One of the most popular and reliable ways to preserve and multiply capitals is investing in residential property. Such investments were widespread in pre-revolution Russia and the practice is now thriving. This article focuses mostly on questions individual 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 of property can be qualified as residential; 3) the limitations on purchasing and using property protected as cultural heritage; 4) due diligence: how to get and check information about residential property; 5) execution of a sale and purchase agreement or donation agreement and state registration of the title transfer; 6) purchase price payment and compliance with currency control regulation; 7) tax on residential property; 8) renting out residential property (requirements and taxes); and 9) disposition of residential property.
Nowadays, Russia has adopted a well-structured and detailed regulation on all the aspects of acquisition, use and disposition of residential property. While the Housing Code of the Russian Federation (Housing Code) defines the characteristics of residential property, another two laws regulate its acquisition and disposition in Russia: the Civil Code of the Russian Federation; and Federal Law # 122-FZ on State Registration of Titles to and Contracts with Real Property, dated July 21, 1997. The latter two laws will be discussed below.
This article will not explore ownership through enveloping (the practice of residential property purchased by individuals through companies) because new Russian laws have made this practice less profitable and unattractive in terms of paperwork. We will also leave uncovered the issues that arise out of living in and the use of condominiums. The latter questions are regulated by the Housing Code and are worthy of a separate article.
This article cannot be used as legal advice or serve as legal opinion. Nonetheless, it may help readers start and/or further their 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 ban on foreigners owning residential property anywhere in the country. However, they are not permitted to own land in state borders or sea port areas, for example. This means that they can buy a house, but not the land beneath it. That also means that the house owners are then dependent on the mood of the landlord.
Residential property may also be bought by a group of individuals. In this case, it will be shared by several owners and each 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 isolated space legally qualified as real property and suitable for permanent living (i.e. it meets sanitary, safety and other technical requirements adopted by the Russian Government for residential property).1 It can be in the form of a flat, a house, a part of a house, or a room. As for the last form, rudimentary Kommunalka (a communal flat owned and inhabited by two or more families) still exists in Russia. During the last decade, Russia has seen an apartment boom. What is an apartment? Most of the world consider an apartment synonymous to a flat but this is not the case in Russia. Here, an apartment technically means a non-residential type of real property which can be used for an overnight or a temporary stay (e.g. in the hotel business), not for living. Initially, such things popped up everywhere as a result of old industrial buildings being converted into habitable areas. However, the sanitary requirements for nonresidential property are lower than for residential ones, which makes these apartments non-residential. Non-residential status also leads to higher utility bills and property tax. In addition, people can physically live in apartments, but they are not allowed to legally reside (to live permanently) there or use them as resident addresses. This triggers 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), cannot seize the only residential property of that individual depriving him or her of a place to live. So, the only residential property may still stay "intact" while the apartment will definitely be arrested and sold. Hypothetically, apartments can be converted into flats if they meet a range of requirements set out for residential property.2
Limitations on Purchasing and Using Property Protected as Cultural Heritage
Residential property can be protected by the federal or regional governments as cultural heritage. Cultural heritage status imposes many extra requirements or even restrictions upon the sale and purchase process, upon potential use, restoration and renovation works such as a ban on changing the room plans or the building's exterior, including its colour.3 One can check a piece of property against the federal and a respective regional register of cultural heritage. These are the links to the open federal register (http://mkrf.ru/ais-egrkn/) and the Moscow register (http://data.mos.ru/opendata/7702155262-obekty-kulturnogo-naslediya-ivyyavlennye-obekty-kulturnogo-naslediya).
Due Diligence: How to Get Information About Residential Property and What to Check
The first step after choosing a piece of property is to check its legal status and the title transfer history. In this case, you can start with an open resource – the electronic Register of Titles to Real Property and the State Cadaster of Real Property (both can be found here). Both databases are interconnected and contain information on a residential property's address, size, type (a flat, a house, a room), current owners, registered encumbrances (such as mortgages, leases that are one year and longer), a cadaster price (used for property tax calculation and other tax purposes). However, this information alone is not enough.
