Russia will introduce inter vivos (living) and post-mortem (testamentary) personal foundations for property management

On 1 July 2021, the President of the Russian Federation signed draft law No. 1172284-7 “On Amendments to Part One and Part Three of the Civil Code of the Russian Federation,” which will permit the establishment of personal foundations for managing property and businesses in Russia. The law will enter into force on 1 March 2022.

Under this law, Russian citizens will have an opportunity to create both living (inter vivos) and post-mortem (testamentary) personal foundations. As a general rule, the regulation of personal foundations will also apply to testamentary foundations. Currently existing foundations that pursue socially relevant causes (charitable, cultural, educational and other similar foundations) will be called “public benefit foundations.” Personal foundations and public benefit foundations will therefore be separate and distinct legal forms of a non-profit unitary organisation.

Why is the Personal Foundation Structure Being Introduced?

According to the explanatory note to the draft law, personal foundations are being introduced in the Russian law solely for the purpose of ringfencing and effectively managing specific property in accordance with the objectives designated by the founder of the foundation who granted his/her property to the foundation.

According to the law’s authors, the emergence of such entity will promote Russia’s investment appeal, as the personal foundation helps preserve the order of business operations and management of property and assets established by its founder even after the founder’s death.

However, the authors of the law also point to positive consequences for the fiscal system if personal foundations are used to repatriate assets to Russia, because a personal foundation is required to be registered in the unified state register. Furthermore, information on such foundation and its founder will be publicly available.

General Provisions on Personal Foundations

A personal foundation will be entitled to engage in entrepreneurial activities in line with the objectives set down in the personal foundation’s charter and if such activities are necessary for the achievement of the foundation’s objectives. For the purpose of carrying on business activities, the personal foundation may establish business companies or be a participant of them.

The property to be transferred to the foundation by its founder will be owned by the personal foundation. The founder of the personal foundation does not have any rights to the property of the foundation created by him/her. Other persons are not permitted to transfer property to the personal foundation on a gratuitous basis.

The value of property transferred to a personal foundation (except for a testamentary foundation) by its founder when establishing a personal foundation may not be less than RUB100 million; the value of such property is determined based on an assessment of its market value.

Management of Personal Foundations

A citizen has the right to determine who will administer his/her assets during his/her lifetime and after his/her death and designate the objectives for which the foundation’s funds will be used, including how and to whom the foundation will make payments.

As the general rule, the contents of the terms and conditions of the management of the personal foundation and the contents of other bylaws are not subject to disclosure and are confidential.

The role of the sole executive body of the personal foundation or of a member of the collective body of the personal foundation may be played by any natural or legal person appointed in accordance with the personal foundation’s charter, except for the personal foundation’s founder. The charter of the personal foundation may also provide for the formation of a supreme collective body, a board of guardians and a supervisory body.

Importantly, the beneficiary of the personal foundation may not act as the sole executive body of the testamentary foundation or as a member of the collective executive body of the testamentary foundation.

Income from the management of the property of a personal foundation may be transferred to the beneficiary.

Beneficiary Status

Beneficiaries of the personal foundation may be any persons other than for-profit legal entities. The beneficiary is not liable for the obligations of the personal foundation and the personal foundation is not liable for the beneficiary’s obligations.

As the general rule, the beneficiary’s rights cannot be passed to other persons. The rights of the personal fund’s beneficiary may not be subject to the enforcement of such beneficiary’s liabilities. Transactions that do not comply with this rule are null and void.

The terms and conditions of managing the personal foundation may also include provisions on the transfer of all or part of the assets of the personal foundation to certain categories of persons from an unspecified group of persons, including upon the occurrence of circumstances that cannot be predicted.

Liability

The law also envisages measures designed to protect the interests of the founder’s creditor by preventing the possibility the founder’s property being unfairly placed out of the creditor’s reach by transferring such property to the personal foundation. Within three years of the establishment of a personal foundation, the founder is vicariously liable for the obligations of such personal foundation in case of the insufficiency of its property, and a personal foundation (other than a testamentary foundation) is vicariously liable with its property for the founder’s obligations. In exceptional cases, however, the period of vicarious liability may be extended by court to five years from the date of the establishment of the foundation.

Significance of and Prospects for the Development of Personal Foundations

The proposed structure of the personal foundation has some features in common with the institution of personal foundations (stichting) known in European law and with trusts under English and American law. However, in its current form, the structure of a living (inter vivos) personal foundation does not offer any significant advantages to the founders or beneficiaries in order for the personal foundation to be regarded as an effective vehicle for administering property. Furthermore, it appears that the provisions on the founder’s vicarious liability and on the disclosure of a significant part of the information relating to the personal foundation will not increase the attractiveness of Russian personal foundations or provide them any competitive advantages as compared to their foreign counterparts.