Utility Payments in Russian Commercial Leases: Legal Risks, Taxation, and Case Law Analysis

 

March 28, 2026

BRACE Law Firm©

 

 The lease of properties (premises, buildings, or entire complexes) always requires a supply of utility resources, without which normal operation of the property is impossible. Despite its commonplace nature, utility supply issues in leasing involve numerous challenges, making this topic consistently relevant.

This article examines aspects of utility supply for non-residential leased properties, as utility services for residential tenancies follow separate rules.

What Utilities Include

The concept of utilities is quite broad; it sometimes includes not only the supply of energy resources but also property security, internet access, ventilation, and air conditioning; in some cases, it includes facility management (cleaning) services.

This article focuses on the provision of so-called "utility energy resources" (electricity, water supply and sanitation, heat supply, and gasification), as special industry regulations govern their use (the "utilities", "utility resources", or "energy resources").

Other services that a lessor provides to a lessee (e.g., security, maintenance of ventilation systems, or premises cleaning) may be termed "operating services".

General Overview of the Issue

When entering into a lease agreement, the parties must determine the types of energy resources and the volume of utility services the lessee will require for normal operation of the property. The complexity lies in the fact that a lessor does not independently generate the energy resource and has no right to sell or resell it. Exceptions exist when the lessor is simultaneously the resource producer: for instance, if the building is equipped with its own boiler house.

A lessor may only provide the lessee with the resource that the lessor itself acquires from a resource supplying organization (the "supplier", "resource supplier", or "utility provider"). Resource supply is determined by special technical norms and rules that differ for each type of energy supply. These rules regulate the procedure for connecting to the supplier's networks, accounting for consumption volumes, and payment terms. The specific nature of energy supply limits the lessee's ability to enter into a direct contract with the supplier.

The law imposes current operating expenses on the lessee, which includes utility services (cl. 2, Art. 616 of the Civil Code of the Russian Federation (the "Civil Code")). Therefore, the lessee and the lessor must agree on exactly how the lessor's costs for providing energy resources will be reimbursed. Replacing such compensation entirely with rent will not work, as rent is the consideration the lessee pays for the provision of the property for use, while the payment of utility services must compensate for the lessor's losses. The Supreme Arbitration Court of the Russian Federation (the "SAC RF") expressed this view as early as 2002: utility reimbursement is not identical to rent. If the parties agreed on compensation for such services but did not establish rent, the agreement is deemed not entered into, as a material condition has not been coordinated. [1]

The most common methods for a lessee to pay for utility services are:

• utility compensation amounts are included in the rent (as a fixed amount or variable payments);
• the lessee reimburses the lessor for energy resource costs separately from the rent;
• the lessee enters into a contract directly with the utility resource supplier (if technical conditions and industry rules permit);
• the lessee enters into an intermediary or agency agreement with the lessor to acquire utility services.

The parties perform accounting and taxation of these payments depending on the method of utility resource reimbursement.

Thus, the interaction between the lessor and the lessee regarding the provision of such services falls under the regulation of several legal spheres simultaneously:

• industry legislation and technical energy supply norms regulate the rules for supplying energy resources to the lessor and influence the possibility of the lessee entering into a direct contract with the supplier;
• civil legislation (taking into account industry energy supply norms) regulates the contractual relationship between the lessee and the lessor regarding the method and procedure for the lessee's reimbursement of utility costs;
• taxation and accounting rules apply depending on the method the lessee uses to pay for utility services.

Utility Resource Payments Included in Rent

The most common method for transferring utility payments to the lessor is to include them in the rent.

One should consider that reimbursement of the lessor's costs cannot be regarded as a sale and purchase of the energy resource. Regardless of the compensation method (within the rent or separate from it), energy supply relations between the lessee and the lessor do not arise in this case, and the payments themselves are compensatory in nature. [2] An organization that leases out buildings or premises is not endowed with the status of an energy supplying organization, and the lessee is not a consumer or subscriber for the lessor. This principle is established in cl. 22 of Information Letter of the Presidium of the SAC RF No. 66 dated January 11, 2002, On the Review of the Practice of Resolving Disputes Related to Leases, and is reflected in numerous judicial practices.

An exception is the situation where the lessor is simultaneously endowed with the status of an energy resource supplier. For example, the lessor equipped the property or territory with its own boiler house, obtained a tariff, and independently supplies heat and hot water to its lessees. In this case, the parties enter into a separate heat supply agreement, and there is no need to reimburse the resource within the lease agreement.

The legal characterization of energy resource payments in a lease is very important, as it affects the reflection of payments in the accounting of both parties and the taxation procedure.

