Real Estate Transactions in Russia: Overview of Special Regime Established for Transactions Involving Parties Connected with "Unfriendly" States

According to Presidential Decree No. 81 of 1 March 2022 "On Additional Temporary Economic Measures Aimed at Ensuring the Financial Stability of the Russian Federation" (Decree 81), a special procedure was introduced on 2 March 2022 for carrying out transactions that entail the emergence of ownership title to real properties and are entered into/performed by individuals or legal entities¹ connected with "unfriendly states".²

In this overview you will find a description of the practical aspects of the application of Decree 81 to real estate transactions based on clarifications of government authorities and organisations of professional communities that are available on the date of this overview.

1 What are the specifics of carrying out transactions according to Decree 81?

The execution and performance of transactions falling withing the scope of Decree 81 requires a permit from the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation where an ad-hoc subcommittee was set up specifically for these purposes (Commission). Decree 81 does not prohibit one from carrying out such transactions, it only introduces a requirement to receive a special permit.

2 What kinds of transactions fall within the scope of Decree 81?

Decree 81 applies to real estate transactions that concurrently meet all the following conditions:

(a) Parties involved

The parties to the transaction are the following persons:

• a Russian resident and
• a person who:

• is connected with an "unfriendly" state ("Foreign Person"); and/or
• is controlled by a Foreign Person ("Controlled Person"); and/or
• is a foreign person not connected to an "unfriendly" state, but purchased real property from a Foreign Person after 22 February 2022 ("Other Foreign Person").³

That said:

• The term "Russian resident" is used in the meaning assigned thereto by Russian currency laws and, among other things, includes:
• Russian citizens (including those holding the citizenship of another state);
• foreign citizens and stateless persons permanently residing in the Russian Federation based on a residence permit; and
• Russian legal entities.⁴

• The term "connection" is not expressly defined. Decree 81 gives a non-exhaustive list of indications manifesting a connection to an "unfriendly" state, including citizenship, place of registration, place of business and the key profit centre.⁵

In the absence of additional clarifications and any practice of the application of Decree 81, we cannot exclude that the grounds for establishing a connection to an "unfriendly" state may also include, for example, dual citizenship (ie Russian citizenship and citizenship of an "unfriendly" state) and/or a residence permit in an "unfriendly" state.

Earlier Rosreestr (the Russian Registration Authority) published a clarification saying that Rosreestr should not be concerned about dual citizenship of an applicant if this fact does not directly follow from the set of documents submitted for the state registration.⁶ However, in our opinion, such interpretation of Decree 81 is not well-founded. Since the public registration of a title to the real property is not a guarantee of the validity of a underlying transaction, we believe that the fact of there being no questions raised by Rosreestr in the course of such registration will not imply that the relevant transaction was carried out in compliance with the requirements of Decree 81 (for more detail please refer to paragraph (b) of section 4 below).

• To establish the presence of "control" when determining if somebody is a Controlled Person, one relies on signs indicating that a company of strategic importance is under the control of a foreign investor. The list of such signs is established by the laws on foreign investment⁷ and is set out in Annex 1 hereto.
• Persons who concurrently satisfy all of the following conditions shall not be deemed Foreign Persons:

• they are controlled by Russian legal entities or individuals (their ultimate beneficiaries are the Russian Federation, Russian legal entities or individuals); and
• information on control over such persons has been disclosed to the Russian tax authorities.⁸

Please note that if real property is jointly owned by spouses and one of the spouses, who may not be a registered owner of such real property, satisfies the criteria of being a Foreign Person or Other Foreign Person, then the transactions involving such property fall within the scope of Decree 81.

(b) Types of transactions

The transaction must entail the emergence of ownership title to real property (no matter whether real property is purchased or sold by the Foreign Person, Controlled Person or Other Foreign Person).⁹ The list of transactions coming under this criterion is not exhaustive and includes, inter alia, sale and purchase agreements, gift agreements and contributions to the authorised capital of a legal entity.

According to the clarifications of the Central Bank of the Russian Federation, Decree 81 does not apply to transactions if:

• real properties (including those under construction) are located outside the Russian Federation; or
• payments in connection with such transactions are made into accounts/deposits opened by residents with foreign banks and other financial market organisations outside the Russian Federation which have been disclosed by residents to the Russian tax authorities.¹⁰

In addition, the Commission has already issued "general" permits (ie the permits intended for the public at large) to carry out/ transactions of the following types (ie there is no need to obtain a separate permit in relation to such transactions):¹¹

• transactions involving the purchase of real property by an individual who qualifies as a Foreign Person (for example, real property sale and purchase agreements where the Foreign Person (individual) acts as a purchaser);
• transactions involving the sale of real property by an individual who qualifies as a Foreign Person (for example, real property sale and purchase agreements where the Foreign Person (individual) acts as a seller) provided that the sale proceeds are credited to a type "C" bank account.

