Documented proof of close kinship between the donor and recipient is essential for the application of this exemption from personal income tax.
Although a literal reading of this rule does not imply that its application differs with respect to different categories of immovable property and their commercial target use, additional informal criteria have developed in the law enforcement practiceLetter of the Russian Ministry of Tax No. BS-4-11/9359@ dated 24 July 2023, Resolutions of the Arbitrazh Court of the Ural District
- the target use of the immovable property (commercial or for personal or family use);
- the actual use of the immovable property (by both the donor and the recipient);
- the legal status of the parties to the transaction (individual entrepreneur status) (“IE”).
Position of the supreme court of the Russian Federation on the case of IE E.V. Khabieva
In April 2026, the Supreme Court, in the case of IE E. V. KhabievaRuling of the Judicial Panel on Economic Disputes of the Supreme Court of the Russian FederationIn particular, in 2019, IE E. V. Khabieva received 11 commercial immovable properties as a gift from her mother, an individual entrepreneur. The properties in question were used in the entrepreneurial activities of both the donor and the recipient, by being leased out.
Guided by the rule in clause18.1 of Article 217 of the Russian Tax Code, which provides for an exemption from personal income tax on income received as gifts between close relatives, the daughter, an individual entrepreneur, did not report the income from the immovable property gifted to her by her mother in her personal income tax return.
The tax authorities, however, objected to the application of the relevant rule in this situation, as they believed the exemption is granted for gifts of immovable property used for personal purposes, not for profit, meaning that gifts between close relatives should not be entrepreneurial in nature. As a result, IE E. V. Khabieva was assessed additional personal income tax and a fine.
The taxpayer disagreed with such decision of the tax authority. According to IE E. V. Khabieva, tax legislation does not provide exceptions for the personal income tax exemption, either regarding the status of the parties to the transaction or the use of the gifted property.
Taking into consideration that proof of close kinship with the donor is sufficient to apply the personal income tax exemption, IE E. V. Khabieva filed a lawsuit to invalidate the tax authority’s decision.
The courts of first instance and appeal granted the taxpayer’s claims and upheld that the exemption from personal income tax was based solely on family ties. Nevertheless, the cassation court took into account the entrepreneurial nature of the property use, disagreed with the lower courts’ findings, set aside their decisions, and referred the case for a new trial. Based on the results of the new trial, IE E. V. Khabieva’s case was dismissed at all levels.
As a result, IE E. V. Khabieva filed a complaint with the Supreme Court.
The Supreme Court set aside all lower courts’ decisions and invalidated the tax authority’s decision.
The Supreme Court stated that the nature of the immovable property use (potential or actual), its functional characteristics, and the donor’s and/or recipient’s status as an individual entrepreneur are irrelevant for the application of the personal income tax exemption. The Supreme Court also cited clarificationsLetters of the Russian Ministry of Finance
Furthermore, the Supreme Court noted the “circular” movement of commercial assets within the family. In essence, the property previously belonging to her and her husband, which had previously been gifted between family members and close relatives, was returned to IE E. V. Khabieva. Therefore, the Supreme Court held that the gift itself to IE E. V. Khabieva did not result in a taxable gain due to the continuous control of the assets by family members and close relatives, and the transfer of the property between them did not change the overall financial result of its use. In other words, the non-residential commercial properties were returned to their original owner.
Therefore, the key circumstance of this dispute is the fact that the gift of assets between close relatives occurred while maintaining their commercial target use for profit-making within the family.
The Supreme Court’s position, formulated in the case of IE E.V. Khabieva, undoubtedly provides guidance for taxpayers in resolving similar disputes, but it seems premature to talk of the precedent-setting significance of this case based on the actual circumstances of the family involved.
