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Toni Schönfelder
A lifetime of innovation

So, Think You Want to Buy Some Land?

By Yevgenia Borisova

Despite being one of Moscows largest property holders, GlavUpDK pays no taxes on the land it uses.

Ivan Ivanov has some capital and decides to build a small widget factory in the Moscow region. He finds a vacant lot to build it on in an area where new construction is allowed and sets out to buy it from the owner, in this case the regional administration.

So he goes to the regional property committee to find out how he can go about buying that lot.

The answer: Nobody knows. Or rather, nobody knows for sure.

Article 30 of the Land Code seems to say that if a company or individual wants a specified parcel of land to build on -- say, next to a river or between two hills -- he can only lease the land, not own it. The only other option is to be granted the land "in use," a designation usually reserved for nonprofit organizations such as churches, schools and hospitals.

However, if an individual or company wants to purchase an unspecified plot of land -- say, 10 hectares, no matter the location -- among those being offered by an administration, it seems he or it can only do so through a tender or auction, unless no other party has applied for that tender or auction.

And this is just Article 30. In all, the new Land Code, despite being just several dozen pages in length, contains 103 articles, many of which appear to contradict each other or articles in other codes such as the Labor Code, Civil Code and Administrative Code.

Conflicting Opinions

It is telling that within a month of the passing of the code at least three books appeared, all with the same title: "Commentary on the New Land Code of the Russian Federation," and each longer than the code itself.

And in the case of Article 30, all three give different interpretations of its meaning.

Nikolai Kalinin, head of the State Dumas agrarian committee, says in his commentary on Article 30 that if an applicant want a specific plot of land, he needs to only designate "lease" or "ownership" when applying, suggesting that a specific land plot can indeed be bought.

However, professor Sergei Bogolyubov, who helped draft the code as head of the department that oversees agrarian and ecological law at the governments Institute for Legislation and Comparative Legal Studies, says otherwise. In his book, Bogolyubov concludes that under Article 30 only nonspecified plots can be bought. Specified plots can only be leased or given "in use."

And yet a third interpretation is offered in a book by Nikolai Popov and Vladimir Zakharyin that was published in the Vladimir region. In their commentary on the code, Popov and Zakharyin avoid Article 30 altogether, saying only that it "is hardly possible at the level of federal legislation to take into account all peculiarities that could come up when the procedures of land transactions will be implemented."

Regional land inspectors and committees are stumped over Article 30 and many other items in the code.

At last months First Land Congress in Moscow, thousands of inspectors from all of Russias 89 regions expressed confusion over the details -- or lack thereof -- in the code and demanded clarifications.

And the frustrated property committee of the Moscow region, which presides over what is widely considered to be Russias most desirable nonagricultural land, had to officially request that several relevant federal organizations explain what Article 30, among other articles, actually means.

"In connection with the new Land Code, we would like to ask you to comment for us on the use of Articles 30, 31, 32 and 38 [as regards] the sale and lease of spare land parcels," the committee wrote.

These and other problems have led to uncertainty as to when actual land sales will begin.

Deputy Moscow Mayor Oleg Tolkachyov, citing the need to harmonize local laws with the new Land Code, told the Kommersant newspaper last week that the city has yet to set a date for its first land auctions and left unclear when it might. (Moscows first experimental land auction was largely a failure. The city tried to sell 13 plots in Zelenograd in 2000, but the starting prices were too high and too many limitations were put on what could be done with the land. In the end, only three plots found owners.)

Breakthrough or Chaos?

"The positive influence of the introduction of the Land Code is so great that any faults are insignificant at this point," a group of Andersen land experts said in a recent statement.

Although the new code ignores the thorniest issue -- agricultural land -- it nonetheless permits nationally what until now was only legal in a handful of regions, that is the buying and selling of urban and commercial land, or about 2 percent of Russias 1.7 billion hectares.

Under various regional and local laws passed in the last 10 years, 129.1 million hectares, or some 7.6 percent of total Russian land, have been privatized, according to the governments National Report on Land, issued in December.

The code -- passed after much stormy debate in the Duma, including chants of "shame, shame" from Communists and Agrarians -- replaces the 43 main federal land laws and regulations and hundreds of other resolutions.

"It effectively did not bring up anything new, but it put land legislation in order and gave further impetus to its development," said Vladimir Mogusev, the head of the legal department of Roszemkadastr, the countrys top land management authority and organizer of the First Land Congress. "Of course, the code could be argued and debated, but only practice will show what needs to be changed," he told delegates.

