Russian Succession LawPractical Aspects

General Overview of Russian Succession Rules1. Rules on succession are regulated by the RF Civil Code

(part III) and the RF Notarial Framework Legislation N 4462-1 dated 11.02.1993;

2. Succession takes place under will or, if the deceased left no will, under statutory intestacy rules;

3. Heirs by law are called to succession in the order of priority established by Art. 1142-1145 and 1148 of the RF Civil Code;

Unless Russian assets are “packed” into trust or foundation, they are inherited under will or applicable law;

Trends of Russian Succession Law Establishment of the Unified Informational Notarial

System (UINS)See: Federal Law No. 166-FZ as of October 2, 2012 “On amendments in the RF Notarial Legislation” (will come into force in July 1, 2014)

From July 1, 2014 UINS will contain registers:- on certified wills and notifications on will revocations;- on opened inheritance cases.

Beneficiaries would be able to track wills and revocations.

Russian Taxation at Succession (part 1) No Special Taxation Upon Inheritance and Donation No Inheritance Tax (previous tax repealed in 2006) No Gift Tax (no special regulations, though personal

income tax can apply) No Special Property Transfer Taxes No Special Stamp Duties or Transfer Fees No Net Wealth Tax or Endowment TaxBUT: State Duties and Notary fees can applyConclusion: Inheriting on the Russian level can be

effective tool of succession planning (save for practical issues)

Russian Taxation at Succession (part 2)

Personal Income Tax Legislation: Proceeds (both monetary and in-kind) received from individuals by way of an inheritance are generally exempt from taxation in Russia (art. 217 para 18 of RF Tax Code)

Exceptions: Royalties paid to the heirs (successors) of authors of works of science, literature and art and of discoveries, inventions and industrial samples are subject to RF personal income tax at the rate of 13%

Forced Heirship: Russian Perspective

Case study

Beneficiary

CY company

Russian company

Will under CY legislationWife

RF Legislation: Existence of heirs entitled to inheritance notwithstanding the will content (compulsory share) (art. 1149 of the RF Civil Code):• Disabled spouses, parents, dependents• Disabled or minor children

Rules of Compulsory Share

• The right to a compulsory share is satisfied out of the residual non-bequested part of the estate.

• Consequences: risk of diminishing the rights of other legal heirs to that portion of estate

No Will28%

INHERITED PROPERTY

• If non-bequested part of assets is insufficient to satisfy the right to a compulsory share, it is satisfied out of bequeasted assets.

Compulsory share: not less than half of the share which the heir is entitled to in case of succession by operation of law.

Property inherited by will72%

Property inherited by law28%

Inheritance Taxation in the RF: Common Rules

January 1, 2006

Law of the RF N 2020-1 dated December 12, 1991 “On taxation of inherited or gifted property” (cancelled by Federal Law N 78-FZ dated July 1, 2005)

Exception: 13% tax rate applies to fees paid to heirs of authors of works of science, literature, art, discoveries, inventions, industrial designs.

No tax applies as a general rule Tax on inherited property

Key factor – Date of Inheritance Certificate Issuance

Before After

Typical Case of Inheritance without Will

Head of Family (Deceased)

Heirs

NO WILL

WifeChild 1 (Minor)

Child 2 (Minor)

Child 3 (Minor)

Child 4 (Minor)

MotherFather (PEP)

Types of Inherited Assets

Land (agricultural);

Dividends and Interests;

Funds on bank accounts;

Shares of public companies (main business)Shares of private companies;

Receivables and rights under loan agreements;

Land plot

Real Estate (apartments, house, commercial property);

Types of Assets: Dividends and Interests

Death date

Key factor for taxation – death date of the deceased.

• Dividends (declared and not paid)

• Interests under loan agreements (payable before date death)

NO TAX

• Dividends • Interests under

loan agreements(payable after death date)

INCOME TAX

Types of Assets: Real Estate and Land PlotNo special tax applies to inheritance of real estate and

land plots;Obligation to pay state duties and notary fees: for children, spouse, parents, brothers and sisters of the

deceased - 0,3% from the value of inherited property, but not more than 100 000 rubles (circa $2800);

for other heirs - 0,6% from the value of inherited property, but not more than 1 000 000 rubles (circa $28 000);

Obligation to pay land tax and property tax in future;

Land plot

Minor heirs cannot dispose or encumber inherited property unless under consent of guardianship and trusteeship authorities;

Consent is feasible only if transaction is not to minor’s detriment;

Effectively real estate and other assets passed to minors are ‘trapped’.

Types of Assets: Shares (Private and Public Companies)No special tax applies to inherited shares.Obligation to pay state duties and notary fees: for children, spouse, parents, brothers and

sisters - 0,3% from the value of property, but not more than 100 000 rubles (circa $2800);

for other heirs - 0,6% from the value of inherited property, but not more than 1 000 000 rubles (circa $28 000);

Minor heirs cannot dispose of shares unless under consent of guardianship and trusteeship authorities, save for expenses below threshold (circa $200);

Voting is “grey area” and the safe route is to seek authorities’ consent;Consent is feasible only if transactions and voting are in minor’s benefit;

Management in companies with minor shareholders can be obstructed.

Types of Assets: Funds on Bank AccountsNo special tax applies to inherited funds on bank

accounts.Obligation to pay state duties and notary fees: for children, spouse, parents, brothers and sisters -

0,3% from the cost of inherited property, but not more than 100 000 rubles (circa $2800);

for other heirs - 0,6% from the cost of inherited property, but not more than 1 000 000 rubles (circa $28 000);

Minor heirs cannot dispose of funds unless under consent of guardianship and trusteeship authorities, save for expenses below threshold (circa $200);

Consent is feasible only if funds are spent exclusively for minor’s benefit;

Use of funds passed to minors can be seriously limited.

