A Q&A guide to private client law in the Russian Federation.
The Q&A gives a high level overview of tax; tax residence; inheritance tax; buying property; wills and estate management; succession regimes; intestacy; trusts; co-ownership; familial relationships; minority and capacity, and proposals for reform.
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The Q&A is part of the PLC multi-jurisdictional guide to private client law. For a full list of jurisdictional Q&As visit www.practicallaw.com/privateclient-mjg.
The tax year in Russia is a calendar year (1 January to 31 December).
An individual must file an individual income tax return by 30 April and pay taxes by 15 July of the year following the year in which the relevant income was received. Generally, if an individual receives income from a Russian company or a Russian subdivision of a foreign organisation (for example, an employer), the legal entity making the payment acts as a tax agent, and reports and withholds the individual income tax for the individual. Unless the individual has other income, from which no Russian taxes have been withheld, he is not required to file a tax return.
There are certain categories of individuals (for example, self-employed entrepreneurs, advocates and notaries) who must make advance tax payments three times a year and file individual income tax returns (these individuals may also apply a simplified system of taxation, which is not discussed here).
Russian tax legislation does not use the concept of "domicile".
An individual is generally recognised as tax resident in Russia if he stays in Russia for not less than 183 days during any consecutive 12-month period. The 183-day stay in Russia is not interrupted by short-term (less than six months per trip) trips abroad for medical treatment or training (study). There are a few exemptions, for example, members of the Russian armed forces and state servicemen sent on a state mission abroad are taxed in Russia as Russian tax residents regardless of their period of stay in Russia.
A tax resident is subject to Russian individual income tax on his worldwide income at a flat rate of 13% (which remains one of the lowest income tax rates in Europe) and may apply certain tax benefits (for example, standard, social and other deductions and exemptions).
A non-resident is subject to tax at a flat rate of 30%, but only with respect to his Russian-source income (subject to the provisions of an applicable tax treaty). Special tax rules apply to foreign individuals who are recognised as highly qualified foreign specialists. The only criterion is that the individual's salary must be at least RUB2 million (about US$65,000) per year. The issue of defining the required qualification level and competence of foreign employees is left to employers. Besides a simplified procedure for obtaining work permits and work visas, individuals recognised as highly qualified foreign specialists are subject to 13% Russian individual income tax on their salary income (but not on their other income from Russian sources) irrespective of their tax residency.
Certain types of income of Russian tax residents and non-residents are subject to different tax rates outlined in Question 6.
There is no special exit tax or any other tax imposed when a person leaves Russia and becomes a non-resident (other than a tax rate increase for the Russian-source income), regardless of whether he has concurrently renounced Russian citizenship or not.
The Russian tax legislation relies on the 183 days test for determining tax residency (see Question 2, Residence). There are no particular tax rules which define or affect temporary residents in Russia.
Russian taxation depends on the 183 days test for determining tax residency, rather than on nationality (see Question 2, Residence).
Non-residents are subject to 30% tax on capital gains that are recognised as Russian-source income (for example, the sale of real property located in Russia or sale of shares or other securities in Russia), subject to the terms of any applicable tax treaty. In certain cases, the sale of real estate and other assets may also be subject to the Russian transfer pricing rules.
Non-residents can only deduct acquisitions costs in calculating capital gains on the sale of securities and derivatives in Russia (Article 214(1), Russian Tax Code). There are fairly complicated rules establishing several tax baskets (for example, for operations with publicly traded securities and non-publicly traded securities) and governing the ability to combine financial results on transactions falling under these categories. The sale of securities and derivatives are subject to a separate set of transfer pricing rules.
Non-residents (unlike Russian tax residents) cannot generally deduct acquisition costs when calculating capital gains on the sale of other assets (for example, real estate) (there are a number of clarifications of the Russian Ministry of Finance on this issue). This may be an important factor when structuring the acquisition of real estate in Russia.