Despite this achievement, the code itself is being criticized by experts and officials not only for its internal inconsistencies, but also for the lack of regulations needed to implement and enforce it.

In fact, many experts say the code was passed without enough debate and think it might have been better not to pass it at all.

"This code looks like it was written by at least 30 people who refused to talk to each other," said Alexei Leonov, a prosecutor in the Moscow region who specializes in land and ecology.

Leonov said that events like the First Land Congress, which he attended along with land inspectors and other experts and high-ranking officials, "should have been organized before the Land Code was approved."

The Land Code has so many faults that "now only courts can decide who is right," Yelena Galinovskaya, senior researcher at the Institute for Legislation and Comparative Legal Studies of the Russian Federation, told delegates at the congress.

Another problem, according to most Moscow real estate experts polled for this article, is the voluminous "back-up" documentation needed in order to make the code work. Additionally, the areas where foreigners can and cannot buy land, a decision much awaited by the foreign business community, has not been established.

"The code doesnt address the lack of zoning plans in most Russian cities, nor does it introduce [general] principles for the parceling of land," the Andersen experts said in their statement.

Conflicting Codes

"One of the most striking examples of the discrepancies introduced into land legislation by the new Land Code is the regulation of the right of permanent use," said Konstantin Kouzine, a lawyer with the law firm Linklaters & Alliance.

"According to the Civil Code, the right of permanent use in respect to state or municipal land can be granted by the respective state or municipality to any person or legal entity," Kouzine said. "The Civil Code also states that in the absence of any other claim to the land under a building, the buildings owner has the statutory right of permanent use in respect to the land."

But the new Land Code states that the right of permanent use can only be granted by governmental or municipal legal entities or authorities and provides no statutory ground for the creation of such a right. Despite this omission, the code states that legal entities (except governmental ones) claiming land via the right of permanent use must convert this right into a lease or ownership by Jan. 1, 2004.

It is unclear which of the two codes should prevail in this respect. The intention of the government seems to be to amend the Civil Code to bring it into compliance with the Land Code. But until then it will be up to the courts to decide, and whether they will give preference to the more recent Land Code is unknown.

For example, what happens if the land lease signed by a buildings owner with regard to the land under his building terminates and he cannot renew it for some reason on reasonable terms within a reasonable period of time?

Under the Civil Code, the owner of the building automatically gets the right of permanent use. Under the new Land Code, the buildings owner is entitled to nothing.

"Say some enterprise signed a 49-year land lease -- and Moscow signed a lot of such leases. But no one knows what will happen when they expire. According to the new code, when the lease finishes the owner of the land does not necessarily have to sign a new land lease with the same lessee," Kouzine said.

"Well, of course, it would happen in the distant future and we will probably have ceased to exist then, but this issue should have been resolved by the Land Code," Kouzine said, adding that even if some legal mechanisms could "arguably" be used for the protection of the buildings owner, the absence of a title to the land will almost inevitably decrease the value of the building substantially.

"Another question is what will happen with land leases between permanent users of land [acting as landlords] and their tenants on conversion of the right of permanent use into lease or ownership. There are quite a lot of such leases in Russia, and there is no provision in the Land Code to tackle them," he said.

Moscows Land: Two-Thirds Is No Ones
No. of Contracts or Individual Land Taxpayers Total Area (Hectares)
Total 52,326 108,000
Currently Leased 47,044 22,758
In Free Use (schools, churches, hospitals, etc.) 1,507 6,905
Total Area Without Contracts -- 78,337
No Contracts, but Public Space (roads, parks, lakes, rivers, etc.) -- 36,000
Land Taxpayers 30,000* no data
*Moscow tax inspectorate numbers for individuals or entities that pay tax. Many pay land taxes despite not having titles to the land they use.
Source: Mokomzem

Clever Lawyers

Eventually, one of the main goals of the Land Code is to introduce a real market and increase local, regional and federal tax bases. But the current management of land is so poorly organized that only a tiny fraction of potential revenues are being collected -- or are likely to be collected -- in the near future. From taxes on land already privatized, together with income from rent, a total of just 24.8 billion rubles ($810 million) was collected in Russia last year.

The problem with tax collection regarding land is a combination of stupidity, as one prosecutor called it, and "clever lawyers," as one Tax Ministry official put it.

The "stupid" part, according to prosecutor Leonov, is that the new Land Code, as opposed to the old one, does not list fines and penalties for violating land legislation. Such fines are detailed in the Administrative Code, which was approved by the Duma in December.