The procedure for carrying out obligations by means of type "C" bank accounts is set out in Decree 95 and the Central Bank of Russia regulations passed in accordance therewith. The funds arriving in such a bank account may be used for a limited number of purposes as are determined by the type "C" bank account regime established by the Central Bank of Russia.¹² The list of such purposes is set out in Annex 2 hereto;

• shared construction agreements; and
• transactions of the Controlled Person being a Russian resident which entails emergence of ownership title to the apartment buildings and/or other real property built and put into operation in accordance with the requirements of the laws on shared construction. We believe that this rule mainly applies to the sale of finished apartments and non-residential premises by Russian developers controlled by a Foreign Person.

(c) The time of carrying out the transactions

The procedure applies to the transactions that are carried out after 2 March 2022 inclusive. This means that if an agreement was signed before 2 March 2022, but the registration of title takes place after this date, then the agreement falls within the scope of Decree 81.

3 The procedure for obtaining a permit

To obtain a permit, one should submit an application and transactional documents to the Commission, including information on the beneficial owners, subject matter, substance and essential terms of the transaction.¹³ Either party to the transaction may act as an applicant. Documents may be submitted on paper and in an electronic form.

The application form is approved by the Commission and published on the official website of the Russian Ministry of Finance.¹⁴ There is no set time frame for considering the application or the procedure for issuing permits by the Commission.

Based on the results of such consideration, the Commission may issue:¹⁵

• a permit to carry out the transaction;
• a permit to carry out the transaction under a certain condition; and
• a refusal to issue a permit to carry out the transaction; there are no set grounds for such refusal.

4 Consequences of a failure to obtain a permit

(a) Invalidity of the transaction

We believe that transactions carried out in breach of Decree 81 may qualify as being void, since they are conducted in gross violation of the legal requirements and infringe public interests.¹⁶

Should this be the case, the lawsuit to apply the consequences of the invalidity of a transaction may be brought by a party who has a legal interest in the transaction (for example, by the party to the transaction, the Russian Ministry of Finance, prosecutor or another person whose interest is protected by law). The statute of limitations is three years of the commencement day of the performance under the void transaction and, where the lawsuit is brought by a person not being a party to the transaction, of the day when such person learned or should have learned of the commencement of the performance thereunder.¹⁷

Depending on the circumstances, there may be other grounds for invalidating such transactions (for example, as transactions made for a purpose that runs counter to the founding principles of law and morality).

(b) Impossibility to obtain state registration of a title transfer

When carrying out the public registration of real estate transactions, Rosreestr verifies, within the limits of its competence, the legality of such transactions. On discovering a violation of Decree 81 Rosreestr may suspend the registration process and deny public registration if the violation is not cured within the time limits set in the suspension notice.¹⁸

According to the Rosreestr clarifications available to date:¹⁹

• a permit of the Commission must be submitted for public registration as part of the registration set of documents;
• Rosreestr does not require that contracts must contain specific wording concerning the conformity/nonconformity of the parties to the transaction with the Foreign Person criteria; and
• with regard to Russian citizens, Rosreestr relies on the provisions of the Russian laws on citizenship according to which a Russian citizen holding the citizenship of another country is regarded only as a Russian citizen. This means that when registering title under real estate transactions, Rosreestr will treat all Russian citizens (unless they themselves designate otherwise) as not coming under the Foreign Person criteria. However, as mentioned above in paragraph (b) of section 2 hereof, this position of Rosreestr does not exclude the risk of the transactions being invalidated.

5 Practical recommendations

(a) For notarised transactions

According to the clarifications of the Federal Chamber of Notaries:

• before certifying a transaction, notaries need to check whether the country of incorporation/citizenship of the relevant person and of the persons who control the parties to the transaction belongs to "unfriendly" states; and
• where the notary is unable to accurately identify the principal place of business or the key profit centre of a business entity, the notary may include the parties' relevant representations in the text of the transaction or in an information protocol.²⁰

From our practice, we would like to note that, without a permit from the Commission, notaries in Moscow insist on incorporating into contracts the parties' representations assuring that the parties to the transaction do not meet the criteria of Foreign Persons, Controlled Persons and Other Foreign Persons.

