the Russian Federal Tax Service of 13 July 2009 No 3-2-06/76 stated that a resumed lease agreement for an indefinite period of time shall be considered as a new lease agreement.
The court practice could not show similar views either (though regarding civil law disputes rather than tax once). For instance, Federal Arbitration Court of the North-Western District considered that entering into a lease agreement for a new period or its resumption for an indefinite period of time is entering into a new agreement (Resolution of 13 February 2003 No A56-33806/01) but the Moscow District Federal Arbitration Court considered that the lease legal relations are not deemed terminated and that the agreement is not new in accordance with the art. 621.1 (Resolution of 28 July 2003 No KA-A40/4940-03).
Similar disagreements also arise with regard to another questions - whether it is required to register real estate lease agreements entered into for, say, 11 months and prolonged for the same period of time. The Russian Federal Tax Services thinks that at prolongation, the contract that is valid is the previous one which term after the prolongation is more than one year, thus, the prolonged agreement shall be registered (letter of 13 July 2009 No 3-2-06/76). However, the Presidium of the Russian Supreme Arbitration Court concluding that such an agreement is not subject to registration, qualifies it as a new one (par. 10 of Information Letter of 16 February 2001 No 59). The first opinion (supposedly unfavourable for the parties to a lease agreement) allows to, through the second one (supposedly favourable) does not allow to continue amortisation of the inseparable improvements.
Therefore, we consider certain tax risks in the case when the lessee having under-amortised inseparable improvements to the leased property made within the framework of the basic lease agreement, continues to charge amortisation without entering an additional agreement on prolongation of the basic lease agreement.