19.04.2019 — Supreme Court: Appealing Against State Authority’s Order Is Not Prerequisite for Challenging Fine Imposed for Its Non-Performance

In one of the cases adjudicated by the Supreme Court, the company challenged the imposition of a fine for the failure to perform the actions prescribed in the state authority’s order. The lower courts ruled that since the company has not challenged the order, then it is legal and valid and the company should be fined for its non-performance. However, the Supreme Court did not agree with this position and remanded the case for a new trial, instructing the lower courts to review the authorities’ order on the merits. In addition, the Supreme Court rejected the arguments of the lower courts that the company’s failure to challenge the order deprives the company of the right to object to the imposition of a fine for its non-performance.

In the case at hand, the company was fined for the failure to comply with the order issued by the state authority. The company appealed against the imposition of fine in court and argued that the order was illegal and that there was not the company’s fault in the failure to perform the actions prescribed therein. The Moscow City Court disregarded the company’s arguments and dismissed the claim, since the order was issued by the authorized official within his competence and in compliance with the established procedure, while the company has not challenged the order in court.

The Supreme Court disagreed with this interpretation of the legality of the order and sided with the company. The Supreme Court remanded the case for a new trial and pointed out that the lower courts should have examined the company’s arguments in justification of the failure to perform the order due to the impossibility to perform it and should not have avoided considering the order on the merits on the grounds that it had not been challenged by the company. Thus, the Supreme Court reaffirmed the position of the courts that appealing against the order is not a prerequisite for challenging the fine imposed for its non-performance (Decision of the Supreme Court of the Russian Federation dated 18 March 2019 No. 5-AD19-10).

18.04.2019 — Experts Are Pessimistic About Russian Construction Sector

According to the results of a study of the construction industry business climate in the first quarter of 2019, experts from the Higher School of Economics gave a pessimistic forecast for the development of the Russian construction sector. At the beginning of this year, the index of entrepreneurial confidence declined significantly and the percentage of companies facing bankruptcy in connection with the implementation of construction projects increased. This pessimistic assessment is largely due to the deep degree of regulatory uncertainty in the industry considering the recent major legislative amendments related to the project financing and escrow accounts.

The Center for Market Studies of the Higher School of Economics published the research describing the business climate in the Russian construction industry in the first quarter of 2019. Based on the analysis of the opinions of the CEOs of the construction companies and the official statistics data, the industry is pessimistic about the prospects for its development and is still one of the most problematic and unpredictable sector of the economy.

The index of entrepreneurial confidence showed the largest minimum over the past few years and turned out to be quite a bit better than in the beginning of 2009 (– 20%): both the scope of construction works and the financial conditions of construction companies continue to deteriorate. The share of companies in pre-bankruptcy has grown (now their share is 1/5 of the total number of companies on the market). The difficult economic situation is caused by legislative changes, in particular, the introduction of the mandatory project financing in housing projects from 1 July 2019 and the prohibition on direct financing from individuals, what may lead to bankruptcy of low-profit construction companies.

At the same time, analysts note a moderate rise in entrepreneurial activity in the second quarter of 2019. One third of construction companies are counting on increasing their production activity, while almost all of the surveyed CEOs of the construction companies (90%) are confident that the overall economic situation of their companies will not deteriorate significantly.

17.04.2019 — Violation of Land Plot Permitted Use May Lead to Fines and Additional Taxes

Use of the land plot not in accordance with its permitted use may lead to serious risks for the company related to imposition of fines by state authorities, as well as additional charge of income tax by the tax inspection. The courts interpret the land legislation in a very restrictive manner and rule that not only the land plot itself, but also the buildings located thereon and all the premises therein shall be used in accordance with the permitted use of the land plot. Otherwise the company may be fined, even if only a small part of the premises is used not in accordance with the permitted use of the land plot. In addition, the Supreme Court agreed with the additional charge of income tax in this case due to the fact that the company has the right to reduce the tax base by the rental payments only if the permitted use of the land plot is observed.

