Russia's
New Land Code
Oganes Sarkisov & Geoffrey Cleasby
International Copyright, U.S. & Foreign Commercial Service and U.S. Department of State, 2002. All rights reserved outside of the United States.
Summary
In late 2001, Russia's new Land Code came into effect. This new law is of critical importance to investors, as it strengthens the legal basis on which urban land may be transferred and held, and facilitates the transfer of state-owned urban land to private ownership. Agricultural land will be covered by future legislation. The Land Code is expected to provide stimulus to the real estate market. It should also encourage foreign investment, since it clarifies the rights of foreigners by affording them, with a few exceptions, the same rights as Russians. End Summary.
The passage into law on October 30, 2001 of Russia's new Land Code dispels much of the uncertainty that had surrounded real estate transactions, and removes some of the constraints to investment in real property. The primary impact of the Land Code is on urban land, which accounts for a mere 2% of Russia's vast territory, but is where most of the population lives, and where most of the economic activity takes place. Agricultural land will be covered by future legislation, as will a law clarifying the rules for government compulsory purchases. To a large extent, the new Land Code might be viewed as legislation to facilitate the privatization of land, as it details the conditions for the sale of state-owned land to the private sector.
Effective Privatization of Land
The absence of land ownership had presented a legal and psychological hurdle to investment in Russia. The new Land Code establishes the basis under federal law for land ownership, and provides new rights and opportunities for foreign investors in Russia. It provides for circumstances in which nonagricultural land may be - and in some instances must be - transferred to private owners.
The Land Code gives owners of buildings the right to purchase (from the State or municipality) the plots of land on which their buildings stand. The same right applies to investors who intend to develop a certain plot of land, provided that necessary approval has been obtained. In future privatization sales of buildings or structures, the law now requires that they be sold together with the land on which they sit. Owners of existing buildings, facilities or structures located on land owned by a third party will now enjoy the preemptive right to purchase or lease the land plot beneath such buildings.
The Land Code establishes formulae to calculate the price at which the owners of existing buildings may purchase the land on which those buildings sit. This formula is based on the size of the plot, the land tax rate, the purpose for which the building and land are used, and two other coefficients. These calculations result in an extremely attractive price for land to those with rights to purchase, and is thus a strong encouragement to exercise those rights, and an assurance of rapid and widespread private ownership.
Fair Treatment of Foreigners
With a number of exceptions, the Land Code treats foreign individuals and legal entities equally with Russians. There is equal treatment for companies owned exclusively by Russian shareholders and those owned wholly or partly by foreign shareholders. Rights to acquire land under existing buildings, or for construction are equally enjoyed by Russian and foreign entities. Foreigners are also permitted to lease land. Although, broadly speaking, foreign individuals and companies are not discriminated against under the Land Code, it does place the following restrictions on foreigners:
The right to acquire land under existing buildings or for construction applies to foreigners, but can never be granted to them free of charge.
Foreigners are specifically prohibited from owning land plots in areas around Russia's borders with other countries, and in certain other 'special territories' of the Russian Federation pursuant to other federal laws.
The President may establish a list of types of buildings and other structures to which preemptive buy-out or lease rights to land plots may not apply to foreigners.
Foreigners are also prohibited from owning agricultural land.
Some of the restrictions above are meant to address legitimate national security interests. It is probable that other restrictions may be avoided if foreign investors register as Russian legal entities with foreign ownership, since Land Code does not impose any restrictions on Russian legal entities, even with 100% foreign capital, and treats them equally with Russians. As stated below, the issue of ownership of agricultural land is due to be addressed under separate legislation.
Limited Applicability to Agricultural Land
The Land Code has limited applicability to agricultural land, as it is expressly provided that the transfer of ownership of such land will be the subject of a separate Federal law. The question of sales of agricultural land has been the subject of heated debate in Russia, and is such a point of contention with 'conservatives' that the government considered it expedient to address the issue in a separate bill. Excluding agricultural land from the Land Code helped speed its passage through the legislature. Therefore, the full provisions of the Land Code apply only to that approximately 2% of Russia's vast territory that is urban, but in which lives most of the population and in which most of the economic activity of the country takes place. The passage of the Land Code will, therefore, have a great impact on the business and investment climate of Russia.
On March 19, 2002, the Russian Government submitted to the Duma (parliament) a draft law, 'The Law on Agricultural Land Turnover' which will allow the sale and transfer of Russia's agricultural land. Land classed as 'agricultural' comprises 406 million hectares of Russia's 1.7 billion hectares. Of that, 190 million hectares are arable land. An agricultural land law, when passed, will be the subject of a future International Market Insight report.