Foreign nationals who are recognised as Russian tax residents are subject to the 13% tax on capital gains and may enjoy substantial tax benefits. In particular, Russian tax residents are tax-exempt on income from the sale of private real estate or other private property (for example, vehicles) owned for a period exceeding three years. Russian tax residents are also fully tax-exempt on income from the sale or redemption of their participation interests and/or shares in Russian companies (obtained as from 1 January 2011) provided that both:
They have continuously held those shares for more than five years.
The income has been derived from the sale or redemption of either non-publicly traded shares or shares of Russian high-tech (innovative) companies.
Russian tax implications depend on the tax residency, rather than on nationality. Foreign tax residents are subject to Russian withholding tax with respect to Russian source income (see Question 1), subject to any tax treaty, if applicable.
Individual income tax rates for Russian tax residents are as follows:
Ordinary income and income for which no specific tax rates apply: 13%.
Awards and prizes received for participation in competitions or games organised for advertising purposes in excess of RUB4,000: 35%.
Interest on bank deposits exceeding statutory thresholds: 35%.
Benefits from saving on interest rates exceeding statutory thresholds: 35%.
Interest above statutory thresholds received by a (agricultural) credit consumer's union member on the contributed funds: 35%.
Dividends received from Russian or foreign companies: 9%.
Interest on mortgage-backed bonds issued before 1 January 2007: 9%.
Income on mortgage certificates issued by a founder of trust management before 1 January 2007: 9%.
Individual income tax rates for non-tax residents are as follows:
Ordinary income and income for which no specific tax rates apply: 30%.
Dividends received from Russian companies: 15%.
Income received by foreign nationals from individuals for service (works) provided for personal or domestic purposes: 13%.
Employment income received by highly qualified foreign specialists: 13%.
Previously, individuals receiving property as an inheritance or a gift were subject to a separate tax in Russia. The tax rate varied depending on the price of the property and the particular relation (from 5% to 40%). Separate inheritance and gift tax was replaced by general individual income tax as of 1 January 2006.
Under the current rules, taxpayers are generally exempt from the individual income tax on income and property received on inheritance except for royalties paid to heirs with respect to intellectual property rights.
Property received as an inheritance or gift is subject to individual income tax at the ordinary rates (that is, the flat 13% rate for Russian tax residents on their worldwide income (except for any prizes or winnings above RUB4,000 received through competitions, games and other activities for the purposes of advertising goods (works, services) which are subject to 35% tax) and the flat 30% rate for non-residents only on their Russian-source income).
Russian tax legislation provides an exemption from gift and inheritance taxation as discussed below (see below, Exemptions).
Taxpayers are generally tax-exempt with respect to gifts either in cash or in-kind from individuals. General income tax only applies to gifts such as real property, vehicles and shares from individuals who are not close relatives. The group of close relatives comprises a spouse, parents and children (including adoptive parents and adopted children), grandparents and grandchildren, and full and half brothers and sisters.
Charity donations (made by charitable organisations in the forms specified by Russian legislation) received by individuals are also tax-exempt (Article 217, Russian Tax Code).
Property received as an inheritance or gift between close relatives is exempt from taxation (see above, Exemptions). Therefore, in practice no special techniques are applied. However, wealthy Russian individuals may use foreign trusts and foundations for transferring property to non-relatives and for more complex estate planning structures.
The gift and inheritance tax regime applies to all owners of Russian real estate and other assets, regardless of their nationality and tax residency. However, the tax laws of other jurisdictions and any applicable tax treaty may need to be taken into account.
There are no other taxes on death or on lifetime gifts. However, there will be certain notary fees, which may need to be considered.
The tax structuring technique may significantly depend on the type of the asset, related expenses and the intended use of the property.
If an individual acquires real property for investment purposes in Russia (that is, for receiving lease payments or subsequent sale of the property at a higher price), he may consider structuring the acquisition through a foreign company (with or without a branch in Russia) or a Russian company. Foreign companies holding real estate, for example, may be used to optimize taxation, get access to certain tax treaty benefits or defer taxation.
