Long-awaited amendments to the Tax Code of the Russian Federation effective 1 January 2026
As part of the large-scale amendments adopted to tax legislation at the end of 2025, in order to eliminate tax uncertainty, legislators adopted amendments to the Tax Code of the Russian Federation clarifying the procedure for the VAT and corporate income taxation of the reimbursement (compensation) received by former owners for the expropriation of immovable property from them for state (municipal) needs.New provisionsSub-clause 30 of clause 2 of Article 146, sub-clause 68 of clause 1 of Article 251, clause 48.36 of Article 270 of the Tax Code of the Russian Federation. Amendments made by Federal Law No. 425-FZ dated 28 November 2025 were added to paragraph 1 of Article 251 and Article 270 of the Tax Code of the Russian Federation, determining the lists of income and expenses not included in determining the tax base for corporate income tax, as well as clause 2 of Article 146 of the Tax Code of the Russian Federation, which determines the list of transactions not recognised to be subject to VAT.
Previously, there was no uniform approach to the taxation of such compensation received by the former owners. In most cases, tax authorities held that the amount of such compensation for expropriated property is recognised as the taxpayer’s income for corporate income tax purposes, while the transfer of the property itself during the expropriation is recognised as a sale and subject to VAT. However, the clarifications issued by the Russian Ministry of Finance themselves do not reveal a consistent position on this issue. An analysis of judicial practice, however, shows that the courts are guided by the legal position set out in the ResolutionResolution of the Presidium of the Supreme Arbitrazh Court of the Russian Federation No. 2019/09 dated 23 June 2009 in case No. А32-7432/2007-56/191-2008-56/23 of the Presidium of the Supreme Arbitrazh Court of the Russian Federation of 2009, stating that compensation for the expropriation of property is a means of covering the damage caused, rather than payment for the sale of the property for tax purposes.
Despite extensive positive court practice on this issue for taxpayers, the lack of direct legislative codification in the Russian Tax Code has only generated numerous disputes with tax authorities and increased the risk of tax authorities’ claims in the form of tax liability and additional VAT and corporate income tax assessments.
Amendments to the Russian Tax Code effective 1 January 2026 resolve the ongoing debate on this issue and potentially eliminate related disputes and risks for taxpayers under the general tax system (GTS).
However, improvements to the current legal framework do not provide complete certainty for the expropriation of property for state (municipal) needs that arose prior to the entry into force of the relevant amendments to the Russian Tax Code (before 31 December 2025).
Background of the issue before amendments to the Tax Code of the Russian Federation
Initially, the issue of taxation of the amount of reimbursement (compensation) for immovable property ex-propriated for state (municipal) needs was directly regulated in sub-clause 2 of clause 1 of Article 220 of the Tax Code of the Russian Federation only for former owners who were individuals. In particular, since 2019, individuals were entitled to apply a special tax deduction equal to the entire redemption price of the immovable property, which completely exempted the received compensation from personal income tax.Subsequently, the legislator eliminated the regulatory gapAmendments made by Federal Law No. 259-FZ dated 8 August 2024 on this issue for taxpayers using the simplified tax system (STS).
From 1 January 2025, pursuant to sub-clause 5 of clause 1.1 of Article 346.15 of the Tax Code of the Russian Federation, income in the form of compensation, including losses incurred due to the expropriation of immovable property, has not been taken into account when determining the tax base under the simplified tax system.
However, for taxpayers using the general tax system, this issue remained unresolved for a long time.
The fact is that income in the form of compensation received due to the expropriation of immovable property is not explicitly mentioned in Article 251 of the Tax Code of the Russian Federation, which establishes an exhaustive list of income not accountable for tax purposes. Therefore, tax authorities classifiedLetters of the Ministry of Finance of Russia No. 03-03-06/1/43047 dated 29 April 2025, No. 03-03-06/1/31384 dated 31 March 2025, No. 03-03-06/1/171 dated 24 March 2011, No. 03-03-06/4/15 dated 13 March 2008 the nature of such compensation received by the taxpayer as extraordinary income for corporate income tax purposes, pursuant to the general provision of clause 3 of Article 250 of the Russian Tax Code.
