Russian business owners have traditionally resorted to flexible foreign law vehicles for succession planning and asset protection purposes, such as the popular Privatstiftung in Liechtenstein and similar structures in civil law jurisdictions and some common law countries. They have also used various international trusts (e.g., in Cyprus, Jersey, Cayman Islands and many other popular common law countries), life insurance and other instruments.
Although these are all well respected and reliable options, many Russian business owners were hesitant to use them due to their complicated legal structure, high costs and language requirements. Such instruments also do not always work well with pure domestic assets in Russia that require day-to-day management, such as Russian commercial organizations.
In order to provide a domestic alternative, Russia introduced in 2018 the concept of inheritance foundations, which, similar to will trusts, can only be established after the death of a founder. Due to this reason and their relative novelty, inheritance foundations have not caught on yet in Russia.
Still, with many Russian business owners now in their 50s, 60s and 70s, there has been demand for a more flexible domestic instrument for transitioning a business to governance by professional management and for protecting the interests of heirs without resorting to foreign law instruments and laws of foreign jurisdictions.
In order to satisfy this growing demand, Russia has introduced the new concept of private foundations, which will supplement inheritance foundations as of 1 March 2022. But, unlike existing inheritance foundations, can be established and tested during the lifetime of their founders.
Russian and foreign assets with a value of at least RUB 100 million can be transferred to a foundation; this includes cash, investment portfolios, real estate, business assets (shares and interests in commercial organizations) and other property. When financing a foundation, it is necessary to observe the limitations on foreign currency operations between Russian residents. For example, being a Russian currency control resident, a Russian law private foundation cannot accept as a contribution foreign shares and similar assets from Russian resident founders.
Property transferred to a foundation is not included in the estate of the founder; it does not constitute marital property and cannot be divided in the event of a divorce. The founder bears subsidiary liability for the financial obligations of the foundation, and the foundation for the obligations of the founder, for a three-year period after the establishment of the foundation (five years in exceptional cases, for example, if creditors have valid excuses for not submitting their claims on time). However, the foundation is not responsible for the liabilities of the beneficiaries, and they are not liable for those of the foundation.
There is no requirement to publish reports on the use of a foundation's property. Information on the terms of management and other internal documents of the foundation is confidential and should not be disclosed to any third parties, with only a few exceptions: a private foundation's details will be made known to the creditors of the founder and to the state authorities in Russia. The Russian authorities will also be aware of the names of the beneficiaries and payments made to them.
Maximum flexibility is envisaged for structuring the management of a foundation. The law does not establish any requirements for managers such as licenses or other qualifications; therefore, a foundation can be managed by a wide range of persons such as trusted advisers and/or legal entities of the founder, but not the founder themselves or the beneficiaries. The equivalent of a private trust company may be set up in Russia or abroad for the management of a private foundation.
The founder can be included in the supreme collegial body and supervisory board of the foundation; if so, their approval can be required for concluding certain transactions specified by the founder in the charter documents of the foundation. The founder can also change the charter, terms and internal documents of the private foundation during their lifetime. For additional control it is also possible to create an oversight body -- the equivalent of a protector (enforcer) in a trust.
The beneficiaries of a foundation can be members of a family or another group of persons, but not commercial organizations. Such persons may receive regular or single distributions upon the occurrence of conditions set by the founder, but cannot participate in the management of a business transferred into the private foundation. The beneficiaries have the right to demand information on the activity of the private foundation in those cases set out in the charter, as well as the right to demand an audit of the foundation. Foundations are not subject to mandatory state audits. The founder can also be a beneficiary and receive regular payments during their lifetime from the foundation they established.
No special tax and currency control benefits have been introduced yet for the new private foundations. Thus, a private foundation, being a non-commercial organization under Russian law, is a fully taxable entity that can be subject to the Russian 20% corporate profit tax (including on investment income), VAT, property and other applicable taxes, and is subject to CFC rules in relation to its foreign assets. It can enjoy the usual tax benefits, for example, 0% participation exemption for qualifying dividends. But there is currently no special exemption for capital distributions such as the one available to foreign law trusts.
The foundation acts as a withholding agent for individual income tax purposes. Payments to the beneficiaries are subject to the individual income tax at the rate of 13% or 15% for residents, and 30% for non-residents. The beneficiaries will not have to submit tax returns or pay tax on payments from the foundation on their own.
The use of new private foundations could reduce the number of inheritance disputes in Russia over business assets, and provide continuity and professional management for Russian businesses. It could also prevent the misuse of funds and ensure long-term financial support for family members.
However, for them to become a popular wealth management and succession-planning tool for wealthy individuals in Russia, it is necessary to fix some of the initial drawbacks of the legal and tax regime applicable to new private foundations, as well as to develop Russian laws and reliable court practice on the protection of assets.
1 Federal Law No. 287-FZ, dated 1 July 2021 "On the Introduction of Amendments into Parts One and Three of the Civil Code of the Russian Federation".