Russia is party to more than 70 double tax treaties with other jurisdictions, including:
It is not essential for an owner of assets in Russia to make a will in Russia (in this case the rules on intestate succession will apply) (see Question 28). A will can be created in accordance with the rules of another jurisdiction which was the last residence of the testator. A will in a foreign language must have a notarised Russian translation.
A will must be in writing. Generally, it must be certified by a notary in Russia (but a simple written form is possible in emergency circumstances), specify the date and place where it was made and must comply with other applicable formalities for creating a valid Russian will, including the following:
It must be written by the testator or by a notary as directed by the testator and then read by or to the testator, and the testator must understand its meaning.
It must be signed by the testator. If the testator cannot sign the will (for example, because of illness or disablement) it can be signed by another person on his behalf in the presence of both a notary and the testator.
A witness must be present.
These formalities do not vary depending on the nationality, residence and/or domicile of the testator.
Beneficiaries can redirect their inheritance entitlement by including it in their own wills. The inheritance entitlement redirected in this way is not included in the beneficiary's estate on his death. The compulsory share of the inheritance can not be redirected.
See Question 15.
A foreign grant of probate is recognised in Russia. It must be translated into Russian and notarised.
There are no relevant typical estate administration issues if foreign nationals die in Russia.
A notary is responsible for administering the estate where there is no will. If assets need to be managed, the notary must enter into an agreement with a professional manager to manage the assets. A testator can nominate an executor (in place of the notary) in the will to manage the assets disposed of in the will and undertake any duties concerning the administration of the estate. The executor can also be a beneficiary of the will.
The estate vests initially in the notary or executor who are responsible for administering the estate.
Establishing title and gathering in assets (including any particular considerations for non-resident executors)?
The assets are gathered in by the notary or executor, and distributed either according to the succession laws or the terms of the will. If necessary, those persons inheriting the assets can register their title to those assets once they have been distributed.
Those persons who inherit the assets must ensure that they execute any obligations of the estate, including paying any taxes due on the estate. If there are no beneficiaries to the inheritance, then it is the responsibility of the notary or executor to ensure that any taxes due are paid.
The notary or executor will inform the beneficiaries that they are entitled to receive an inheritance, and the beneficiaries must confirm that they accept that inheritance. Once the acceptance has been received, the notary or executor can distribute the estate according to the succession laws and/or the terms of the will.
The same rules apply whether the estate is purely domestic or has foreign connections.
A beneficiary can apply to the court to challenge the executors/administrators. A beneficiary can challenge a will once an inheritance is opened.
Russian legislation allows succession by will and intestate succession. For intestate succession, the statutory heirs inherit the entire estate. If the deceased executed a will, the rules on forced heirship must be taken into account.
The Russian Civil Code distinguishes between different kinds of heirs in intestacy (statutory heirs) and provides for eight priorities of heirs. For example:
Children, surviving spouse and parents of the deceased (the deceased's grandchildren and their posterity should inherit by right of representation) are considered heirs of the first priority.
Brothers and sisters of the deceased and his or her grandparents are considered heirs of the second priority.
Heirs of the subsequent priority should inherit only if there are no heirs of the preceding priority.
In principle, a person may dispose freely of his assets by will (for example, bequest his assets as he wishes), determine the shares of the heirs, and disinherit all or some of the heirs in intestacy, subject to forced heirship rules. Minor or disabled children, a disabled spouse, disabled parents and certain other persons (disabled persons or dependents) are entitled by law to what is called a "compulsory portion" of the estate. If these forced heirship claims are disregarded by the testator, the heirs whose statutory claims have been infringed can bring claims against any of the heirs or beneficiaries.
Russian rules on forced heirship are mandatory and apply to the estates of all persons who die with their last residence in Russia, save for real property located outside the Russian Federation and not shown on the Russian State Register. The Russian rules on forced heirship entitle a forced heir whose compulsory portion has been disregarded in a will to challenge the dispositions in the decedent's will.