Nevertheless, the assertion that such compensation could be classified as extraordinary income was refuted in the Resolution of the Presidium of the Supreme Arbitrazh Court of the Russian Federation of 2009, in which the court concluded that the occurrence of tax consequences with respect to compensation amounts in such cases violates the principle of full compensation, as defined by Article 15 of the Civil Code of the Russian Federation.
Despite the repeated recognition by the Federal Tax ServiceLetters of the Ministry of Tax of Russia No. SD-4-3/9846@ dated 29 July 2022, No. SD-4-3/12727@ dated 3 July 2018 and the Ministry of Finance of RussiaLetters of the Ministry of Finance of Russia No. 03-03-06/1/90029 dated 21 November 2019, No. 03-01-13/01/47571 dated 7 November 2013 of the priority of the Supreme Court’s position, tax authorities continued to adhere to a pro-fiscal approach counteracting the approach of the Supreme Arbitrazh Court of the Russian Federation.
In view of the foregoing, due to the lack of clear legislative regulation, two opposing approaches have emerged in practice:
1. The pro-fiscal approach, followed by tax authorities, implied that the expropriation of immovable property in consideration of the reimbursement (compensation) was classified as the sale of such property, since the expropriation involved the transfer of ownership.
- Corporate income tax: The Russian Ministry of Finance recognisedLetters of the Ministry of Finance of Russia No. 03-07-11/62429 dated 4 July 2024, No. 03-03-07/32 dated 6 July 2012 etc that compensation paid for expropriated immovable property is not recognised as gratuitous payment, but rather taxable income, since such a payment is not includedLetters of the Ministry of Finance of Russia No. 03-03-06/1/119176 dated 6 December 2022, No. 03-03-06/1/60603 dated 12 August 2019 etc in the exhaustive list of income not accountable when determining the income tax base. However, tax authorities found it difficult to determine which type of income the relevant compensation should be classified as (non-sales or sales income).
- VAT: The Russian Ministry of FinanceLetters of the Ministry of Finance of Russia No. 03-03-06/1/90029 dated 21 November 2019, No. 03-07-11/53236 dated 27 July 2018, No. 03-07-11/39995 dated 27 September 2013, No. 03-07-11/369 dated 11 September 2012 considered the expropriation of immovable property for state (municipal) needs to be equivalent to a sale, which is subject to VAT. In some situations, the expropriation of land plots only was not recognised by the tax authorities as a sale, not the immovable property located on them.
- Corporate income tax: Levying corporate income tax on the compensation amount from the owner of the expropriated property violates the compensatory nature of such an amount and the principle of full compensation for lossesResolutions of the Arbitrazh Court of the Far Eastern District No. F03-3555/2015 dated 15 September 2015, FAS of the Moscow District dated 18 May 2012 in case No. А40-77804/11-91-333, No. КА-А40/4352-09-P dated 26 May 2009, of the Western Siberi-an District dated 1 March 2011 in case No. А81-1212/2009.
- VAT: Compensation for losses equal to the value of the expropriated property is a method of covering damages, rather than payment for the sale of the propertyResolutions of the Ninth Arbitrazh Court of Appeal No. 09AP-11824/2025-GK, No. 09AP-13562/2025-GK dated 23 October 2025 in case No. А40-229719/2024, of the Eighteenth Arbitrazh Court of Appeal No. 18AP-5671/2025 dated 26 August 2025 in case No. А76-31343/2024, of the Arbitrazh Court of the Moscow District No. F05-28710/2023 dated 22 November 2023 in case No. А40-273572/2022, of the Arbitrazh Court of the Ural District No. F09-6633/22 dated 7 November 2022 in case No. А50-688/2022, of the Arbitrazh Court of the North Caucasian District No. F08-616/2015 dated 24 March 2015, FAS of the Moscow District dated 13 May 2013 in case No. А40-60239/12-99-347. Nevertheless, judicial practice, taking into account the principle of the unity of fate of a land plot and property closely associated with it, did not consider the disposal of immovable property located on a expropriated land plot in isolation from it, and did not recognise such a transaction as a sale for VAT purposesResolution of the Arbitrazh Court of the Ural District No. F09-3365/25 dated 31 October 2025 in case No. А76-373/2022.