Types of Rights
The Land Code now recognizes the following rights to own or use land:
(by the State, municipalities or private individuals and legal entities).
(Rights to perpetual or indefinite use were originally granted under a Soviet law of 1921. In future, new rights this type may only be granted to State and municipal institutions, Federal Treasury-owned enterprises, State and local authorities. Legal entities, other than those listed in the previous sentence, with existing rights of perpetual use will have, until January 1, 2004 to convert and re-register their rights as either owners or leaseholders)
(Private individuals will be allowed to maintain and transfer by inheritance their existing rights of lifelong inheritable possession and perpetual use. However, no new rights of this type may be created); and
Other existing rights to land plots that are not provided for by the new Land Code should be re-registered within the categories permitted.
Other Issues
Acquiring New Land Rights for Construction
The new Land Code stipulates two different procedures of land allocation for construction purposes:
- In urban areas:
State or municipal authorities will organize public tenders, and the winner will be granted rights to either purchase or lease the land for construction.
- Outside of urban areas:
For land allocation for construction of industrial facilities outside of urban areas, no tender is required. Instead, the Land Code requires; a) a thorough investigation of ecological, sanitary, architectural and other issues (in some cases – of public opinion), and; b) a specific request for land rights from an investor.
Termination of Land Leases
The following provisions constitute grounds for termination of land leases:
- Misuse of the land plot;
- Use of the land plot that results in a decline in fertility of agricultural land or negatively affects the environment;
- Failure to rectify a range of intentional violations of applicable environmental regulations; and
- Failure to use the land plot for its designated purpose within a three-year period.
Some Tax Implications
As stated earlier, those entitled to purchase state and municipal land will probably find the initial price very attractive, and can be expected to purchase the land on which their properties stand. During this initial phase of privatization, the land and property tax considerations are likely to be of secondary concern to purchasers. Subsequently, however, the tax implications of real estate transactions should grow in significance.
Russia has followed the norm of many countries in making land a non-depreciable asset. This will obviously impact the decision of future users to buy or lease land, since lease expenses are generally deductible for profit-tax purposes. Investors should also note that value added tax (VAT) is charged at a rate of 20% on purchases of land. However, when land is leased from the federal or municipal authorities, the lease payments are exempt from VAT. While VAT on land should be recoverable for most investors, for those ineligible to reclaim VAT, such as banks, the VAT would represent an additional cost of buying the land. Even some developers of commercial office centers would be unable to recover VAT on land in full if part of their office space were rented by accredited representative offices of foreign companies.
Although land plots are exempt from property tax, they are subject to land tax payable at fixed rates per hectare. If the owner of the building buys the underlying land plot directly from the Moscow authorities at the price that lawmakers set, he may find the land tax is higher than property tax would be. In Moscow and St. Petersburg the land tax rate is determined by the municipalities and depends on location.
There is still no concept of single ownership title to land and buildings combined; they are still considered two separate properties. Therefore, when an investor buys land with a building on it, there is some flexibility in allocating the price between the land and the building. This would therefore have implications in the future property-tax liability and in depreciation expenses.
Potential Consequences For The Real Estate Market In Moscow Moscow has a vibrant real estate market, which has largely recovered from the 1998 financial crisis and is now enjoying a construction boom which started in 2001. Almost everywhere in Moscow's center older buildings are undergoing refurbishment, and there are numerous new developments of office blocks and retail centers. Shopping malls and large retail stores, such as the foreign-owned IKEA, Metro AG, and AVA chains are springing up around Moscow's ring-road
By some estimates, Moscow is Europe's largest city, and Russia's undisputed commercial and political capital. The vast majority of Russian companies have their headquarters in Moscow, regardless of where their commercial activities take place. However, there has long been a shortage of Western-standard office space. This has resulted in relatively high prices for Moscow office space, even though most other costs are well below those of Western capitals. According to a recent global survey by the firm DTZ, in 2001 Moscow was the 11th most expensive city in the world in terms of overall office occupancy costs. Rents for class 'A' offices are now around the $600 per-square-meter level, including operating costs but excluding VAT (20%). While prices have not yet regained the high levels of the period immediately preceding the 1998 crisis, they are rising rapidly, despite more high-quality office space coming on stream.
While the real estate market in Moscow is functioning, it is not yet easily accessible to the newcomer. The market as understood in most other countries, is still a relatively new concept. Mortgage financing is not universally available, loan terms are short and interest rates relatively high. However, the market is moving very quickly to achieve the service standards demanded by increasingly sophisticated clients. Most analysts believe that, as the Russian economy continues to improve and as more foreign firm set up shop in Moscow, demand for quality office and commercial space will remain robust. The implementation of the Land Code will provide a continuing boost to the development of the real estate market.