To avoid forced heirship rules and increase the predictability of successions, Russian residents may attempt to use offshore inter vivos trusts or foundation structures. There is currently no practice in Russia where Russian courts recognised forced heirship rights on property held in non-revocable discretionary trusts or foundations (however, from the Russian legal perspective this risk should not be completely excluded).
The portion of a testator's estate that he can freely dispose of without violating forced heirship rules can be calculated as the difference between the following:
The value of the testator's estate.
The compulsory share (forced heirship claims) of the statutory heirs.
The freely disposable portion can be left by the testator to any heir (statutory or appointed) or by way of a bequest to any legatee he wishes to appoint. With regard to the freely disposable portion of the estate, the testator is unrestricted and there is no need whatsoever for equal treatment of the persons who are to benefit from the freely disposable portion. Therefore, the testator can leave the entire freely disposable portion of his estate to one statutory heir without any other statutory heir having any right to challenge such disposition.
Trusts or foundations also allow segregation of ownership; assets transferred to trusts or foundations cease to be property of the grantor. Russian law does not recognise trusts and has no equivalent instrument, which triggers a number of issues. According to Russian international succession law, the succession of an estate is subject to the law of the country of which the testator had last domicile at the time of his death. A testator whose last domicile is Russia cannot therefore establish a testamentary trust given that it would not comply with Russian succession law (there may be an exemption for immovable property located outside of Russia which is subject to special provisions in the country in which it is located).
This is also the position for inter vivos trusts. It is, therefore, only possible to establish an inter vivos trust if a foreign legal system applies which acknowledges the concept of a trust. The establishment of an inter vivos trust in Russia is not possible.
If a testamentary trust violates the forced heirship rights of Russian heirs, the heirs may be able to enforce their rights in Russia. Also, if an inter vivos trust prevents forced heirs from having the compulsory portions vested in them, they can attempt to deprive the beneficiaries of the trust of a corresponding fraction of their rights.
Application of the forced heirship rules in jurisdictions of tax residency of the beneficiaries may need to be separately checked (see Question 24).
See Question 24.
Real estate is subject to the succession laws of the jurisdiction where it is located. Real estate registered by the state in the Russian Federation is subject to Russian succession laws. Other assets are subject to the succession laws of the country that was the person's last place of residence.
The Russian courts will generally apply the doctrine of renvoi where this doctrine is also applied in the deceased foreign national's home jurisdiction. The doctrine is particularly relevant in relation to immovable property located in Russia.
The intestacy rules prescribe how the assets are distributed where there is no valid and enforceable will in place. The assets are distributed to the categories of legal heirs, starting with the first category of legal heirs. Assets only pass on to the next numbered category of legal heirs where there are no legal heirs in the previous category:
First category legal heirs. The assets are distributed equally between the spouse, children and parents of the intestate.
Second category legal heirs. The assets are distributed equally between the full and half brothers and sisters of the intestate, and the maternal and paternal grandparents of the intestate.
Third category legal heirs. The assets are distributed equally between the full and half brothers and sisters of the intestate's parents (that is, the intestate's uncles and aunts).
Fourth category legal heirs. The assets are distributed equally between the great grandparents of the intestate.
Fifth category of legal heirs. The assets are distributed equally between the children of full nephews and nieces of the intestate, and the full brothers and sisters of the intestate's grandparents.
Sixth category of legal heirs. The assets are distributed equally between the children of the grandchildren of the intestate once removed, the children of the intestate's cousins, and the children of the intestate's grandparents once removed.
Seventh category of legal heirs. The assets are distributed equally between the step-daughters, step-sons, step-father and step-mother of the intestate.
Eighth category of legal heirs. The assets are distributed to the Russian state.
Beneficiaries can only challenge the adequacy of their provision if there has been a contravention of the law concerning the way that the assets have been distributed.