Elimination of the debate from 1 January 2026
Effective 1 January 2026, amendments concerning the taxation procedure for the expropriation of immovable property for state (municipal) needs entered into force.The list of transactions not recognised as subject to VAT was supplemented by sub-clause 30 of clause 2 of Article 146 of the Tax Code of the Russian Federation, namely, the transfer of immovable property expropriated for state (municipal) needs for which the taxpayer is provided reimbursement (compensation).
The lists of income and expenses not taken into account when determining the tax base for corporate income tax were supplemented with new, corresponding provisions: sub-clause 68 of clause 1 of Article 251 and clause 48.36 of Article 270 of the Tax Code of the Russian Federation, in particular, income in the form of compensation for losses due to the expropriation of immovable property for state (municipal) needs, as well as expenses (losses) in reimbursement of which such compensation was received.
Therefore, due to the adopted amendments to the Tax Code of the Russian Federation, effective 1 January 2026, when immovable property is expropriated for state (municipal) needs and the corresponding compensation is paid, the former owners will not incur VAT or corporate income tax consequences.
Retroactive application of the amendments to the Tax Code of the Russian Federation?
Currently, the issue of legal regulation of the taxation of legal relations related to the expropriation of property for state (municipal) needs that arose prior to the entry into force of the relevant amendments to the Tax Code of the Russian Federation, i.e. before 31 December 2025, remains unclear.In this regard, we would like to point out that amendments to tax legislation are retroactive only if they repeal, mitigate tax liability, or provide additional guarantees to protect taxpayers’ rights. Other amendments that improve the taxpayer’s position may also be retroactive, but only if the law expressly provides for such retroactive application.
Given that the lawFederal Law No. 425-FZ dated 28 November 2025 amending and clarifying the taxation procedure for the expropriation of property for state needs does not expressly provide that such new provisions in the Tax Code of the Russian Federation may be retroactive, it should be assumed that the new rules apply from the moment they enter into force, namely, from 1 January 2026, and for future periods.
In our opinion, we assume that the effect of the new provisions of the Tax Code of the Russian Federation in terms of time does not prevent taxpayers under the general taxation system from not accounting for compensation received prior to 31 December 2025 for the expropriation of property for state (municipal) needs as income for corporate income tax purposes, nor from not associating it with the sale for VAT purposes.
The abovementioned conclusion is based on the following:
- firstly, by analogy with the regulation in the transition period (before the amendments entered into force on 1 January 2025) of the procedure for accounting for the purposes of the simplified tax system of compensation for immovable property expropriated for state needs, the Ministry of Finance of Russia in its explanation indicatedLetter of the Ministry of Finance of Russian No. 03-11-11/117947 dated 25 November 2024 the right of taxpayers not to include in income under the simplified tax system compensation received in the previous reporting period, i.e. in 2024, and as a ground for excluding such compensation from income, referred to the legal position set out in the Resolution of the Presidium of the Supreme Arbitrazh Court of the Russian Federation of 2009;
- secondly, given the prevailing judicial practice, which is predominantly favourable for taxpayers under the general taxation system, if tax authorities raise claims, taxpayers have a chance to prove that compensation amounts for the expropriation of immovable property for state needs are neither subject to VAT nor included in income for corporate income tax purposes.
Denuo’s tax lawyers have extensive experience in tax structuring, including in integrated territorial development projects (ITD), where the issue under consideration is extremely relevant and pressing for taxpay-ers under the general taxation system. We will be happy to assist you in resolving issues related to the taxation of transactions involving the expropriation of immovable property for state (municipal) needs, as well as prepare a well-reasoned defence against tax authorities’ claims for presentation during pre-trial and trial representation.
