The Constitutional Court (CC) on Friday resolved one of the most controversial issues in bankruptcy cases, recognizing that a bankrupt legal entity still has to pay income tax on the sale of its property. The decision on the priority of payment was a compromise: the Constitutional Court did not support the idea of paying to the budget first or last, and the requirements of the Federal Tax Service will be on a par with the requirements of ordinary unsecured creditors of the debtor. This will reduce the already small share of the money they receive – and lawyers insist that bankrupt property is not sold for profit, which means that it is better to abolish the tax on it altogether.
The Constitutional Court on Friday issued a ruling (.pdf) on the payment of income tax on the sale of property of bankrupt companies. The transfer of this issue to the Constitutional Court was initiated by two applicants at once – the Supreme Court of the Russian Federation and Energy Construction Works LLC, who asked to check the constitutionality of the legislative norms allowing the payment of income tax by a bankrupt company.
The essence of the request was reduced to the fairness and economic feasibility of levying tax on “paper” profits from the sale of property (bankrupt citizens are exempted from paying income tax in similar situations).
The discussion turned out to be wider than litigation – the authorities expressed opposite views on the problem. Thus, the Ministry of Finance, in a letter dated February 1, 2022, said that until the exclusion of a legal entity from the Unified State Register of Legal Entities, the obligation to pay taxes remains with him, and the Federal Tax Service proposed to directly enshrine in the law the payment of income tax on the sale of the bankrupt’s collateral property even before payments to the secured creditor. The need for priority payment of tax as current payments until the repayment of registered debts of a bankrupt was supported in his response by the Presidential Plenipotentiary Representative in the Constitutional Court Alexander Konovalov. Representatives of the State Duma and the Federation Council, on the contrary, opposed the income tax and its priority payment, since this increases the debt and does not allow the maximum repayment of creditors’ claims.
The Constitutional Court put an end to the discussion, recognizing the tax collection as lawful, explaining that the sale of property – both voluntary and forced in the course of bankruptcy proceedings – is inextricably linked with the previous economic activity of the bankrupt, which involved the payment of taxes, and therefore cannot “without a special indication of then the legislator and, in addition to his will, be withdrawn from the general rules for taxing profits. At the same time, the Constitutional Court pointed to the need to regulate in the law the sequence of paying tax on income from the sale of property at auction – and until then, such requirements will be paid within the third stage of the register.
This option has become a compromise between two existing practices: attributing income tax to current payments, which are repaid in priority, or to register claims, for which usually the bankrupt’s money is no longer enough.
In addition, the Constitutional Court clarified that there are no “reliable legal grounds” to attribute income tax to the costs of ensuring the safety of the collateral, therefore this payment to the budget cannot be repaid from the funds from the sale of property before the start of settlements with the secured creditor, as sometimes happened in practice. .
According to lawyers, the most fair decision would be not to tax the sale of the bankruptcy estate by writing down such a rule in the law (the possibility of which was also pointed out by the Constitutional Court). Oleg Zaitsev, chairman of the Bankruptcy Club Association, believes that “there can be no profit from bankruptcy,” so such a tax should not be levied. “It would be correct to admit that the tax does not arise at all, since in bankruptcy the fixed assets of an enterprise are not sold for profit,” agrees arbitration manager Sergei Domnin. But the Constitutional Court “obviously took a compromise position” between budgetary and private interests, which is still “a gigantic achievement for our bankruptcy law,” says Mr. Zaitsev.