The trust is a well-known legal instrument in common law countries, but has no equivalent in many civil law jurisdictions, including Russia. Russian law does not recognise a distinction between legal and beneficial ownership, which forms the basis on which assets are transferred to a trust. Russian law recognises the concept of "trust management". In contrast to the nature of the trust relationship, "trust management" does not contemplate a transfer of the property title to a "trust manager".
Conceptually, the tax efficiency of trusts is based on the shift of ownership of assets from the settlor to a third party, the trustee. At the same time, trusts are not recognised in Russia. Therefore, the possible application of trusts in international succession planning for the purposes of reducing taxation in Russia is severely restricted.
Given the above limitation, the use of a trust arrangement in international succession planning involving Russia can only be used under the following conditions:
Assets situated in Russia probably may not be transferred to a trust, whereas assets situated in common law countries may possibly be so transferred.
Assets situated in foreign countries that recognise trusts probably can be transferred to a trust.
As a consequence of the uncertain nature of a trust under Russian law, it is advisable to adopt a conservative approach and ensure that all trust structures maintain an underlying company (or other recognised legal entity) to hold the relevant portfolio of (Russian) assets concerned. In this regard, the use of an underlying company can provide an added level of protection in the event that a trust, even if irrevocable, is viewed as a look-through entity (that is, transparent) by Russian tax authorities.
Generally, foreign trusts are taxed in accordance with the applicable foreign legislation. Russian-source income distributed to a foreign trust is subject to Russian withholding tax (that is, 15% on dividends and 20% on other income). As the trust is not eligible for tax treaty benefits, an underlying holding company may be required. Distributions from a foreign trust to a Russian tax resident individual are subject to individual income tax at the standard 13% rate.
Since trusts are not recognised under Russian law, there are also no rules on determining the tax residency of a trust. Under the Russian Tax Code, companies are recognised as tax residents in the country of their incorporation. The Russian Tax Code does not currently provide for the possibility to determine a company's tax residency based on the place of effective management and control or any other similar criterion. Therefore it is unlikely that a foreign trust would be considered as a Russian tax resident (for example, if the trust is not recognised as a transparent body) if its trustee or protector are located in Russia.
Since trusts are not recognised under Russian law, there is a risk that a trust governed by foreign law would not be recognised in Russia. Therefore, it is highly advisable to maintain an underlying intermediate legal entity that will hold Russian assets (see Question 30).
Russia does not apply taxation based on effective management and control (see Question 30). Therefore the tax residency of the trustee may be irrelevant for Russian tax purposes.
Does the law provide specifically for the creation of non-charitable purpose trusts?
Does the law restrict the perpetuity period within which gifts in trusts must vest, or the period during which income may be accumulated?
Can the trust document restrict the beneficiaries' rights to information about the trust?
Russian law has no concept of a trust, recognition of foreign trusts may not be guaranteed (see Question 30).
Russian law has no concept of a trust, recognition of foreign trusts may not be guaranteed (see Question 30).
Russian law has no concept of a trust, recognition of foreign trusts may not be guaranteed (see Question 30).
Trusts are not recognised by Russian law and settlors may need to use foreign intermediary companies to contribute property to the trust and to hold underlying assets (see Question 30).
Under the Russian Civil Code and Family Code, jointly held property can only be alienated with the mutual consent of the spouses. Therefore, if a spouse has given his authorisation to disposal of the property and its contribution to a trust, it may be increasingly difficult for him to subsequently make a successful claim against trust assets in case of dissolution of the marriage. However, the legal implications may need to be carefully determined in each particular case. If a spouse failed to give his consent to alienation of the jointly held property, a contribution to a trust may be contested.