The parties establish the principle for determining utility charges in the agreement:

• as a fixed sum stipulated in the agreement, which does not change by period and does not depend on the volume of the resource consumed by the lessee. This method is permissible but applied rarely, as it contains financial risks for both parties: the lessor may receive insufficient cost compensation, and the lessee will be forced to overpay if it reduces its consumption volumes. Fixed utility payment amounts are advisable if the agreement is for a short term or if the lessee, due to the nature of its activities, consumes an identical volume of resources every month;
• as a variable part of the rent, which is calculated each month taking into account the volume of utility services consumed by the lessee;

The forms for calculating the variable part of the rent may vary depending on the technological features of the leased property:[3]

• based on metering devices. This is the most applicable and effective method – it allows for monitoring consumed volumes and correctly calculating the reimbursement amount based on the prices and tariffs of the suppliers. However, metering devices may be absent for various reasons: lack of technical capability, the specific nature of resource supply, or simply the lessee's reluctance;
• if a metering device is not installed, the fee is generally calculated proportionally to the share of the area the lessee occupies at the property;
• another option for calculating the energy resource fee is based on equipment capacity indicators and its operating time (applied for electricity supply). An example is a precedent in the West Siberian District related to lease payments. In the event the lessee failed to install metering devices, the parties agreed in the contract on an alternative procedure for calculating the variable payment part. The calculation formula used the following indicators: the capacity of the equipment used, the operating time of the equipment during the day, the cost of 1 kWh according to the supplier's tariff, as well as compensation for the lessor's energy losses arising during the lessee's energy supply, in the amount of 2.0%.[4] In another example, in addition to capacity and time criteria, the lessee's personnel headcount was also included in the formula. [5]

When utility services are part of the rent, a question arises: can the variable part exceed the actual costs the lessor incurred when paying for the resources consumed by the lessee? In this case, the principle of freedom of contract, which allows for establishing any amount of rent (both in the fixed and variable parts), as well as the ability to set a fixed cost for utility payments, conflicts with their compensatory nature.

It is logical to assume that the variable part of the rent must be economically justified – that is, it should cover only the lessor's actual expenses. In 2020, the Supreme Court of the Russian Federation issued a ruling on this matter. An electricity supplier applied an inflated tariff to a lessor, which the lessor subsequently successfully challenged and recovered from the supplier as unjust enrichment. However, regarding the lessee, the lessor continued to charge fees based on the inflated tariff. The lessee appealed to the court, but its claim was rejected. The courts pointed out that the variable part of the rent is contractual in nature, and the supplier's tariff has no direct relation to the lessee's payments, as it is intended for settlements between the supplier and the lessor. However, the Supreme Court of the Russian Federation supported the lessee. Under the lease agreement, variable payments were made dependent on the supplier's tariff. Therefore, the lessor acted in bad faith: after adjustments with the supplier, it should have performed a recalculation of the utility resource payment with the lessees.[6]

However, another approach can be found in judicial practice. For instance, the Fifteenth Arbitration Appellate Court did not support a lessee who attempted to challenge the cost of utility resources. Under the agreement, the variable part of the rent includes the cost of electricity, heat supply, ventilation, and air conditioning. Electricity consumption is recorded by metering devices. The cost of heat supply is determined based on the leased area. Simultaneously, the lessor establishes tariffs for electricity and heat supply via its own internal order. That is, the variable rent is not made dependent on the lessor's actual expenses. The lessee claimed that the cost calculation was unfair as it exceeded the lessor's own costs. The court pointed out that the lessee, by entering into the lease agreement, voluntarily agreed to such payment terms, and no mandatory legal norms were violated.[7]

Thus, there is no direct legal requirement for the mandatory application of the supplier's tariff to calculate variable rent. The law does not prohibit calculating the variable part at rates established by the lessor itself, even if they exceed the tariffs of the resource suppliers. Furthermore, the cost of utility services can be established as a fixed sum for the entire lease period, without monthly consumption accounting and without recalculation to the supplier's tariff – this method is legitimate alongside the variable form of payment.

In essence, this issue remains open. The cost of utility payments paid by the lessee may deviate within reasonable limits from the amounts the lessor paid to the supplier under the following conditions:

• when utility payments are part of the rent and are reflected in the accounting and tax records of both parties specifically as rent (income/expense), rather than as separate cost reimbursement;
• in addition to the re-invoiced tariff, the lessor may include its own operating costs and losses (within reasonable limits) that it incurred in connection with acquiring the resource for the lessee's needs. In any case, this must not be characterized as the sale or resale of the resource itself.

