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Introduction
One of the most popular and reliable ways to preserve andmultiply capitals is investing in residential property. Suchinvestments were widespread in pre-revolution Russia and thepractice is now thriving. This article focuses mostly on questionsindividual investors should keep in mind when considering to buy(or receive as a gift) residential property in Russia. They are: 1)who can acquire residential property in Russia; 2) what kind ofproperty can be qualified as residential; 3) the limitations onpurchasing and using property protected as cultural heritage; 4)due diligence: how to get and check information about residentialproperty; 5) execution of a sale and purchase agreement or donationagreement and state registration of the title transfer; 6) purchaseprice payment and compliance with currency control regulation; 7)tax on residential property; 8) renting out residential property(requirements and taxes); and 9) disposition of residentialproperty.
Nowadays, Russia has adopted a well-structured and detailedregulation on all the aspects of acquisition, use and dispositionof residential property. While the Housing Code of the RussianFederation (Housing Code) defines the characteristics ofresidential property, another two laws regulate its acquisition anddisposition in Russia: the Civil Code of the Russian Federation;and Federal Law # 122-FZ on State Registration of Titles to andContracts with Real Property, dated July 21, 1997. The latter twolaws will be discussed below.
This article will not explore ownership through enveloping (thepractice of residential property purchased by individuals throughcompanies) because new Russian laws have made this practice lessprofitable and unattractive in terms of paperwork. We will alsoleave uncovered the issues that arise out of living in and the useof condominiums. The latter questions are regulated by the HousingCode and are worthy of a separate article.
This article cannot be used as legal advice or serve as legalopinion. Nonetheless, it may help readers start and/or furthertheir research on the topic.
Who Can Acquire Residential Property in Russia?
Generally, any individual, regardless of his or her citizenship,can acquire residential property in Russia. There is no direct banon foreigners owning residential property anywhere in the country.However, they are not permitted to own land in state borders or seaport areas, for example. This means that they can buy a house, butnot the land beneath it. That also means that the house owners arethen dependent on the mood of the landlord.
Residential property may also be bought by a group ofindividuals. In this case, it will be shared by several owners andeach of them will hold title to a share in that property.
What Kind of Property Can be Qualified as Residential?
The Housing Code defines residential property as an isolatedspace legally qualified as real property and suitable for permanentliving (i.e. it meets sanitary, safety and other technicalrequirements adopted by the Russian Government for residentialproperty).1 It can be in the form of a flat, a house, apart of a house, or a room. As for the last form, rudimentaryKommunalka (a communal flat owned and inhabited by two or morefamilies) still exists in Russia. During the last decade, Russiahas seen an apartment boom. What is an apartment? Most of the worldconsider an apartment synonymous to a flat but this is not the casein Russia. Here, an apartment technically means a non-residentialtype of real property which can be used for an overnight or atemporary stay (e.g. in the hotel business), not for living.Initially, such things popped up everywhere as a result of oldindustrial buildings being converted into habitable areas. However,the sanitary requirements for nonresidential property are lowerthan for residential ones, which makes these apartmentsnon-residential. Non-residential status also leads to higherutility bills and property tax. In addition, people can physicallylive in apartments, but they are not allowed to legally reside (tolive permanently) there or use them as resident addresses. Thistriggers one more risk. Under the Russian Civil Procedure Code§446, a court, ruling on remedies to be paid by an individual(e.g. in case of debt recovery, bankruptcy procedures), cannotseize the only residential property of that individual deprivinghim or her of a place to live. So, the only residential propertymay still stay "intact" while the apartment willdefinitely be arrested and sold. Hypothetically, apartments can beconverted into flats if they meet a range of requirements set outfor residential property.2
Limitations on Purchasing and Using Property Protected asCultural Heritage
Residential property can be protected by the federal or regionalgovernments as cultural heritage. Cultural heritage status imposesmany extra requirements or even restrictions upon the sale andpurchase process, upon potential use, restoration and renovationworks such as a ban on changing the room plans or thebuilding's exterior, including its colour.3 One cancheck a piece of property against the federal and a respectiveregional register of cultural heritage. These are the links to theopen federal register (http://mkrf.ru/ais-egrkn/) and the Moscowregister (http://data.mos.ru/opendata/7702155262-obekty-kulturnogo-naslediya-ivyyavlennye-obekty-kulturnogo-naslediya).
Due Diligence: How to Get Information About ResidentialProperty and What to Check
The first step after choosing a piece of property is to checkits legal status and the title transfer history. In this case, youcan start with an open resource – the electronic Register ofTitles to Real Property and the State Cadaster of Real Property(both can be found here). Both databases are interconnected andcontain information on a residential property's address, size,type (a flat, a house, a room), current owners, registeredencumbrances (such as mortgages, leases that are one year andlonger), a cadaster price (used for property tax calculation andother tax purposes). However, this information alone is notenough.
