The State Duma in the second reading approved tax breaks for personal funds

The State Duma in the second reading approved the government bill with multiple amendments to the Tax Code. The most sensational of them is about personal income tax for Russians working from abroad for Russian companies. The draft law also contains rules on the adjustment of a new mechanism for a single tax account and on the expansion of the practice of pre-trial appeal against decisions of tax authorities. By the second reading, the document was supplemented with amendments on the taxation of personal funds – we are talking about eliminating tax consequences when transferring property to such funds and vice versa, as well as reducing the income tax rate for them from 20% to 15%.

The bill with numerous amendments to the Tax Code was approved by deputies on Thursday in the second reading. His most discussed innovation was a 13% personal income tax (or 15% on income over 5 million rubles a year) for citizens working from abroad for Russian companies, both in the state and on freelance. Tax will be withheld from their income even after they lose their tax residency in the Russian Federation (see “Kommersant” dated May 18). Other norms of the first reading include the expansion of the practice of pre-trial appeals to property claims, as well as the introduction of a more flexible approach to interim measures and the adjustment of the single tax account mechanism (see “Kommersant” dated May 31).

By the second reading, the bill was replenished with almost 150 amendments – and a whole block is devoted to the taxation of personal funds. The possibility of their establishment in Russia has appeared since March 2022 – citizens can create such funds for property management (worth from 100 million rubles) by analogy with foreign trusts. Personal funds can be registered in special administrative regions, including in the case of “moving” from a foreign jurisdiction – but with assets of more than 5 billion rubles. So far, due to unattractive tax conditions, this mechanism remains unclaimed – taxation of profits from personal funds is carried out in a general manner (at a rate of 20%), while beneficiaries must pay personal income tax on property transferred to them by a personal fund.

The approved amendments describe that the transfer of property to a personal fund or vice versa will not entail tax consequences – in terms of personal income tax, VAT and income tax.

Income received from the fund by the beneficiaries, determined by the founder, during the distribution of assets after his death, will not be subject to personal income tax. During the life of the founder, only income received by him or his close relatives (spouses, parents, children, brothers and sisters, grandparents, as well as grandchildren) will be exempt from tax if they are tax residents of the Russian Federation.

The fund itself, which can earn on property management, will pay a reduced income tax – 15% instead of 20%. Deputy Finance Minister Alexei Sazanov explained the choice of such a rate by the fact that a personal fund is considered “as a kind of continuation of an individual” – and the amount of payment is equal to the current maximum personal income tax rate. At the same time, the rate of 15% is applicable only if 90% of the fund’s income is passive (from dividends, interest, sale of securities, rental of real estate).

“The lack of regulation of the taxation of personal funds is one of the reasons why they have not yet become widespread in practice,” says Andrey Chugunov, a tax lawyer at MEF Legal. Now, according to the Unified State Register of Legal Entities, only a few such funds are registered. As Sergey Nazarkin, managing partner of NSV Consulting Limited, adds, structuring through a personal fund is significantly inferior to donating assets to a close relative and such popular forms as foreign trusts and private foundations. Dmitry Kletochkin, a partner at the law firm Rustam Kurmaev & Partners, believes that the amendments largely remove taxation problems – a personal fund, in fact, is a “pocket” of an individual or family, and “it would be strange to tax money every time an individual transfers it from pocket to pocket.”

According to Sergei Nazarkin, the amendments may contribute to the introduction of personal funds into Russian practice, but they do not solve all problems: for example, exempting only close relatives – residents from personal income tax when distributing property during the life of the founder of the fund may reduce the attractiveness of this instrument. For example, if the beneficiary is studying abroad. In his opinion, the interest in Russian personal funds will be determined not by the effectiveness of the instrument as such, but by the political situation and sanctions that have deprived Russian citizens of the opportunity to use and create foreign structures for inheritance planning.

Evgenia Kryuchkova