Contractual formulations establishing the method for calculating utility payments are of decisive importance. It is essential that the settlement procedure be stated clearly and unambiguously. If the text indicates that the calculation formula is based on the energy resource supplier's tariff, the lessor is obliged to apply that tariff taking into account the indicators and coefficients stipulated in the formula. If the parties agreed in the contract on a different payment rate that differs from the supplier's tariff, these contractual terms must be performed. In addition to the main tariff, the lessor is not prohibited from establishing an increasing coefficient to compensate for its own losses.

Lessee Reimburses Utility Resource Costs Separately from Rent

This method involves the lessor's expenses for acquiring utility resources being excluded from the rent (neither in the fixed nor the variable part). The lessee reimburses the lessor for the expenses, but they do not constitute rent. In this case, the principle of re-invoicing costs applies, which affects the accounting and taxation procedure.

One should consider that since such payments are not contractual rent, the reimbursement amounts transferred by the lessee must strictly correspond to the amount of the lessor's actual costs. This is the difference from the previous settlement method: if utility reimbursement is included in the rent, the amounts may deviate slightly from the costs actually incurred by the lessor.

The procedure for compensating the lessor's costs should be clearly reflected in the agreement, specifying the method and procedure for the parties' interaction:

• settlement terms can be provided for in the lease agreement itself;
• a separate compensation agreement may be executed (in which case a reference to this agreement must be made in the lease);
• the use of an agency agreement scheme is permitted.

An agency scheme implies entering into a separate agency agreement between the lessee-principal and the lessor, who acts as the agent (cl. 1, Art. 1005 of the Civil Code). The lessor, as an intermediary, enters into an agreement with the resource supplying organization in its own name but at the expense of the lessee-principal – that is, it acts on the commission principle. The mandate principle (where the lessor enters into an agreement with the resource supplier in the name of the lessee) is not suitable for everyone, as by no means every lessee can hold the status of a consumer-subscriber.

Under an intermediary resource supply agreement, the rights and obligations of the consumer (subscriber) arise for the lessor, and the lessee reimburses the lessor for the incurred costs (Art. 1001, 1011 of the Civil Code). The lessor provides the lessee with monthly agency reports with documents confirming the costs. It is important to note that under an agency agreement, the lessor is entitled not only to cost reimbursement but also to a fee (Art. 1005, 1006 of the Civil Code). This is a significant difference between the intermediary scheme and a standard compensation agreement, which does not presuppose any additional payments beyond the reimbursement of actual costs.

Regarding the payment of utilities, a problem arises: what happens if the lessor and the lessee did not agree on utility payments at all? Which of them will bear liability to the resource supplier?

The classic legal approach places all financial liability to the resource supplying organization on the owner of the property – that is, on the lessor. This issue was considered in 2015 in the Review of Judicial Practice of the Supreme Court of the Russian Federation (the "Supreme Court of the Russian Federation"). [8] The court, with reference to Article 210 of the Civil Code, pointed out that the owner bears the burden of maintaining its property, and entering into a lease agreement does not create obligations for the lessee toward the utility provider. The lessee bears the obligation to maintain the property directly toward the lessor. Therefore, the lessor is obliged to pay for the resource (except for those cases where a direct contract is entered into between the lessee and the resource supplying organization).

In 2014, the Supreme Court of the Russian Federation considered a claim by a heat supply company against a property owner. Part of the building was leased out; under the agreement, the lessee was obliged to enter into direct contracts with resource suppliers. Neither the owner nor the lessee entered into such contracts, and no payment for thermal energy was made. The court of cassation instance denied the claim because, due to the transfer of the building for lease, the owner did not possess the energy-receiving device. However, the SAC RF overturned this decision. A building owner, by virtue of law, bears the costs of its maintenance. The fact that the lessee failed to enter into a direct energy supply contract in violation of the arrangements is irrelevant: the lessee will be liable for this to the lessor, not the supplier. Internal relationships between the lessee and the lessor do not affect the right of the energy supply organization to demand payment from the owner.[9]

A steady position has formed: the right of an energy resource supplier to be paid for its services does not depend on the existence of a written contract. Actual use of the resource is regarded as acceptance of an offer, and consumption is determined by the actual ownership of the connected networks through which the utility resource is supplied.[10]

However, there is another alternative approach in practice: the party that actually used the energy resource is obliged to pay for it. As a rule, this position is applied in situations where properties or energy-receiving devices are transferred from state ownership into the possession and use of management companies, housing and utility organizations, state enterprises and institutions, as well as concessionaires under concession agreements.