Those resources do not show details on the previous owners, how and when the title was assigned to the current owner, whether he or she and the previous possessors complied with the legal requirements of the title transfer (title transfer history), and so on. This information is crucial, and in failing to do his or her best in checking it, the investor always risks facing a vindictive claim from former owners who lost their property because of fraud or other criminal schemes. Also, the register and cadaster named above do not contain information about people residing in the property in question. The Housing Code grants people officially residing in the property (registered residents of the property) the right to keep living there even if the title to it has been transferred to a new owner. A new owner cannot deprive residents from their right to live there. The list of the property residents is usually kept by a local department of the Home Office. There is no open access to the data, only owners, residents of a particular property and state agencies can get that information. Nevertheless, a potential seller shall show a fresh extract from the resident list to disclose how many people have the right to reside in the property. In any way, a sale and purchase agreement (SPA) shall expressly name residents – otherwise it can be challenged by the buyer in court later. The extract from the resident list shall also be submitted to Rosreestr, which is a state agency that registers all the transfers of the titles to real property.
What can be done if there are people registered in the property for sale? A potential buyer can, for example, insist on a special provision in the SPA obliging the seller to terminate the residency status of all the residents as soon as the title transfer is registered by Rosreestr.
The best way to get all the information checked before entering an SPA or a donation agreement is to consult with a lawyer working with 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 a requirement to do it before a notary public, except for cases when shares in property are in question. That exception was made to protect pre-emptive rights of the other shareholders to buy the share for sale (pre-emptive right only works when shares are being sold not donated). Before executing a certain SPA, a notary public shall check with the other property owners and get their refusal to buy the share (shares) at a given price. As soon as the notary gets their certified refusals, a notarial deed will be executed. Execution of a notarial deed does not mean the completion of the title transfer to a new owner. Title transfer is a separate and mandatory procedure held in Rosreestr which follows the SPA or the DA execution (with or without a notary public).
One should be aware that executing a SPA or DA before a notary public is an expensive decision. A notary's fee is calculated as a progressive percentage of the sales price or the cadaster price (depending on which one is higher).4 While planning the transaction, it is highly recommended to check with a notary about applicable notarial fees. Notarial costs are normally split between parties.
To complete the title transfer, the parties should file an application with Rosreestr or with a regional service provider (My Documents Service Center) and pay a service fee (around $30). The latter works like a qualified post office. They check the submitted documents against the required list but do not go deeper, and they deliver them directly to Rosreestr. It usually takes Rosreestr from three to four weeks to register the transfer. No certificates on title are issued anymore; the new owner may get only an excerpt from the register or check the status of the application on the agency's website.
Purchase Price Payment and Compliance with Currency Control Regulation
Investors should bear in mind that Russia still actively uses currency control.5 Payments of purchase price for a residential property located in Russia are also subject to such control. If the parties of an SPA are Russian currency residents (Russian citizens or foreign citizens permanently residing in Russia) they can use cash (rubles only) for payment. If one of the parties is a non-resident (a foreign citizen or a Russian citizen permanently residing abroad), the parties can use rubles and foreign currency for payment, but the purchase price can only be paid by a wire transfer between the two bank accounts. In this case, the currency resident can only receive the money in an account opened with a Russian bank.
If residents and non-residents fail to comply with currency control regulation, they may be subject to a fine amounting up to 75–100% of the illegal transaction.6
Tax on Property
As soon as the title to residential property is transferred to a new owner, a buyer or a donee becomes a payer of individual's property tax. The person gets registered as a taxpayer automatically on the basis of information submitted to the fiscal authority (the Federal Tax Service (FTS)) by Rosreestr. Individual's Property Tax is a local tax imposed by a local administration on an individual's property located within the borders of a particular municipal area. That also means that the tax rate, tax deductions and privileges are set locally and differ from place to place. However, they shall all be drawn from the basic principles of the Tax Code of the Russian Federation (Chapter 32 "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 the year succeeding the tax period. While calculating the tax, the FTS shall use cadaster or inventory price of the residential property. Right now, 28 out of 85 regions (federation members) are using cadaster price (CP) for tax purposes, while the rest of the regions are still using inventory price. In regions with CP defined, the tax base shall be calculated in the following way:
If a residential property is located in the area where CP is used, the individual property tax rate cannot be higher than 0.1 percent. The government plans to switch to the CP of real property for tax calculation purposes throughout the whole country by 2020.