Trusts or foundations allow segregation of ownership. Assets transferred to trusts or foundations cease to be the property of the grantor. Distributions are formally at the discretion of a trustee or a board of directors of the foundation (discretionary trust/foundation). Creditors normally cannot have access to trust/foundation assets. However, there is a risk that if an individual makes use of a company, trust/foundation in a clearly abusive manner (or in case of a non-discretionary trust/foundation), the court may allow the piercing of the corporate veil or recognise the trust/foundation as non-existent/transparent. Therefore, this may enable the individual's creditors to have recourse to the assets. In addition, in Russia it is impossible to hold assets directly in an irrevocable trust as a means of protection, because Russian law does not generally recognise the common law concept of trusts. If the asset protection strategy includes a foreign intermediary company holding Russian assets, the risk of the structure being invalidated may be reduced.
Co-owners are taxed independently in Russia, because tax is applied on an individual basis. Co-owners can hold assets in equal or unequal shares, and co-owners have a pre-emptive right over co-owned assets.
Spouses may enter into a marriage contract to specify their property rights within the marriage, and this can be revised throughout the duration of the marriage. When a spouse transfers property, the marriage contract must also be considered, as it may contain clauses that affect both the way the property has been divided between the spouses, and also how that property can be dealt with.
If a couple marry without a marriage contract, then property ownership is determined by law in the following way:
Movable and real property that was owned separately at the time of the marriage, or is subsequently separately acquired by gift or inheritance, remains the sole property of the owner.
Assets, including real property, acquired by the couple during the marriage then become "joint property", and are held in equal shares by the couple. Shares in joint property can be disposed of under will.
Jointly held property can only be alienated at the mutual consent of the spouses (see Question 34). Spouses are also included in the first priority of heirs and are entitled to a compulsory portion of the estate.
There is no form of recognised relationship for same-sex couples in Russia.
The Russian Family Code does not provide a definition of "marriage" or "married". However, under Article 10 of the Russian Family Code marriage is concluded in a registry office and rights and obligations of spouses arise from the date when the marriage is concluded in the registry office.
The Russian family legislation uses the term "dissolution of marriage", which is defined as termination of a marriage at the application of one or both spouses.
The Russian Family Code does not provide a definition of "adoption" or "adopted." However, under Article 125 of the Russian Family Code, adoption of a child is subject to state registration in a registry office.
The term is not defined by law. Russian legislation does not draw a distinction between children who were born in marriage and outside marriage. It is important to establish whether the child's father is named in the birth certificate. Otherwise, fatherhood would need to be established through statutory procedures or by court.
There is no form of recognised relationship for same-sex couples in Russia.
When an heir is a minor, he can own assets under the guidance and responsibility of a tutor up to the age of 14 years, and under the guidance of a curator up to the age of 18 years (full adult age in Russia, when he is no longer a minor).
The tutor's role is to:
Undertake any legal activities required on the minor's behalf.
Deal with the minor's assets on the minor's behalf.
Protect the minor's interests in relation to third parties.
The curator's role is to:
Deal with the minor's assets, with the minor's agreement.
Provide guidance and assistance to the minor when dealing with third parties and the authorities.
Protect the minor from the undue influence of others in respect of the minor's assets, investments and so on.
When a person loses capacity their assets must be controlled by a tutor or curator. Whether a tutor or curator is appointed depends on the kind of capacity loss (a tutor is appointed where a person is incapable, and a curator is appointed where a person has limited capability).
Russia recognises powers of attorney (or their equivalent) made under the law of other jurisdictions, provided that such powers of attorney are legalised, translated to Russian and certified by a notary.
There are no current proposals for the reform of private client law in Russia.
Description. This official webpage of legal information is a web publication, which is a part of the state legal information system ran by a federal authority. The official webpage of legal information contains only Russian texts of the legislation, including the Russian Tax Code, the Civil Code and the Family Code.
Description. This is the official database of decisions of Russian arbitration courts handling economic disputes, including disputes of corporate taxpayers.
Qualified. Russia, 2007
Areas of practice. Tax planning and restructuring for corporate and private clients; tax advice for M&A and corporate reorganisations; wealth management.
Qualified. Russia, 2001; Utah, US, 2005
Areas of practice. General tax planning and structuring; employee compensation and benefits, including share-based incentive programmes; general employment and migration advice; personal data protection; wealth management.