The regulatory justification for this approach is that an energy resource is an independent good, and the obligation to pay for it is not regulated by Article 210 of the Civil Code. The burden of property maintenance (as established in Article 210 of the Civil Code) should be distinguished from the obligation to pay for the consumed energy resource. The title of the owner or right holder of the property does not affect this obligation. The actual recipient of the resource is obliged to pay its cost to the supplier.

An example is a precedent in the Far Eastern District, on the basis of which a Ruling of the Supreme Court of the Russian Federation was issued. An electricity supplier filed a claim against the owner of properties (a city administration) to recover fees for actual use of the energy resource. The energy supply properties were leased to a guaranteeing organization, LLC City Vodokanal, which owned the city's utility infrastructure properties and provided services to end consumers. In such a situation, payment should be demanded not from the administration as the owner of the energy-receiving devices, but from the possessor and user – in this case, from the lessee. [11]

In another example, the Volga District Court considered a dispute over the recovery of energy resource fees from a management organization (housing and utilities). The initial claim was filed against the city administration as the property owner. However, the court pointed out that the actual possessor and user of the energy supply properties was the management organization, which provided water supply to the population – that is, to the end consumers. Therefore, the housing and utility organization bears the obligation to pay for the energy resource.[12]

A similar approach applies to properties that the state transfers to commercial organizations under a concession agreement or assigns to enterprises and institutions under the right of economic management or operational management.[13] For example, in the East Siberian District, a resource supplier to concession properties filed an initial claim against the administration. However, the court judged that the fact of operating the properties for industrial activities, rather than the legal basis for using the property, is relevant for determining the proper payer.[14]

Thus, if neither the lessor nor the lessee pays the supplier for the provided energy resource, the supplier by default files a claim against the lessor. Exceptions to this rule are possible in the following cases:

• if the lessee has entered into a direct contract with the resource supplier;
• if a state-owned property is transferred for use (including under a lease) to a management company or a housing and utility organization authorized to provide the resource to end consumers.

Direct Contract between the Lessee and Resource Suppliers

This method of utility resource supply implies that the lessee enters into a contract directly with the resource supplier and acts as the consumer (subscriber).

A direct contract gives the lessor and the lessee legal, financial, and technological independence from each other. The lessee acts as a party to the energy supply (or utility service) agreement and bears personal liability to the supplier:

• the lessee pays for services directly; therefore, in the event of payment delays, the supplier will address its claim and lawsuit directly to the lessee. When the lessor is the subscriber under the agreement, it must pay the supplier's services promptly, even if reimbursement from the lessee is delayed. As a rule, the lessor receives full compensation for its costs only after it has already paid the suppliers. This is because time is needed to verify the lessee's metering device readings and to prepare and issue accounting documents that the lessee must sign before performing settlements. All of this creates a cash flow gap for the lessor, whereas a direct contract between the lessee and the supplier relieves the lessor of unnecessary financial burden;
• the lessee bears liability for the technical condition and fire safety of the receiving devices and equipment. This obligation is removed from the lessor – the lessor will be liable to the supplier only for the equipment it operates as a direct consumer.

The problem is that not every lessee can enter into such a contract. This requires certain technical capabilities and conditions (cl. 2, Art. 539 of the Civil Code):

• the consumer must have an energy-receiving device that meets the supplier's technical requirements;
• the receiving device must be connected to the energy supplying organization's networks. As a rule, this requires obtaining technical conditions from the resource supplying organization, executing an act on technological connection, an act on the delimitation of network balance ownership, and an act on the delimitation of operational responsibility;
• the consumer must ensure energy consumption accounting – that is, equip the building or premises with metering devices.

These rules apply to electricity, heat, water, and gas supply (cl. 2, Art. 548 of the Civil Code) and are reflected in industry norms. For example, a heat energy consumer may be the owner of heat-consuming installations or another legal possessor. [15] To enter into an electricity supply agreement, a subscriber must provide title-confirming documents for the energy-receiving device. Only one energy supply agreement may be entered into regarding a single device. [16] In electricity supply, an energy-receiving installation is equipment that converts electricity for its consumption by the end user. [17] To enter into a water supply or sanitation agreement, a subscriber must provide documents regarding the right to the property, the water supply and sewer networks, and other connection devices. The subscriber must also confirm the existence of metering devices. If a subscriber does not have a direct connection to centralized water supply or sanitation, it executes an act on the delimitation of balance ownership and operational responsibility with the owners of the water supply and sewer networks.[18]

Lessor's Accounting for Utility Payments

The reflection of utility services in the lessor's accounting depends on the method of their payment.