Adoption of the Land Code in the Regions
At a recent Land Code Forum, organized by the American Chamber of Commerce in Russia, representatives of Moscow's city government outlined a plan for rapid adoption of the legislation in the capital city. However, concern was expressed that some of the less reform-minded governments of Russia's 89 regions may drag their feet. Russia's Deputy Minister for Economic Development and Trade, Alexander Maslov, told the AmCham's Real-Estate Committee that the federal government anticipates the possibility of slow implementation of the Land Code in certain regions, and warned that "potential land investors or future land purchasers are free to sue any regional administration if it openly opposes land sales or sets up insurmountable red tape in sale procedures, and the federal government will support such investors."
Necessary Follow-up
Significant follow-up is required on both the federal and local levels in order to put the Land Code fully into effect. Although, foreign individuals and companies are not discriminated against under the Land Code, they will, however, be subject to special treatment in respect to land in border areas on Russia's frontiers and land beneath certain (security) sensitive buildings. Clarification of these restricted land plots will be required.
Observers note that Russian legislators will need to review the provisions of the Civil Code that now appear outdated since passage of the Land Code. For example, the Land Code seeks to alter the balance of certain aspects of the relationship between the lessor and lessee of a land plot. Only when the Civil Code is updated to reflect these changes will there be legal certainty on these issues. A review of the Civil Code is a major task, however, and although drafting work has begun, the process is bound to take some time.
On the municipal and local levels, cities like Moscow and St. Petersburg are reviewing local laws and procedures to ensure that they comply with the Land Code. In Moscow, both the exact rates for purchase and the procedures for processing applications have yet to be set. The Moscow land committee has stated that it is working expeditiously on these issues.
For more information about the Land Code and potential implications for your businesses in Russia please refer to BISNIS Bulletin, December 2001/January 2002 http://www.bisnis.doc.gov/BISNIS/BULLETIN/jan02bull5.htm or contact Oganes Sarkisov:
Oganes Sarkisov
Commercial Specialist
U.S. & Foreign Commercial Service Moscow
Bolshaya Molchanovka, 23/38
121069, Moscow Russia
Phone: 7-095-737-5030
Direct Phone: 7-095-737-5029
Fax: 7-095-737-5033
E-mail: Moscow.Office.Box@mail.doc.gov
Direct e-mail: Oganes.Sarkisov@mail.doc.gov
Further Assistance for U.S. Companies
The U.S. Commercial Service (CS) Moscow encourages U.S. companies wishing to do business in Russia to utilize our services. For more information about our services and programs, please see our website at:http://www.buyusa.gov/russia/en/ or http://www.BuyUSA.com
Two of the Commercial Service's most popular programs in Russia are:
Gold Key Service: Experienced Commercial Specialists identify opportunities, arrange business appointments with pre-qualified Russian agents and distributors, and accompany you to the meetings. Basic Gold Key Service cost $600 for one day of appointments (typically four) and $300 for each additional day. GKS with full logistical support cost $1,200 for one day of appointments, and $630 for each additional day. Logistical support includes assistance with reservations at suitable hotels (several of which provide discounted rates); airport pick-up/drop-off; ground transportation to meetings; and interpreter services for eight hours a day. The Commercial Service requires sufficient company literature and price lists at least thirty days prior to the desired appointment dates, and accepts payment by VISA, MasterCard, American Express and Discovery cards.
International Partner Search: U.S. companies interested in finding local partners and licensees in Russia are encouraged to utilize the International Partner Search (IPS) service. We will provide you with a report on up to five qualified overseas agents, distributors, manufacturer's representatives, joint venture partners, licensees, franchisees, or strategic partners who have examined a U.S. company's materials and have expressed an interest in the company's products, services, or licenses, or have expressed an interest in otherwise partnering with the company. The current charge for our IPS service is $600.
To the best of our knowledge, the information contained in this report is accurate as of the date published. However, the Department of Commerce does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.
Sent by BISNIS, U.S. Department of Commerce, http://www.bisnis.doc.gov. Contact: Judith_Robnson@ita.doc.gov Tel: 202-482-2022 (legal); Joan_Morgan@ita.doc.gov, Tel: 202-482-2709 (agribusiness); Jeffrey_Kamins@ita.doc.gov, Tel: 202-482-3729 (construction). 03/21/2002