But the new Administrative Code comes into force only in July.

"This is a stupid move," said Leonov. "How can a law cease to work for six months? Imagine we stop punishing for theft or murder -- just for half a year?"

He said violations of land legislation are common. In the Moscow region last year, 1,139 violations were registered and 1.2 million rubles worth of fines were collected.

But, Leonov said, if a plot of land is occupied illegally, it is extremely difficult to drive out the squatters. "Yes, there is a possibility to clear them through the courts. But local law enforcement bodies dont have enough manpower to deal with all this," he said.

And then there are the "clever lawyers" mentioned by the Tax Ministry official, Rafail Gabbasov, at the First Land Congress.

"There are companies here in Russia with clever lawyers who say they have no legal documents for the possession of land they occupy, and they refuse to pay land tax," Gabbasov said. "Imagine, the company that runs foreign embassies and consulates does this," he said, referring to the Foreign Ministrys Main Administration for Service to the Diplomatic Corps, or GlavUpDK.

The head of the Moscow tax inspectorates payment department, Faina Khusainova, said GlavUpDK cost the city budget 46 million rubles last year alone.

GlavUpDK is a state enterprise that runs diplomatic properties, including most of 138 foreign embassies and consulates located in the city. It also owns 160 old and new mansions and its own prestigious polyclinics, hospitals and other properties.

"This is a long, involved story concerning this company," Khusainova said. "They say that they dont have any legal titles [for the use of land], and because Article 15 of the law on payment for land says that payments are done on the basis of such documents, they dont pay taxes at all."

The precedent is not unique. According to Moskomzem, City Halls land committee, only 32 percent of the capitals land has been clearly assigned to lessors or users who hold official contracts for lease or use (see table). Another third of Moscows land is occupied by roads, parks, water reservoirs and other places of common use.

In fact, it seems that officially only 3,775 land users have legal titles that oblige them to pay land tax. However, according to the Moscow tax inspectorate, about 30,000 land users pay tax. So, are most of these 30,000 paying taxes voluntarily? It looks that way.

"We are explaining to them that they must pay tax on the actual use of the land," she said. "But those with clever lawyers are a disaster," Inna Pugachyova, tax expert with Roszemkadastr, the federal governments land management authority, said in an interview.

"In 2001 alone, the losses caused by GlavUpDK by not paying land tax is about 46 million rubles, including about 43 million rubles for its properties located within the Garden Ring," said Khusainova.

She said total losses were much greater: GlavUpDK, whose properties are located on 416 hectares of land throughout Russia, including a total of 161 hectares in Moscow, 75 of which are in the center, has signed leases on only 19 hectares of its Moscow land.

These unpaid taxes would have added 13 percent more to Moscows land tax collection total of 349 million rubles last year -- or enough to pay the wages of at least 2,500 teachers for a year.

Khusainova said there are no official statistics on such violations, but listed three other examples of companies with "clever lawyers" who have recently won court cases -- after the Moscow tax inspectorate sued them -- that exempt them from taxes as long as they dont have legal titles to the land they occupy.

Among these three are the Moscow Broadcasting Co., which occupies 29 hectares of land and has failed to pay 4.1 million rubles in taxes; Mosstroi-6, which has failed to pay 154,000 rubles in taxes on its 1 hectare of land; and Mosoblbytsoyuz, which has not paid 268,600 rubles for its 0.5 hectares of land.

Khusainova said these defeats have discouraged tax officials from pursuing GlavUpDK in court.

"We ... applied to Moskomzem last summer, asking it to speed up the preparation of legal title for the land," said Khusainova. "We got an answer from the committee that deals with the issue, but the problem is that the land this organization sits on is federal property [and Moskomzem does not exercise power over it]."

A source in Moskomzem, who asked not to be named, said the issue is being reviewed, but it is complicated and must be taken piecemeal.

"The issue will be completely clear after all land is divided legally into federal, regional and municipal [parts]," the source said. The law on the division of lands into federal, regional and municipal took effect Jan. 17, but most experts think it will take at least a year to complete.

Another problem with GlavUpDK in particular is that it is a designated "special land user."

"Russia has intergovernmental agreements with some of the foreign embassies that use our land for very little money -- say, for 1 ruble. And in their countries, our embassies use their land for the same sort of money," the Moskomzem source said.

"According to a presidential decree of 1993, our land is federal property and the issue of taxation of such land is not sorted out," GlavUpDK chief Ivan Sergeyev told reporters last week.

"We have our land in free term-less use," he said.

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