If utility services are included in the rent, accounting follows the general rules established for lease payments. It is irrelevant whether the utility cost is a variable component or is fixed by the agreement as a set amount.

The method for accounting for lease income depends on whether the lessor is a professional participant in the lease market:

• if leasing property is one of the lessor's primary business activities and it enters into such agreements regularly (i.e., acts as a professional lease market participant), the rent is accounted for as revenue from the sale of services (cl. 1, Art. 249 of the Tax Code of the Russian Federation (the "Tax Code"));[19]
• if leasing is not a core business line for the lessor, the rent is accounted for as non-operating income (cl. 4, Art. 250 of the Tax Code).

The lessor may use any income accounting method:

• Accrual method: lease income is recognized on the last day of the settlement period established in the agreement (this may be a month, quarter, or another period according to contractual terms) or on the last day of the reporting tax period. The amount of income is reflected in the amount fixed in the lease agreement excluding VAT; the actual amount and date of rent receipt do not affect this accounting method (Art. 271 of the Tax Code);
• Cash method: lease income is recognized on the date of actual receipt of the lease payment in the actual amount received (cl. 2, Art. 273 of the Tax Code).

The variable part of the rent intended for utility payments is accounted for under the same rules.

Regarding utility payments that the lessor itself transfers to suppliers, they are accounted for as expenses in the corresponding reporting period (cl. 5, 11, 16, 18 of the Regulations on Accounting, approved by Order of the Ministry of Finance of Russia No. 33n dated May 06, 1999, On Approval of the Regulations on Accounting 'Expenses of the Organization' PBU 10/99 (the "PBU 10/99")):

• if the lessor is a professional participant in the lease services market, payments are accounted for as expenses from ordinary activities;
• if leasing is not a core business line for the lessor, they are accounted for as other expenses.

To determine the tax base for corporate income tax, the lessor accounts for its utility payment costs as follows:

• as part of material expenses – if leasing is the lessor's primary activity and it accounts for lease payments as part of sales income (subcl. 5, cl. 1, Art. 254 of the Tax Code);
• other lessors account for utility payments as part of non-operating expenses (subcl. 1, cl. 1, Art. 265 of the Tax Code).

If the cost of utility services is paid separately from the rent in the form of compensation, it is not accounted for as part of the lessor's income, as it does not increase economic benefit (cl. 2 of the Regulations on Accounting, approved by Order of the Ministry of Finance of Russia No. 32n dated May 06, 1999, On Approval of the Regulations on Accounting 'Income of the Organization' PBU 9/99 (the "PBU 9/99")). The lessor reflects these amounts as reimbursement for the cost of consumed utility services.

For corporate income tax purposes, the utility service amounts reimbursed by the lessee are accounted for as part of non-operating income (Art. 250, subcl. 3, cl. 4, Art. 271 of the Tax Code).[20] The accounting date is the day the lessor presented the lessee with documents confirming the compensation amount – that is, the cost of consumed utility services.

The lessor also does not account for these amounts as part of its expenses, as there is no reduction in economic benefit (cl. 2, 16 of PBU 10/99). The cost of such utility payments is attributed to settlements with the lessee. The lessor recognizes its costs as non-operating expenses on the last day of the period for which settlement documents were received from the utility provider (subcl. 20, cl. 1, Art. 265, cl. 1, 7, Art. 272 of the Tax Code).

Lessee's Accounting for Utility Payments

If utility payments are part of the rent, they are included in the lessee's current expenses and are not taken into account when forming the cost of the lease obligation (cl. 5, 7 of PBU 10/99).[21]

For tax accounting, the lessee reflects these amounts in the same way as the main rent:

• as part of other expenses related to production and sales (subcl. 10, cl. 1, Art. 264 of the Tax Code);
• as part of non-operating expenses if the lessee does not use the property for primary production or product sales, but the lease is related to income-generating activities (subcl. 10, cl. 1, Art. 265 of the Tax Code).

The lessee may use any expense accounting method:

• Accrual method: the lessee recognizes expenses regardless of whether the payment is actually made (subcl. 3, cl. 7, Art. 272 of the Tax Code). Expenses are recognized on the last day of the settlement period established in the agreement (e.g., month or quarter) or on the last day of the reporting (tax) period – whichever date comes first. If the term of the lease agreement exceeds the reporting period and the rent or utility payment is made as a lump-sum payment (e.g., for a year at once), lease expenses are recognized evenly throughout the year;[22]
• Cash method: based on the actual payment date. This is possible when the rent is paid after the fact without advance payment – for example, if payment for the previous month is made in the current month.

