Experts call Kyiv City Council’s intention to increase 100 times price of renting building land as corruptive

Author

Lesia Solovchuk

The draft decision of the Kyiv City Council on raising land rent rates for developers in the capital may create a precedent that will affect not only construction companies, but thousands of Kyiv residents as well.

The Institute of Legislative Ideas experts performed an anti-corruption examination of the document and concluded that the draft decision of the Kyiv City Council dated January 11, 2022 contained corruption risks and violated a number of tax laws.

If the document is adopted, according to the experts, the new rental rates will have an impact on the Kyiv residents for whom the tax initiatives of the city authorities will result in an increase in the price per square meter. After all, the developer leaves every hryvnia of additional costs to the final product—real estate, that is, buyers or end tenants.

Land lease: What the corruption component of the Kyiv City Council’s decision is

The authorities set out their arguments in an explanatory note. According to it, the city’s budget faced a shortfall of 500 million UAH due to the "investment law" adopted back in 2019. At the same time, the City Council provides no details about specific figures of how budget revenues will increase and whether they will be commensurate with the new rental rates.

Maksym Domin, a lawyer-analyst at the Institute of Legislative Ideas, comments that it is not yet clear from the document why such a decision is being made right now and what the city's budget will get from it.

"With this amendment, the Kyiv City Council is changing the tax that established the new minimum rental rates. They raise rates for some positions by 2-3 times, and for real estate it grows 100 times. That is, this amendment makes significant adjustments to the cost of construction work," the lawyer explains.

On the other hand, the Kyiv City Council committed violations of the Tax Code. Because it was allowed to increase or decrease the rental rates for 2022 according to the procedure until July 15, 2021 (no later than 6 months before the start of the new budget period). In addition, they cannot be changed during the budget year.

In other words, the experts point to a legal conflict that allows the tax authorities to manipulate the rules: some of the tenants may be subject to the old lower rates, while others may be subject to new and higher rates.

"Herein lies the corruption component. The legal conflict allows some tenants to work at the old tax rates, referring to a violation of the procedure for imposing new ones, or through agreements with the tax authorities. Others, on the contrary, will pay at new higher tax rates fearing the accrual of arrears and sanctions from the tax authorities. After all, there might be even opening of criminal cases if a certain amount of debt accumulates," the lawyer explains.

The experts note that the city authorities exceed their powers when, despite the procedure prescribed in the Tax Code, they propose to change their size and put them into effect within 10 days after the decision is made.

For such a decision, the Kyiv City Council missed the deadline for six months, and now any changes can only be made in relation to 2023.

Who the tax changes refer to

In fact, the new rental rates will impact less developers and more the Kyiv residents themselves, for whom the tax initiatives of the city authorities will result in an increase in the price per square meter. After all, the developer leaves every hryvnia of additional costs to the final product—real estate.

How may the minimum rental rate for land in Kiev increase:

100 times—from 0.1% to 10%—for constructing and maintaining multicompartment building;
3 times—from 3% to 10%—for constructing and maintaining multicompartment building (for the period of construction);
3 times—from 3% to 10%—for other residential development;
2.5 times—from 3% to 8%—for constructing and maintaining a multicompartment building with shopping, entertainment, and market infrastructure (for the period of construction);
1.5 times—from 5% to 8%—for constructing and maintaining a multicompartment building with shopping, entertainment, and market (non-residential use);
4 times—from 3% to 12%—for constructing and maintaining other public buildings.

The Kyiv City Council did not provide a rationale for the effectiveness of this decision. Such calculations should show, on the one hand, how much the increase in rent will replenish the capital’s budget—at least the expected figures.

According to the expert, the Kyiv residents have the right to know how much the cost of a square meter will increase with respect to this decision under the new construction conditions.

"In addition, there are more than 800 condominiums of residential complexes in the capital that have not registered a land plot as property, as provided by law. All these co-owners will be required to pay at least 10% additional rent for the plot calculated from its normative evaluation. Or the new apartment owners will be forced to start the procedure for re-registration of the plot for themselves. However, this procedure requires time and a large number of documents, for example, a geodesic zoning examination," Domin explains.

The Institute of Legislative Ideas recommends either refusing to adopt a decision with corruption factors, or establishing that it comes into force on January 1, 2023.

"Our recommendations are, firstly, to hold consultations with the public—to hear the opinion of the Kyiv residents on the need for such a decision. And following the consultations, either adopt the decision with its entry into force on January 1, 2023, or remove it from consideration if we do not see the real justification for imposing new rental rates," the expert explains.

As stated in the Institute conclusion, if the draft is adopted in this form in violation of the procedure, this may become a dangerous practice in the future: since a precedent is being created for the developers, then eventually such a scenario can be applied to other general public.