All news
Trust in Russian: How to take advantage of new opportunities in personal funds
The authorities began to think about creating a structure similar to a foreign trust in 2015. From March 1, 2022, owners of Russian capital will be able to create private funds similar to foreign capital. The minimum amount of financing is 100 million rubles. Wealthy people wanted to have tools that would allow them, firstly, to protect their funds and, secondly, to implement their desired plans for transferring wealth to heirs, regardless of the requirements of inheritance laws. The fund also provided an opportunity to structure ownership of assets and create an asset management system. However, as often happens, at first, private funds, frankly speaking, did not meet the requirements of Russian capital owners. Fortunately, over the past two years, most of the vulnerabilities have been eliminated.
In 2023, private foundations with a preferential tax regime were created. The Tax Code was revised (effective January 1, 2024) to exempt, among other things, the transfer of property from founders to foundations from tax. In addition, special income tax rates were introduced for personal funds, which mainly received passive income. This tax rate is 15% instead of the standard 20%. In other words, the taxation of personal funds has become effectively the same as the taxation of individuals. It is important to note that from January 1, 2025, the income tax rate for everyone will increase to 25%, but the income tax rate for personal funds will remain at 15%.
The same amendment established the procedure for payment and distribution of the fund's assets to beneficiaries appointed by the founder of the fund. By the way, this may be the founder himself, his relatives and people who are not officially related to each other. founder. Special provisions on personal income tax are established with respect to property payments and distribution of personal funds.
Thus, during the lifetime of the founder of a personal fund, the beneficiaries of the fund do not pay personal income tax, but only if they are close relatives of the founder, for example, children and at the same time tax residents of the Russian Federation. For non-residents, fund payments are taxed at a rate of 30%. After the death of the founder, no category of beneficiaries is subject to personal income tax. In fact, receiving income or assets from personal funds after the death of the founder is equivalent to receiving an inheritance and is not taxed in our country. So, now you can also use your personal funds as a tax-effective estate planning tool.
Finally, in 2024, another important step was taken. Private funds are removed from the jurisdiction of the Ministry of Justice, the founders are no longer disclosed in the Register of State Organizations (USRLE), and the structures themselves are considered qualified investors. This is a fundamental change that significantly increases the attractiveness of such structures. Now let's look at how wealthy people can use their personal funds.
Information about the founders of private foundations is no longer published in the publicly accessible register of legal entities. It is difficult to overestimate the importance of this rule. Throughout the life of the foundation, one of the first questions our clients asked was: “Will everyone see that I am the founder?” And it is not only because the owners of large fortunes do not like to put their wealth on display.
The anonymity of the founders is important due to the risk of sanctions. Receiving income from personal funds allows preventing the disclosure of information about income from Russian sources, which is especially important for Russian citizens who have received a second citizenship or have a residence permit. Often, as part of various compliance procedures of foreign financial institutions, a 3-NDFL income tax declaration is requested to confirm the presence of income from Russian sources. The fact of receiving income from personal funds is almost impossible to establish based on information from open sources and tax declarations of an individual.
Until recently, funds could not qualify as qualified investors. This significantly limited the range of assets that could be transferred to a fund, significantly reducing its attractiveness. Qualified investor status allows you to invest in a variety of assets. This includes various exchange-traded products, private equity assets, private debt, and venture capital investments.
But most importantly, fund managers can now allocate funds for long-term professional investment in closed-end mutual funds (CMFs). Let me explain why this is important.
Let's imagine a large owner whose main capital is controlling shares of companies that he manages as a manager or shareholder. He also owns other non-core assets. He owns several residential and commercial properties, deposits in various banks, investment portfolios in several management companies, minority stakes in companies, etc., but he himself has already been forgotten. All these disparate assets can be combined into a closed-end mutual fund, which can be managed by a professional financier. They control the composition and profitability of the portfolio, the activities of companies in which the client owns a minority stake, manage real estate, provide monthly or quarterly reports. As a rule, they put their personal finances in order.
It is important to clarify here that, in practice, private fund managers are not expected to manage the investment activities of the fund. This mission does not include increasing the value of the property. The fund manager acts as the title holder, and his or her job is to ensure that any assets or income received by the fund are managed and distributed to the beneficiaries in accordance with the rules established by the founder.
In this context, closed-end mutual funds within private funds are analogous to foreign special purpose trusts in which outside investment directors are appointed. The job of such a director is to manage the non-core assets and investments of the private fund founder.
The choice of closed mutual funds as an investment management tool seems quite logical. This is due to the fact that, unlike private funds, closed mutual funds are strictly regulated instruments. In addition to licensed management companies, professional depositories and registrars also participate in the functioning of closed mutual funds. And all participants in the infrastructure of closed mutual funds are controlled by the central bank. Until recently, there were no such financial structures on the Russian market.
Including closed-end mutual funds in a private foundation also offers certain tax advantages. Income earned from investments through closed-end mutual funds is taxed only when distributed at the individual fund level. Additionally, if an individual donates assets to a closed-end mutual fund, the benefit income is not taxed, unlike situations where an individual contributes assets to a closed-end mutual fund. However, it is important to note that these complex ownership structures require careful consideration of all tax considerations.
As a reminder, assets transferred to personal trusts are no longer the property of the settlor and will therefore not be included in his estate upon his death. This allows for succession planning based on personal assets, outside the scope of probate law requirements. Here is what this means in practice: • No mandatory joint use requirements. • No assets will be frozen for 6 months. • No. There is no risk that business partners of the deceased owner of a business interest will obstruct the succession.
By the way, personal funds allow maintaining the general level of family well-being not only in the event of inheritance events, but also in the event of unfavorable circumstances.
Private foundations also allow you to "segregate" your assets and their income. For example, you can move your stock portfolio into a foundation. Beneficiaries designated by the founder will receive the income from such portfolios (if the founder so desires), but will never receive the portfolios themselves. In this way, the founder-testator can "insure" his assets and heirs against unwise behavior and dishonest claimants.
We often hear examples of failed plans to acquire real estate. For example, there was a case when a 12-year-old girl inherited billions of rubles in shares of a closed mutual fund from her father. The property is managed by a guardian under the supervision of the guardianship authority until the person reaches the age of majority. However, once your heirs turn 18, their access to shares of legal documents will no longer be restricted.
Children who inherit significant wealth become an attractive target for fraudsters. By “packaging” assets into personal funds and securing rights to income from them without passing them on to children, it is possible to avoid a situation where inherited assets are pledged to a bank for a loan to participate in a “very promising start-up.” property to heirs. Assets can be transferred only upon fulfillment of pre-determined conditions, such as reaching a certain age, obtaining a higher education or other conditions set by the founder.
The situation described is far from the entire range of tasks that can be solved with the help of private funds. As you can see, two and a half years after the launch, Personal Funds have become a convenient tool for structuring, managing and transferring wealth. Now they compete on equal terms with similar organizations created by sub-owners in friendly jurisdictions. We are mainly talking about the UAE. Today, 75 private funds have been registered. We believe that this number will at least triple within a year.
The editor's opinions may not coincide with the author's point of view.