If utility payments are paid separately from the rent in the form of compensation, they are reflected in the lessee's accounting as part of expenses from ordinary activities (cl. 5, 7 of PBU 10/99).

For tax accounting, such compensation payments may be accounted for in two ways (cl. 4, Art. 252 of the Tax Code):[23]

• as part of material expenses – this method is possible only for reimbursement of costs for heating, electricity, and water supply (subcl. 1, cl. 2, Art. 253, subcl. 5, cl. 1, Art. 254 of the Tax Code);
• as part of other expenses related to production and sales – this method is applicable for the reimbursement of not only energy resources but also any other operating costs, such as communication services (subcl. 10, 25, cl. 1, Art. 264 of the Tax Code).[24]

Expenses in the form of compensation are recognized in the reporting period when they were consumed (cl. 1, 2, subcl. 3, cl. 7, Art. 272 of the Tax Code, cl. 16, 18 of PBU 10/99). There are clarifications from tax authorities and the Ministry of Finance of Russia on this matter: to account for costs of ongoing services (which includes leases), if the primary accounting document for the provision of services is prepared immediately after the end of the settlement month in which the fact of business life occurred, the costs should be included in corporate income tax expenses in the reporting period to which they relate.[25]

Taxation of Utility Services in Leases (VAT)

The taxation (calculation of value added tax) of utility services in leases directly depends on the method of their reimbursement – whether such services are included in the rent or paid separately as compensation. The tax authority provided clarifications on this issue back in 2010 in FNS Letter No. ShS-22-3/86@ dated February 04, 2010, On the Application of Value Added Tax when Providing Real Estate Lease Services (the "FNS Letter dated February 04, 2010"). Despite their "age", these clarifications remain relevant and applicable, and the Ministry of Finance of Russia has repeatedly referred to them.[26]

If utility payments are an integral part of the rent (i.e., included as a fixed amount or a variable part), the cost of utility expenses falls under the general VAT taxation rules (cl. 1 of the FNS Letter dated February 04, 2010). These amounts are to be included in the tax base; the lessor calculates and pays tax on them just as on the main part of the lease payment (subcl. 1, cl. 1, Art. 146, cl. 1, Art. 154 of the Tax Code). The lessor issues a VAT invoice to the lessee according to general rules, reflecting the rent cost and the amount of utility payments.[27]

The lessee, in turn, is entitled to tax deductions regarding the VAT charged to the lessor when the lessor acquired such utility services.[28] This VAT may be regarded as "input" VAT and is accepted for deduction in the general manner, based on the VAT invoices the utility providers issued to the lessor (cl. 1 of the FNS Letter dated February 04, 2010, cl. 2, Art. 171, cl. 1, Art. 172 of the Tax Code). For such a deduction, the lessee must be a VAT payer, and the services accepted for deduction must be recognized by the lessee.

If the cost of utility services is not part of the rent (i.e., is neither a fixed nor a variable part) but is paid by the lessee as cost reimbursement, these amounts are not subject to VAT (cl. 2 of the FNS Letter dated February 04, 2010). The general taxation principle applied to compensation payments and damages reimbursement applies here: such payments do not constitute a tax base and are not subject to VAT.[29] In this regard, it does not matter how such settlements are agreed upon – in the form of a separate compensation agreement or as a cost reimbursement condition included in the lease agreement. The lessor does not issue a VAT invoice to the lessee for such payments; therefore, the lessee does not acquire a right to a VAT deduction.[30] Even if the lessor, for some reason, separates VAT in the confirming document, such VAT is not accepted for deduction and does not reduce the tax base for corporate income tax. The "input" VAT that the utility provider charges to the lessor is included in the amount of the compensation sum reimbursed by the lessee.

If utility payments are structured via an intermediary agreement between the lessor and the lessee, taxation of utility payment amounts follows the rules established for intermediary agreements (Art. 156 of the Tax Code). The lessor, acting as a commission agent or agent, re-invoices its costs to the lessee. The general taxation principle for compensation amounts applies here: tax is not calculated or paid on re-invoiced costs. Therefore, the lessor does not accept "input" VAT for deduction, as the tax payment was made in the interest of the customer and will be presented for reimbursement.