Those resources do not show details on the previous owners, howand when the title was assigned to the current owner, whether he orshe and the previous possessors complied with the legalrequirements of the title transfer (title transfer history), and soon. This information is crucial, and in failing to do his or herbest in checking it, the investor always risks facing a vindictiveclaim from former owners who lost their property because of fraudor other criminal schemes. Also, the register and cadaster namedabove do not contain information about people residing in theproperty in question. The Housing Code grants people officiallyresiding in the property (registered residents of the property) theright to keep living there even if the title to it has beentransferred to a new owner. A new owner cannot deprive residentsfrom their right to live there. The list of the property residentsis usually kept by a local department of the Home Office. There isno open access to the data, only owners, residents of a particularproperty and state agencies can get that information. Nevertheless,a potential seller shall show a fresh extract from the residentlist to disclose how many people have the right to reside in theproperty. In any way, a sale and purchase agreement (SPA) shallexpressly name residents – otherwise it can be challenged bythe buyer in court later. The extract from the resident list shallalso be submitted to Rosreestr, which is a state agency thatregisters all the transfers of the titles to real property.
What can be done if there are people registered in the propertyfor sale? A potential buyer can, for example, insist on a specialprovision in the SPA obliging the seller to terminate the residencystatus of all the residents as soon as the title transfer isregistered by Rosreestr.
The best way to get all the information checked before enteringan SPA or a donation agreement is to consult with a lawyer workingwith real estate.
Agreement Execution and Title Transfer Registration
Nowadays, parties can sign a sale and purchase agreement (SPA)or a donation agreement (DA) by themselves. There is no longer arequirement to do it before a notary public, except for cases whenshares in property are in question. That exception was made toprotect pre-emptive rights of the other shareholders to buy theshare for sale (pre-emptive right only works when shares are beingsold not donated). Before executing a certain SPA, a notary publicshall check with the other property owners and get their refusal tobuy the share (shares) at a given price. As soon as the notary getstheir certified refusals, a notarial deed will be executed.Execution of a notarial deed does not mean the completion of thetitle transfer to a new owner. Title transfer is a separate andmandatory procedure held in Rosreestr which follows the SPA or theDA execution (with or without a notary public).
One should be aware that executing a SPA or DA before a notarypublic is an expensive decision. A notary's fee is calculatedas a progressive percentage of the sales price or the cadasterprice (depending on which one is higher).4 Whileplanning the transaction, it is highly recommended to check with anotary about applicable notarial fees. Notarial costs are normallysplit between parties.
To complete the title transfer, the parties should file anapplication with Rosreestr or with a regional service provider (MyDocuments Service Center) and pay a service fee (around $30). Thelatter works like a qualified post office. They check the submitteddocuments against the required list but do not go deeper, and theydeliver them directly to Rosreestr. It usually takes Rosreestr fromthree to four weeks to register the transfer. No certificates ontitle are issued anymore; the new owner may get only an excerptfrom the register or check the status of the application on theagency's website.
Purchase Price Payment and Compliance with Currency ControlRegulation
Investors should bear in mind that Russia still actively usescurrency control.5 Payments of purchase price for aresidential property located in Russia are also subject to suchcontrol. If the parties of an SPA are Russian currency residents(Russian citizens or foreign citizens permanently residing inRussia) they can use cash (rubles only) for payment. If one of theparties is a non-resident (a foreign citizen or a Russian citizenpermanently residing abroad), the parties can use rubles andforeign currency for payment, but the purchase price can only bepaid by a wire transfer between the two bank accounts. In thiscase, the currency resident can only receive the money in anaccount opened with a Russian bank.
If residents and non-residents fail to comply with currencycontrol regulation, they may be subject to a fine amounting up to75–100% of the illegal transaction.6
Tax on Property
As soon as the title to residential property is transferred to anew owner, a buyer or a donee becomes a payer of individual'sproperty tax. The person gets registered as a taxpayerautomatically on the basis of information submitted to the fiscalauthority (the Federal Tax Service (FTS)) by Rosreestr.Individual's Property Tax is a local tax imposed by a localadministration on an individual's property located within theborders of a particular municipal area. That also means that thetax rate, tax deductions and privileges are set locally and differfrom place to place. However, they shall all be drawn from thebasic principles of the Tax Code of the Russian Federation (Chapter32 "Individual's Property Tax").
According to the Tax Code, the tax period is a calendar year(from January 1 to December 31). Tax shall be paid annually(against the invoice issued by the FTS) before December 1 of theyear succeeding the tax period. While calculating the tax, the FTSshall use cadaster or inventory price of the residential property.Right now, 28 out of 85 regions (federation members) are usingcadaster price (CP) for tax purposes, while the rest of the regionsare still using inventory price. In regions with CP defined, thetax base shall be calculated in the following way:
If a residential property is located in the area where CP isused, the individual property tax rate cannot be higher than 0.1percent. The government plans to switch to the CP of real propertyfor tax calculation purposes throughout the whole country by2020.