In one of the recently adjudicated cases, the research and production center received the land plot for research and production activities. The center used part of the premises in the building located on the land plot in accordance with its permitted use, however, another part of the premises was leased for offices and retail, what resulted in imposition of fines by Rosreestr for the improper use of the land plot. The courts of two instances sided with the center, but cassation court explained that the lease of premises affects not only the building itself, but also the land plot thereon. Since the land plot is intended for research and production activities, all premises in the building located thereon shall be used for this purpose (Decision of the Arbitration Court of the Moscow District dated 25 March 2019 on the case No. А40-241271/2016).

In addition, use of the land plot not in accordance with its permitted purpose can lead to additional charge of income tax. The Supreme Court agreed with the tax authority, which excluded the company’s expenses for the rent payments from the declared expenses, because the company failed to confirm that the land plots were used in accordance with the purposes for which they had been provided. Thus, according to the Supreme Court, the company illegally reduced the income tax base by the amount of rent payments, which resulted in the unjustified tax benefit (Decision of the Supreme Court of the Russian Federation dated 17 December 2018 No. 308-KG18-21056).

16.04.2019 — Growth Rate of Global Economy Declines after Two Years of Acceleration

According to the forecasts of the International Monetary Fund (IMF), the growth of the world economy is expected to be at the level of 3.3% in 2019, while it was 3.6% in 2018. The global economy is expected to rise again up to 3.6% in 2020. The reason for the slowdown of the global growth is a cyclical decline of the economic growth in developed countries. The forecast of the Russian economy growth remains to be the same – below the global level.

The growth rate of the global economy declined significantly after a cyclical two-year increase in the second half of 2018. GDP declined from 3.8% in January-June to 3.2% in July-December. The peak of world trade was at the end of 2017. Prices of energy resources have decreased by 17% over the past six months.

Based on these data, the IMF predicts that the average growth rate of the global economy over the next three-five years will be about 3.6%: 1.7% in developed countries and 4.4% in developing countries. The growth rate was negatively affected by the decrease in the number of export orders as a result of protective custom tariffs imposed by the USA. The subsequent decline of import led to a decrease in the growth of the economies of several Asian and European countries.

The forecast of economic growth rates in Russia remains unchanged: 1.6% in 2019 and 1.7% in 2020.

15.04.2019 — International Chamber of Commerce Rated Russia as Potential Place for Arbitration

The International Chamber of Commerce summarized the study on the potential attractiveness of Russia as a place for arbitration of international commercial disputes. According to the survey, Moscow is ranked 6th in the global ranking. Respondents generally evaluate the Russian legislation on arbitration positively and note such advantages as the availability of qualified specialists and the low cost of the dispute resolution.

The Russian National Committee of the International Chamber of Commerce (ICC Russia) conducted a study “Russia as a place of arbitration”. Moscow was ranked 6th place in the ranking after the historical arbitration centers - Geneva, Zurich, Paris, Stockholm, London and Vienna, and is ahead of Singapore, Hong Kong and New York. At the same time, among Russian-speaking respondents, Moscow ranks 4th in the popularity rating.

Survey participants appreciate the quality of Russian arbitration law, noting that it complies with international standards. Arbitration reform aimed at tightening the mandatory legal requirements for arbitration courts and reducing their total number, on the contrary, was assessed controversially: a little more than half of the respondents believe that it has reduced the attractiveness of Russia as a place of arbitration, while the other half are convinced of the opposite.

The respondents noted the advantages of Russian arbitration, such as qualified lawyers who can act as arbitrators and representatives of the parties, as well as relatively low financial costs of the resolution of the dispute. At the same time, the participants of the study are concerned that Russian arbitration courts are subject to the influence of the government agencies, and also broadly interpret the grounds for invalidating or refusing to enforce arbitral awards, which affected Russia’s overall position in the rating given its status as a potential place of execution of arbitral awards.