The necessity of issuing a VAT invoice depends on whose name the lessor-intermediary acts under when receiving utility services: its own name or the lessee's name. This rule is established in cl. 3.1, Article 169 of the Tax Code: an intermediary acting in the interest of another person when issuing and receiving VAT invoices for the acquisition of goods, works, or services in the name of the commission agent (agent) must maintain a register of received and issued VAT invoices according to special rules:[31]

• in Part 1 of the VAT invoice register, "Issued VAT Invoices", the lessor records the VAT invoice re-issued to the lessee for the quarter of execution. Such a VAT invoice is not entered into the sales ledger;
• in Part 2 of the VAT invoice register, "Received VAT Invoices", the VAT invoice received from the utility providers is recorded for the quarter when the document was prepared. Such a VAT invoice is also not reflected in the purchase ledger;
• data from the VAT invoices received from utility providers are reflected in the VAT invoice to be issued to the lessee;
• copies of the VAT invoices received from utility providers are provided to the lessee for reimbursement.

If the lessor, as an intermediary, acts in the lessee's name, it does not re-issue the VAT invoice to the lessee. Relations arise directly between the principal-lessee and the utility provider; therefore, the provider issues the VAT invoice in the lessee's name.[32] This scheme is theoretically possible but rarely applied. In this case, the lessee actually acts as the consumer (subscriber), and in such a situation, it is simpler for the lessee to enter into a direct contract with the supplier.

The lessee may accept the "input" VAT arising in the costs re-invoiced by the lessor under an intermediary agreement for deduction. Deduction is performed according to general tax rules. In any case, the lessee will require a VAT invoice, either directly from the utility provider or re-issued by the lessor.

Final Conclusions and Recommendations

The terms of utility resource payment must be regulated in the lease agreement. The more thoroughly the parties' interaction terms are stated, the lower the risks of conflicts and litigation:

the lessee is obliged to pay (or reimburse) the cost of the utility resource it consumed. Even if the supplier recovers payment from the lessor, the lessor is entitled to re-invoice these amounts to the lessee;

before entering into a lease agreement, it is necessary to determine the types of utility resources the lessee will use and proactively address the issue of the lessee's ability to enter into direct contracts with suppliers. This requires analyzing the property's technical capabilities and the resource supply conditions to the leased areas. If the parties agree that the lessee will enter into a direct relationship with the supplier, this obligation must be established in the lease agreement. It is recommended to set a deadline for entering into direct contracts and to introduce a penalty for the lessee's failure to perform this obligation;

if a direct contract is impossible, the parties must agree on the procedure for reimbursing the lessor's utility resource costs. It is advisable to choose the payment method considering the most optimal taxation scheme for both parties. One should consider that utility payments within the rent are accounted for as income (expenses) and are subject to VAT. If payments are transferred separately from the rent in the form of standard compensation, they are not subject to VAT;

if the lessee transfers utility payments to the lessor, the payment method must be clearly fixed in the agreement. For example: "the fee for electricity and water supply is a variable part of the rent". Or: "the rent does not include the fee for utility services. The procedure for reimbursing the lessor's costs for heat and water supply services is determined by a compensation agreement";

if utility services are defined as a variable part of the rent, the lease agreement must establish the procedure for accounting for the consumed resource volume and the formula for calculating the fee. These terms depend on the presence of metering devices and the nature of the lessee's activities at the property. One should remember:

• when compensation occurs outside the rent, the amounts presented to the lessee must exactly correspond to the lessor's actual costs. If, however, these amounts are included in the rent, the parties may agree on a calculation formula that deviates in cost from the supplier's tariff within reasonable limits;
• as a rule, the lease agreement coordinates the procedure for the parties' interaction in recording metering device readings. It is recommended to establish a deadline for taking readings and transferring them to the lessor, as well as the recording process: for example, whether the participation of the lessor's representatives is required;
• if the parties decide to use an intermediary scheme for acquiring utility services, several points must be considered. First, the lessor as an agent will act in its own name and assume the rights and obligations of a consumer, while the lessee will act as a payer. When it is possible to implement an agency agreement scheme in the lessee's name, it means that the lessee has the capacity to act as a subscriber and can enter into a direct contract with the supplier itself; therefore, an intermediary agreement may prove redundant. Second, an agent is entitled to a fee; thus, under an intermediary scheme, the lessee will incur additional costs.

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References

[1] Clause 12 of Information Letter of the Presidium of the SAC RF No. 66 dated January 11, 2002, On the Review of the Practice of Resolving Disputes Related to Leases.

[2] Resolution of the FAS of the North Caucasus District dated December 06, 2013, in case No. A53-17391/2012.

[3] Resolution of the Fifteenth Arbitration Appellate Court dated April 25, 2025, No. 15AP-1249/2025 in case No. A53-26876/2022.

[4] Resolution of the Arbitration Court of the West Siberian District dated January 31, 2024, No. F04-7067/2023 in case No. A45-37409/2022.