(b) For transactions that are made in a simple written form

As mentioned above in paragraph (b) of section 4 hereof, Rosreestr does not set any requirements that contracts must contain specific wording concerning the conformity/nonconformity of the parties to the transaction with the Foreign Person criteria. Nonetheless, we would recommend incorporating respective representations of circumstances in the contracts.

If the transaction falls within the scope of the "general" permit of the Commission (for more details please refer to paragraph (b) of section 2 hereof), we would recommend enclosing a simple copy of this "general" permit to the contracts as an annex or making references to it in the body of the contracts.

See also:

• Annex 1 Annex 1 Signs of a Controlled Person
• Annex 2 Regime of a C type bank account

¹ "Individuals" and/or "legal entities", as applicable, further in this overview are referred to as "persons".
² As of the date of this overview, the "unfriendly" states include Australia, Albania, Andorra, UK (including the Isle of Jersey and controlled overseas territories such as Anguilla, BVO and Gibraltar), all EU Member States, Iceland, Canada, Lichtenstein, Micronesia, Monaco, New Zealand, Norway, South Korea, San Marino, North Macedonia, Singapore, USA, Taiwan (China), Ukraine, Montenegro, Switzerland and Japan (the list is approved by Russia's Government Ordinance No. 430-r of 5 March 2022).
³ Decree 81, paragraphs a)-c) of item 1.
⁴ Rules governing the issuance, by the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation, of permits for the residents to carry out (execute) transactions (deals) with foreign persons in order to implement additional temporary economic measures aimed at ensuring the financial stability of the Russian Federation and amending the Regulations on the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation (were approved by Russia's Government Resolution No. 95 of 6 March2022) ("Permit Issuance Rules"), item 3, and Federal Law No. 173-FZ of 10 December 2003 "On Currency regulation and Currency Control", clause 6 of article 1..
⁵ Decree 81, paragraph а) of item 1.
⁶ Rosreestr information "Rosreestr on the registration of real estate transactions with persons from unfriendly states" of 18 March 2022 (URL: https://rosreestr.gov.ru).
⁷ Permit Issuance Rules, item 3.
⁸ Presidential Decree No. 95 of 5 March 2022 "On the Temporary Procedure for Fulfilling Commitments to Some Foreign Creditors" ("Decree 95"), item 12.
⁹Decree 81, paragraph а) of item 1; Central Bank of Russia Official Clarification No. 2-OR of 18 March 2022 "On the Application of Certain Provisions of Presidential Decree No. 79 of 28 February 2022" ("Clarification 2-OR"), item 1.7.
¹⁰Clarification 2-OR, item 1.11.
¹¹Excerpt No. 05-06-10/ВН-12886 of 21 March 2022 from meeting minutes of the sub-committee of the the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation (minutes No. 12 of 17 March 2022), paragraphs 1-3; Excerpt No. 05-06-10/ВН-14752 of 29 March 2022 from meeting minutes of the sub-committee of the the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation (minutes No. 17 of 24 March 2022), paragraph 1.
¹²Resolution of the Bank of Russia Board of Directors of 18 March 2022 "On the Establishment of a "C" Type Account Regime for the Purpose of Fulfilling Commitments Owed by Residents to Non-residents as Set out in Decree of the President of the Russian Federation No. 95 of 5 March 2022, Entitled On the Temporary Procedure for Fulfilling Commitments to Some Foreign Creditors".
¹³Permit Issuance Rules, items 4-8, 12.
¹⁴Excerpt No. 05-06-10/ВН-12520 of 17 March 2022 from meeting minutes of the sub-committee of the the Governmental Commission on the Monitoring of Foreign Investment in the Russian Federation (minutes No. 9 of 14 March 2022).
¹⁵Permit Issuance Rules, item 13.
¹⁶Russian Civil Code, clause 2 of article 168.
¹⁷Russian Civil Code, clause 1 of article 181.
¹⁸Federal Law No. 218-FZ of 13 July 2015 "On the Public Registration of Real Property", clause 1 of article 26 and clause 1 of article 27.
¹⁹Rosreestr information "Rosreestr on the registration of real estate transactions with persons from unfriendly states" of 16 March 2022 (URL: https://rosreestr.gov.ru); Rosreestr information "Rosreestr on the registration of real estate transactions with persons from unfriendly states" of 18 March 2022 (URL: https://rosreestr.gov.ru).
²⁰Letter of the Federal Chamber of Notaries No. 1176/03-16-3 of 2 March 2022; Letter of the Federal Chamber of Notaries No. 1392/03-16-3 of 15 March 2022.