If the region still uses inventory price, the tax base iscalculated as inventory price multiplied by a special index set bythe Russian Ministry of Economic Development:
In this case, tax rates shall correlate with the size of aparticular tax base:
The figures above are set in the Tax Code and work like thehighest bar beyond which local authorities are not allowed to go.When checking a particular piece of property at the pre-purchasestage, one should also check upon the rules of individual'sproperty tax calculation in the respective area.
Renting out Residential Property (Requirements and Taxes)
Through investing in residential property, people try to notonly save money but also to earn it. Owners, regardless of theircitizenship and tax status, can rent out their residential propertylocated in Russia. They can do it as individuals or as registeredentrepreneurs. While renting out as individuals, the whole rentalpayment will be deemed as income and subject to income tax. Thesize of the tax rate is directly connected to the individual'stax status in Russia. Russian tax residents are eligible for the 13percent tax rate, while non-residents are subject to the 30 percentrate.
Tax residency in Russia has no connection with citizenship butshall be defined as substantial presence (183 days or more) in thecountry during a calendar year. The tax shall be calculated andpaid to the federal budget annually before July 15 of the yearsucceeding the tax period (a calendar year) during which the incomewas earned. The owner shall also comply with reporting obligationsand file tax returns annually before May 1 of the year succeedingthe reported tax period. To pay less, the owners, including taxnon-residents (business visas or residence permits holders), canregister themselves as entrepreneurs. Business status entitles themto use the Simplified Tax Regime with a tax rate of 6%7or to buy a special patent once a year. Patent prices are set byregional authorities (federation members).
Disposition of Residential Property
No income tax shall be imposed on the former owner when he orshe gifts it for free or donates it to another person. Such a giftor donation can be subject to income tax or a profit tax (thelatter if the donation is given to a legal entity). The donation istotally tax-exempt if a donor and a donee are family members (TaxCode §217(18.1)). In other cases, a donee shall define byhimself or herself the fair market price (a tax base). The tax iscalculated as multiplication of the tax base by 13 or 30 percentdepending on the donee's tax status in Russia.
While deciding to sell residential property, the owner shall inthe first place thoroughly consider the tax consequences. They candiffer depending on several criteria such as: tax residency;possession term; and date of acquisition. So, if the owner is aRussian tax resident, who has already possessed the property forthree years or more and the property itself was acquired beforeJanuary 1, 2016, then the full purchase price will be exempt fromincome tax (Tax Code §217.1). If the property was acquiredafter January 1, 2016, to be fully tax exempt, the owner must havepossessed the residential property for at least five years, exceptfor the cases when the property was inherited or received as a giftfrom family members (when three years of possession are enough).Tax residents can also use tax deductions set forth in the TaxCode. If the owner is a nonresident, no tax privileges (exemptions,deductions, indexes) apply. So, in the two cases (when the selleris a tax resident and owns the property for less than five years orthe seller is a non-resident), the seller shall pay tax from thefull sales price or – if it is lower than cadaster price ofthe property – from 70 percent of the cadaster price. Inregions without cadaster prices for real property, the seller shallpay tax calculated on the basis of the sales price.
Either way, the tax shall be paid before July 15 of the yearsucceeding the tax period (calendar year) during which the purchaseprice for the sold property was received as the date of incomerecognition is defined on cash basis.
The reporting obligations are the same as described in theprevious section, except for the case when the earned income is taxexempt. If there are no tax obligations arising out of propertysale, there are no reporting obligations either.
Conclusion
Investments in residential property in Russia may seemprofitable and reliable – and they can be if an individualinvestor follows the recommended steps, weighs up all the pros andcons, calculates the possible outcome and keeps track of all thechanges in the economics and laws of Russia. To minimise financiallosses and legal risks, investors should coordinate their stepswith wealth planning and tax counsel.
Footnotes
1. The Housing Code of the Russian Federation§15(2).
2. Federal Rules on qualification of real property asresidential property, residential property as not suitable forliving, a flat building as unsafe for living and subject todemolition or reconstruction, adopted by the Federal Government onJanuary 28, 2006, under # 47.
3. Federal Law # 73-FZ on Cultural Heritage (objects ofcultural and historical preservation) of the RussianFederation.
4. §22.1 of Federal Regulation of Notarial Servicesin the Russian federation # 4462-1, dated Fabruary 11,1993.
5. Federal Law #173-FZ on Currency Regulation andControl, dated December 10, 2003.
6. The Code on Administrative Misdemeanours of theRussian Federation §15.25(1).
7. The Tax Code of the Russian Federation, Chapter 26.2"Simplified Tax Regime".
The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circ*mstances.
