Russian government introduces changes to personal trust taxation

The Government has introduced another round of sweeping changes to taxation laws (Draft Law No. 369931-8). For the time being, this draft law has been prepared for its second reading and will be further refined. However, the key positive developments connected with personal trust taxation can already be highlighted.

The civil legislation (articles 123.20-4–123.20-8 of the Russian Civil Code) states that a personal trust can be set up both when its founder is alive and after he or she has passed away, and survive his or her death. A personal trust may engage in business activities consistent with its charter and, for these purposes, set up or participate in business entities. Any property vested in a personal trust becomes its own and is not to be split between successors following the death of the trust founder. The market value of property vested in a personal trust at its foundation may not be less than RUB100 million.

A personal trust has beneficiaries (like beneficiaries in a trust), ie persons that are eligible to receive property from a personal trust when the trust management bodies so decide. Beneficiaries of a personal trust can be any individuals and legal entities (except for commercial entities). Beneficiaries may include the founder him or herself (when they are alive) and after their death – his or her heirs. The process of designating beneficiaries shall be set out in the charter of a personal trust.

To date, the key disadvantage of the personal trust concept has been the absence of a special tax regime, ie profits earned by a personal trust and earnings attributed to the beneficiaries of a personal trust are taxed on a general basis.

The draft law rectifies this disadvantage and stipulates that:

• any profits of a personal trust are taxed at a reduced corporate rate of 15% (instead of the general income tax rate of 20%) provided that over 90% of its income includes passive income (dividends, interest, unearned income from real property and the sale thereof and other similar income);
• the transfer of any property (and property rights) from a personal trust to a beneficiary is not subject to VAT;
• in respect of property tax levied against residential units, garages, and parking spaces that are owned by a personal trust and whose tax base is defined as the cadastral value, applicable tax rates may not exceed 0.3% (except for properties whose cadastral value is over RUB300 million each);
• a beneficiary taking over the property after the death of the trust founder is not liable to pay any personal income tax from the acquired property (including money). If the property is acquired by the founder him or herself or his or her next of kin when he or she is alive, personal income tax is not required to be paid. Tax liability arises when the income earners are nonresidents of Russia;
• if a person receives securities, other property and property rights from a personal trust and these are not subject to the personal income tax, the recipient, when disposing of the same, may expend the cost of their acquisition that has not been previously expended with such personal trust or its founder;
• when any shares or participation interest acquired from a personal trust are disposed of, a five-year grace period of ownership shall be determined to include the period of time such property has been owned by the trust itself. If these assets are received by the founder, the term of ownership is deemed the aggregate period of time it has been in the ownership of the founder and the trust prior to the return to the founder;
• where real property is disposed of by the trust founder, the term of the real property ownership is deemed the aggregate period of time it has been in the ownership of the founder and the trust prior to the return to the founder. This being said, a three-year term of ownership is fixed for all parties involved whereupon no personal income tax from the real property sale is payable; and
• when any other property received from a personal trust is disposed of, the three-year grace period of ownership is deemed to include the period of time such property has been owned by the trust itself. If the property is received by the founder, the term of ownership is also deemed the aggregate period of time it has been in the ownership of the founder and the trust prior to the return to the founder.

These provisions make applying the personal trust concept much more beneficial for retaining and transferring possessions, primarily for those who reside most of their time in Russia.

We are carefully monitoring the progress of the draft law and will be pleased to discuss any potential personal trust to be created to address the specific situation any private clients might find themselves in.