[5] Resolution of the Eleventh Arbitration Appellate Court dated August 10, 2022, No. 11AP-8265/2022 in case No. A72-17517/2021.

[6] Ruling of the SC RF dated October 22, 2020, No. 309-ES20-7441.

[7] Resolution of the Fifteenth Arbitration Appellate Court dated September 08, 2016, No. 15AP-11989/2016 in case No. A53-5506/2016.

[8] Question 5 of the Review of Judicial Practice of the Supreme Court of the Russian Federation No. 2 (2015), approved by the Presidium of the SC RF on June 26, 2015.

[9] Resolution of the Presidium of the SAC RF dated March 4, 2014, No. 17462/13 in case No. A40-128959/12.

[10] Resolution of the Arbitration Court of the North Caucasus District dated June 03, 2024, No. F08-2213/2024 in case No. A32-33180/2022.

[11] Ruling of the Judicial Chamber for Economic Disputes of the SC RF dated September 14, 2015, in case No. 303-ES15-6562, A73-6824/2014.

[12] Resolution of the Arbitration Court of the Volga District dated June 06, 2025, No. F06-2757/2025 in case No. A49-6770/2024.

[13] Ruling of the SC RF dated April 26, 2018, No. 302-ES18-4195 in case No. A10-1551/2017.

[14] Ruling of the SC RF dated February 20, 2021, No. 302-ES20-23733 in case No. A33-17887/2020.

[15] Clause 9 of Article 2 of Federal Law No. 190-FZ dated July 27, 2010, On Heat Supply.

[16] Clauses 28, 34 of Chapter III of Decree of the Government of the Russian Federation No. 442 dated May 04, 2012, On the Functioning of Retail Electricity Markets, Total and (or) Partial Restriction of the Electricity Consumption Mode.

[17] Clause 39 of Article 3 of Federal Law No. 35-FZ dated March 26, 2003, On the Electric Power Industry.

[18] Subcl. (a) of Clause 17 of Decree of the Government of the Russian Federation No. 644 dated July 29, 2013, On the Approval of the Rules for Cold Water Supply and Sanitation and on Amending Certain Acts of the Government of the Russian Federation.

[19] Letter of the Ministry of Finance of the RF No. 03-03-06/1/74 dated February 07, 2011.

[20] Letters of the Ministry of Finance of Russia No. 03-03-07/27491 dated April 17, 2019, and No. 03-03-06/3/118742 dated December 05, 2022.

[21] Subcl. "a" of Clause 7 of PBU 1/2008, approved by Order of the Ministry of Finance of Russia No. 106n dated October 06, 2008, On the Approval of the Regulations on Accounting.

[22] Letters of the Ministry of Finance of Russia No. 03-03-06/1/13706 dated March 16, 2015, and No. 03-03-06/1/1123 dated January 18, 2016.

[23] Letter of the Ministry of Finance of the RF No. 03-03-06/1/339 dated May 29, 2008.

[24] Letters of the Ministry of Finance of the RF No. 03-03-06/1/724 dated November 03, 2009, and No. 03-03-06/1/394 dated June 08, 2010.

[25] Letters of the Ministry of Finance of Russia No. 03-03-05/42971 dated July 27, 2015, and No. 03-03-06/1/78815 dated September 29, 2021; Letter of the FNS of Russia No. SD-4-3/5272 dated March 25, 2019.

[26] Letters of the Ministry of Finance of Russia No. 03-07-11/85932 dated October 25, 2021, No. 03-07-11/3227 dated January 18, 2024, and No. 03-07-11/19594 dated February 28, 2025.

[27] Letter of the Ministry of Finance of the RF No. 03-06-01-04/175 dated September 19, 2006

[28] Letter of the Ministry of Finance of Russia No. 02-08-10/73721 dated August 21, 2020.

[29] Letter of the Ministry of Finance of the RF No. 03-03-06/2/51 dated May 14, 2008; Letter of the FNS of the RF No. ShT-6-03/297@ dated March 21, 2006.

[30] Letters of the FNS of the RF No. ShT-6-03/1040@ dated October 27, 2006, and No. ShT-6-03/340@ dated April 23, 2007.

[31] Clause 3, subcl. "a" of cl. 7, cl. 11, 12 of the Rules for Maintaining the Register of VAT Invoices, subcl. "a" of cl. 11 of the Rules for Filling Out a VAT Invoice, cl. 3 of the Rules for Maintaining the Sales Ledger, approved by Decree of the Government of the Russian Federation No. 1137 dated December 26, 2011.

[32] Letter of the Ministry of Finance of Russia No. 03-07-14/44201 dated October 22, 2013.