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Who Pays the Land Tax when Changing the Property Owner?


Galyna Melnyk, lawyer at Ilyashev & Partners Law Firm

How can a former owner of a building minimize risks during transfer of ownership, and whether a new owner should expect additional charges as long as the land is not registered in his name?

Despite close attention to land use and related aspects of taxation, the local members of parliament have still not clearly formulated the answer to the question who pays and even how to pay the land tax during transfer of rights to the buildings if the land was not registered in the name of the old owner. It creates a lot of tax risks for both the old and the new owner of the buildings.

Transfer of ownership to real estate (buildings, constructions) is closely connected with transfer of obligation to pay tax in respect of the land on which such property is situated. Although the Tax Code of Ukraine (hereinafter, the TCU) sets forth a special rule regarding the date from which the new owner is obliged to pay the tax in such a case (clause 287.6.), unfortunately, in practice, the situation is connected with a number of tax risks both for the old and the new owners of real estate.

According to clause 287.6 of the TCU (as amended on January 01, 2015), the new owner of the building pays the tax on the land plot upon the state registration of ownership to the land plot. However, the tax law does not give a clear answer to the question who pays the tax before registration of title to land by the new owner if the rights to the land under the buildings were not registered by the previous owner of the buildings.

Thus, in some cases the land plots under the alienated buildings are in the state or municipal property, and the old owner (who does not have any title documents for the land) is registered in the database of the land cadastre as the actual user of land under such buildings. Prior to sale of buildings such person pays the land tax as the actual land user, including according to clause 286.1 of the TCU, which sets forth that the data of state land cadastre shall be the basis for calculating the land tax.

If the right to the land is not registered, the status of the land tax payer of the old owner of the building is quite controversial as according to clause 269.1 of the TCU the land tax payers are either land owners or land users, and clause 14.1.73 of the TCU defines land user as the person, who according to the law has the right to use the land plots, including on a rental basis (i.e. it assumes certain registration of land use). However, payment of land tax by the old owner of buildings before their disposal seems quite fair (because the person actually uses the ground to serve its real estate).

However, the situation changes dramatically after alienation of buildings as the new owner of such buildings becomes the actual land user. In this case the new owner does not have formal grounds to pay tax, because he is not a taxpayer as interpreted by the above clauses 269.1 and 14.1.73 of the TCU. He is also protected under clause 287.6 of the TCU that envisages that the new owner of the buildings pays tax only after registration of title to land (that may never happen).

Whereas the fiscal authorities assume that tax must be paid in any case, they charge additional tax on the former owner of the buildings guided by the above clause 286.1 of the TCU that envisages that the ground for accrual of land tax is the data of the State Land Cadastre.

The problem for the former owner is that he may not exclude information about himself from the cadastre at his initiative. According to the Rules of Procedure of the State Land Cadastre (approved by resolution of the Cabinet of Ministers of Ukraine of October 17, 2012, No. 1051), the bodies of cadastre are formally obliged to respond to the application for introduction of changes in the cadastre, which was filed by a new owner of the buildings, who, for obvious reasons, will not benefit from entering data about himself in the cadastre.

How can a former owner of a building minimize risks in this case, and should a new owner expect additional charges as long as the land is not registered in his name?

The old owner of the buildings may oblige the buyer (new owner) to register rights to land and specify compensation for the land tax in the buildings alienation agreement before such registration.

The key argument in defense of the old owner is that after alienation of buildings he does not match the concept of the land tax payer (as is no longer a land user, even in the broadest sense)

Some tax clarifications (in particular, clarification from “ZІR”, letter of the SFSU of April 27, 2016, No. 9552/6/99-99-12-02-03-15, of September 29, 2015, No. 20634/6/99-99-15-03-01-16, of June 02, 2016, No. 12045/6/99-99-12-02-03-15, letter of the Head administration of the SFS in Zaporizhzhya region of February 03, 2016, No. 359/10/08-01-17-01-17) emphasize that those who use land by virtue of ownership of the buildings located on it, violate the law and are obliged to register right to such land and pay tax, in particular, in relation to communal lands – in the form of rent. It follows from the clarification that the new owner of the buildings may expect additional charge of tax regardless of non-registration of title to land.

There are also cases when local councils successfully collected lost profits in the form of rent from the persons who owned buildings located on communal land, and in no way registered their rights to such land (see resolution of the Odessa Economic Court of Appeal of July 20, 2016 in case № 915/1683/14 – ed.).

In conclusion, we note that a comprehensive solution to the problem is possible by amending the TCU (e.g. inclusion of actual land users in the concept of land user) and by extension of the range of people who can initiate changes in the state cadastre.

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