Tax regulation of personal funds — what lies ahead?

A new type of nonprofit organization — a personal fund for structuring ownership and accumulating assets during the owner’s life — has been introduced in Russia on March 1, 2022.

The law No. 389, signed by the Russian President and published on July 31, 2023, establishes a special tax regulation of personal funds, making them more attractive in terms of taxation.

Features of personal funds

Who can set up a personal fund?

A personal fund is a nonprofit organization established during the life of the owner of assets (it is an inheritance fund in case of establishing after his / her demise). Only the owner of the assets or his / her spouse, if joint property is contributed to the fund, can be the founder.

Fund’s assets

When a personal fund is established (except for an inheritance fund), assets with an assessed value of at least RUB 100 million must be contributed.

A personal fund’s assets and the founder’s liability

During his / her life, an owner of assets may contribute these assets to the fund, and the fund (except for an inheritance fund) will bear subsidiary liability for the founder’s obligations with these assets for three years after the fund’s establishment.

In addition, the founder of a personal fund will bear subsidiary liability for the fund’s obligations if the fund’s assets are insufficient.

The structure of a personal fund’s management

The structure of a personal fund’s management is similar to the structure of other Russian nonprofit organizations: a sole executive (any individual or legal entity appointed in accordance with the personal fund’s charter, except for the personal fund’s founder), a supreme collegial executive body and a board of trustees.

The beneficiaries of a personal fund may be any individuals or categories of individuals who will receive all or a part of the fund’s total assets, including in the event of circumstances that may or may not occur. They are appointed by the fund’s founder or the fund’s management.

The founder himself may be a beneficiary if so stipulated in the fund’s charter.

The beneficiary’s rights are not transferrable to other individuals, including in the event of succession or inheritance.

Nevertheless previously Russian tax law did not specifically regulate the taxation of personal funds, their founders and beneficiaries. The taxation of assets contributed to a fund during its establishment also remained unregulated: funds' profits were taxable at the general rate of 20%, whereas beneficiaries paid taxes on assets and payments received from the fund at the rates of 13%/15% - 30%. For these reasons, personal funds were not popular in Russia.

What has changed?

In brief:

• Transfer of property (and property rights) to / from a personal fund will not result in tax consequences for the founder, the fund or its beneficiaries
• Contribution of assets to a personal fund does not interrupt the assets ownership period of the founder for the purposes of using the relevant tax benefits, and the beneficiaries may deduct the founder’s expenses at the moment of disposal of the assets
• Distributions and assets received from a personal fund by the founder or beneficiaries are exempt from taxation if certain conditions are met
• A personal fund is eligible for a reduced 15% rate of profit tax if the certain requirements are fulfilled

In detail:

1. Transfer of assets to a fund.

Neither the fund, nor individuals are taxed.

2. Functioning of a personal fund and receipt of assets from it

• Assets or property rights transferred to beneficiaries who are individuals are not subject to taxes, including VAT
• Income received from a fund in cash or in kind is not subject to taxes and should not be declared by the beneficiaries if received after the demise of the fund’s founder. Certain categories of beneficiaries are exempt from taxes if income is received from a personal fund during the founder’s life
• A fund is eligible for a reduced 15% rate of profit tax if certain conditions are met. Otherwise, the standard rate of 20% is applied

3. Disposal of assets obtained from a fund

• If the founder contributed real estate, stocks (a certain category), bonds of Russian companies, investment shares (a certain category), participating interests in the authorized capital of Russian companies or any other property to the fund, received them back from the fund and then disposed of them, the minimum period of their ownership by the founder before and after contribution to the fund also includes the period of ownership by the fund. Thus, the fact that the assets were owned by the fund does not interrupt the period of their ownership by the founder for personal income tax purposes. It is important to note that the current wording does not indicate that this also applies to property rights
• If real estate is received from a personal fund, the minimum ownership period for such real estate for personal income tax purposes is reduced from five to three years
• If securities, assets or property rights received by a taxpayer from a personal fund were not taxed (see point 2 above), the taxpayer may deduct the acquisition expenses of the personal fund or the founder at the moment of their redemption or disposal. Such expenses must be documented and must not have been previously deducted for tax purposes by either the personal fund or the founder

Entry into force

The law was signed by the Russian President and published on July 31, 2023, and most of its provisions will thus apply to income / expenses from January 1, 2024, however:

• The provisions on deduction of a personal fund’s expenses for transactions with securities apply to relations from January 1, 2022
• The provisions on deduction a the founder’s or the personal fund’s acquisition expenses on property / property rights when they are subsequently redeemed / disposed of will become effective one month after the law’s official publication, i.e., potentially, they may be applied in 2023

At the same time, certain tax issues remain unresolved, e.g., the ability of individuals (beneficiaries) to offset tax on a fund’s dividend income that has already been taxed in Russia.

How can we help?

We will be happy to assist you in all the mentioned questions, compare Russian structures with their foreign analogues, analyze your personal tax situation at all stages and assist you in setting up the structure of your choice.

You are welcome to request further details from the authors.