If the region still uses inventory price, the tax base is calculated as inventory price multiplied by a special index set by the Russian Ministry of Economic Development:
In this case, tax rates shall correlate with the size of a particular tax base:
The figures above are set in the Tax Code and work like the highest bar beyond which local authorities are not allowed to go. When checking a particular piece of property at the pre-purchase stage, one should also check upon the rules of individual's property tax calculation in the respective area.
Renting out Residential Property (Requirements and Taxes)
Through investing in residential property, people try to not only save money but also to earn it. Owners, regardless of their citizenship and tax status, can rent out their residential property located in Russia. They can do it as individuals or as registered entrepreneurs. While renting out as individuals, the whole rental payment will be deemed as income and subject to income tax. The size of the tax rate is directly connected to the individual's tax status in Russia. Russian tax residents are eligible for the 13 percent tax rate, while non-residents are subject to the 30 percent rate.
Tax residency in Russia has no connection with citizenship but shall be defined as substantial presence (183 days or more) in the country during a calendar year. The tax shall be calculated and paid to the federal budget annually before July 15 of the year succeeding the tax period (a calendar year) during which the income was earned. The owner shall also comply with reporting obligations and file tax returns annually before May 1 of the year succeeding the reported tax period. To pay less, the owners, including tax non-residents (business visas or residence permits holders), can register themselves as entrepreneurs. Business status entitles them to use the Simplified Tax Regime with a tax rate of 6%7 or to buy a special patent once a year. Patent prices are set by regional authorities (federation members).
Disposition of Residential Property
No income tax shall be imposed on the former owner when he or she gifts it for free or donates it to another person. Such a gift or donation can be subject to income tax or a profit tax (the latter if the donation is given to a legal entity). The donation is totally tax-exempt if a donor and a donee are family members (Tax Code §217(18.1)). In other cases, a donee shall define by himself or herself the fair market price (a tax base). The tax is calculated as multiplication of the tax base by 13 or 30 percent depending on the donee's tax status in Russia.
While deciding to sell residential property, the owner shall in the first place thoroughly consider the tax consequences. They can differ depending on several criteria such as: tax residency; possession term; and date of acquisition. So, if the owner is a Russian tax resident, who has already possessed the property for three years or more and the property itself was acquired before January 1, 2016, then the full purchase price will be exempt from income tax (Tax Code §217.1). If the property was acquired after January 1, 2016, to be fully tax exempt, the owner must have possessed the residential property for at least five years, except for the cases when the property was inherited or received as a gift from family members (when three years of possession are enough). Tax residents can also use tax deductions set forth in the Tax Code. If the owner is a nonresident, no tax privileges (exemptions, deductions, indexes) apply. So, in the two cases (when the seller is a tax resident and owns the property for less than five years or the seller is a non-resident), the seller shall pay tax from the full sales price or – if it is lower than cadaster price of the property – from 70 percent of the cadaster price. In regions without cadaster prices for real property, the seller shall pay tax calculated on the basis of the sales price.
Either way, the tax shall be paid before July 15 of the year succeeding the tax period (calendar year) during which the purchase price for the sold property was received as the date of income recognition is defined on cash basis.
The reporting obligations are the same as described in the previous section, except for the case when the earned income is tax exempt. If there are no tax obligations arising out of property sale, there are no reporting obligations either.
Investments in residential property in Russia may seem profitable and reliable – and they can be if an individual investor follows the recommended steps, weighs up all the pros and cons, calculates the possible outcome and keeps track of all the changes in the economics and laws of Russia. To minimise financial losses and legal risks, investors should coordinate their steps with wealth planning and tax counsel.
1. The Housing Code of the Russian Federation §15(2).
2. Federal Rules on qualification of real property as residential property, residential property as not suitable for living, a flat building as unsafe for living and subject to demolition or reconstruction, adopted by the Federal Government on January 28, 2006, under # 47.
3. Federal Law # 73-FZ on Cultural Heritage (objects of cultural and historical preservation) of the Russian Federation.
4. §22.1 of Federal Regulation of Notarial Services in the Russian federation # 4462-1, dated Fabruary 11, 1993.
5. Federal Law #173-FZ on Currency Regulation and Control, dated December 10, 2003.
6. The Code on Administrative Misdemeanours of the Russian 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 general guide to the subject matter. Specialist advice should be sought about your specific circumstances.