Types of Assets: Receivables (under Loan Agreements)No special tax applies to inherited receivables.Obligation to pay state duties and notary fees: for children, spouse, parents, brothers and

sisters - 0,3% from the cost of inherited property, but not more than 100 000 rubles (circa $2800);

for other heirs - 0,6% from the cost of inherited property, but not more than 1 000 000 rubles (circa $28 000);

Minor heirs cannot dispose of receivables unless under consent of guardianship and trusteeship authorities, save for expenses below threshold (circa $200);

Consent is feasible only if funds are spent exclusively for minor’s benefit;

Use of receivables passed to minors can be seriously limited.

Taxation of Inherited Dividends and Interests

Change of tax residence influences applicable income tax rate on income from inherited assets (dividends and interests).

Income from sources in Russia:

Tax rate forThe RF Residents:

Tax rate forNon-residents:

Individuals Legal Entities Individuals Legal Entities

Dividends (payable after death date)

9% 9% or 0% (in case of 50% participation in a paying company during 1 year)

15% 15%

Interest under loan agreements (payable after death date)

13% 20% 30% 20%

Taxation of Inherited Dividends and Interests

Re-calculation of tax from the start of the

tax period

Change of residence in the middle of a

tax period

Otherwise

Liability of taxpayers and tax agents:1) Tax liability (20% fine from

outstanding tax + interests)2) Criminal liability

Tax resident is any citizen of Russia or any other country, living in Russia not less than 183 days during 12 consecutive calendar months.

Tax Liability of Minor Heirs Minor Heirs are obliged to pay taxes. Taxes for Minor Heirs are paid

on their behalf by their parents. Parents are liable for failure to pay taxes from minor heirs’ income

See: Resolution of Russian Constitutional Court N 5-P dated March 13, 2008, Ruling of Russian Constitutional Court N 25-O-O dated January 27, 2011).

The age of tax responsibility is 16 years old. Since this age heirs bear their own tax liability.

See: Letter of Russian Federal Tax Service N 3-5-04/495@ dated April 23, 2009, Letter of Russian Federal Tax Service in Moscow N 28-10/076242@ dated August 9, 2007.

Little court practice confirming parents’ responsibility for committing tax offences by Minor Heirs.

Case Study. Consequences of Inheritance of Russian Assets by Minors under Intestate Rules

No Will

Bequeathing of Property to All

Heirs

Special rules for Minor Heirs:1. Obligation of Minor Heirs to pay income tax for assets, providing

income in future (shares, receivables, etc.);2. Consent of guardianship and trusteeship authorities for all transactions

with Minor Heirs’ inherited property;

Joint Ownership of

Inherited Property

WifeChild 1 (15 y.o.)Child 2 (12 y.o.)Child 3 (5 y.o.)Child 4 (1 y.o.)MotherFather (PEP)

Heirs

Land plot

Assets

Solutions for Change of Asset Distribution

No WillInheritance Sharing

Agreement

Special rules for Minor Heirs:1. Entering into Inheritance Sharing Agreement requires

consent of state guardianship and trusteeship authorities;

2. Inheritance Sharing Agreement is concluded in notarial form by Guardianship and trusteeship authorities on behalf of Minor Heirs

3. General prohibition to decrease Minor Heirs’ property;

Wife

Shares of public companies (main business)

Bank accounts

Car

What are the Limits to the Use of International

Succession Planning Structures?

No Will

Limits to the Use of International Succession Planning Structures

No Will

Inheritance Sharing Agreement

Main principle: the testator is free in choosing heirs by will.

Legal entities may inherit: need to be in good standing and not liquidated;

• Legal successors of a reorganized company may inherit;

• Possibility of inheriting by several legal entities created during reorganization;

Existence of heirs entitled to inheritance notwithstanding the will content

• Disabled spouses, parents, dependents

• Disabled or minor children

Cross-Border Inheritance Cases Affecting Succession Planning

Case StudyRussia Switzerland

Head of Family (Deceased)

Real Estate (apartments, house, commercial office);

Place of Inheritance opening

According to International Agreement

If there is no International agreement, according to:• last place of residence

OR• location of property

Applicable Law and Conflicting Norms

Notary officers’ powers to deal with inheritance case are defined by:

The RF Civil Code and International agreements;

National conflict-of-laws rules (in case there are no applicable international agreements);

Applicable Law and Conflicting Norms2 approaches according to the RF international agreements:

Approach 1 Approach 2

Immovable property – registration of rights in the country of property location;

Movable property – registration of rights in the country of the deceased’s last residence;

Movable property – registration of rights in the country of the deceased’s citizenship OR property location;

Confirmed by:•Minsk Convention;•Kishinev Convention;•Bilateral agreements on legal assistance between the RF and Latvia, Lithuania, Estonia, Azerbaijan, Czech Republic, Slovakia, etc.

Confirmed by:•International agreements on legal assistance between the RF and Bulgaria, Hungaria, Viet Nam, Poland, DPRK, Romania, Slovenia, Macedonia and Montenegro.

Applicable Law and Conflicting NormsNational conflict-of-laws rules stipulate the following procedure:

•registration of rights in the country of property location;

Immovable property

•registration of succession rights under Russian legislation;

Immovable property, registered in the RF (sea

and river vessels, aircrafts, space assets)

•registration of rights in the country of the deceased’s last residence;

Movable property

Applicable Law and Conflicting Norms

Thank You For Attention!