Creation of private foundations under Russian law
The concept of ‘private foundation’ (“PF”), which is a new form of non-commercial organizations, has quite recently appeared under Russian law[1]. The novelty is intended to create an efficient mechanism for managing and protecting assets of Russian wealthy people. Owners of big Russian businesses no longer need to resort to similar foreign law vehicles.
PF is an unitary non-commercial organization. The purpose of establishing a PF is to ensure management of an individual’s assets both lifelong and after his/her death for the benefit of beneficiaries[2]. An individual (founder) and/or spouses (founders) wishing to create a PF should transfer, on a gratuitous basis, his/her and/or their assets worth at least RUB 100,000,000 in aggregate (as certified by evaluation thereof) to such PF. PF may be created for a fixed or perpetual term.
It is noteworthy that the PF mechanism allows one to keep the founder’s assets secure from creditor claims: generally, each of the founder and PF only bears secondary liability for each other’s obligations during the initial 3-year period of the PF existence, although the period may be extended to 5 years in exceptional cases.
As at August 1, 2024, there were 48 PFs in Russia, out of which 32 PFs were established during this year.
AGP looked into the key issues covered by the most recent amendments to the private foundation legislation, which are effective as of this August[3].
§I General matters
Effective as of August 8, 2024, it is the Federal Tax Service of Russia (“FTS”), not the Ministry of Justice as previously, which is the body authorized to perform registration of PF. It has become possible therefore to submit a PF registration application via a notary public, as it was earlier provided for other legal forms of legal entities whose registration has been within the jurisdiction of FTS. The performance timeline for registration of PF has been reduced to 3 business days at FTS in contrast to 22 business days required earlier for registration by the Ministry of Justice[4].
Now PFs generally are not subject to the Law on non-commercial organizations[5].
Another novelty is limited access to information on PF founders in the Register. Such information can not be accessed now by third parties.
Also, changes have been made to the Law on commercial secret[6], under which the commercial secret regime may apply to the following information relating to PF:
Finally, a new ground for forced liquidation of PF had been introduced, which is ‘engagement by a foundation in activities specified in the legislation on foreign agents”[7]. In such event liquidation is to be performed by a court’s order upon an authorized body’s claim[8].
§ II. Assets of private foundation and distribution thereof upon liquidation
The following changes to the regulations concerning PF assets have been made:
Restated Article 123.20-4 (1) of the RF CC[9]:
“1. A private foundation means an unitary non-commercial organization established for a fixed or perpetual term by an individual or after his/her death by a notary public, which manages assets transferred to it by or inherited from such individual, as well as other assets in accordance with the management terms approved by such individual.”
Comparison of the previous and currently effective versions of Article 123.20-4 (4) of RF CC:
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It should be noted that, generally, a PF is established by one individual. As an exception to this rule, spouses together may establish a PF and transfer their joint assets to it. Now the law more accurately specifies how assets of a PF established by spouses should be distributed upon liquidation of their PF: if the marriage of the spouses has been dissolved by the time of distribution of assets to the founders[10], the PF assets remaining upon its liquidation should be rendered the common shared property owned by the founders in equal shares, unless otherwise provided by their agreement or a court’s order.
§ III. Applicability of foreign law to PF and submission of disputes to arbitration
A new provision has been added to part three of the RF Civil Code, which allows the choice of foreign law to govern relations between PF, its founder, beneficiaries and persons appointed to the PF management bodies, where such relations include a foreign element, for instance, they involve foreign entities or individuals. A governing law clause should be included in the charter of the PF.
Now the law expressly allows the submission of all or some of disputes that may arise between PF, its founder (founders), beneficiaries or members of the PF management bodies to an arbitral tribunal. A relevant arbitration clause should be included in the PF charter (Article 7, part 7.2 of the Arbitration Law[11]).
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We will continue monitoring developments in the private foundation regulations and update you on any essential changes that may have an impact on current or future operations of Russian business owners.
[1] Federal Law of July 1, 2021, No. 287-FZ, “On amendments to parts one and three of the Civil Code of the Russian Federation».
[2] Beneficiaries of PF may be individuals, including the founder (founders), as well as legal entities, other than commercial organizations. No public disclosure of beneficiaries’ details is required.
[3] Federal Law of August 8, 2024, No. 251-FZ, “On amendments to some legislative acts of the Russian Federation and Federal Law of August 8, 2024, No. 237-FZ, “On amendments to part one and Article 1202 of part three of the Civil Code of the Russian Federation”.
[4] Federal Law of August 8, 2001, No. 129-FZ, On state registration of legal entities and individual entrepreneurs”.
[5] Federal Law of January 12, 1996 № 7-FZ “On non-commercial organizations”.
[6] Federal Law of July 29, 2004, No. 98-FZ “On commercial secret”.
[7] Activities of foreign agents are specified in Article 4 of the Federal Law of July 14, 2022, No. 255-FZ, “On control over activities of persons being under foreign influence”.
[8] State control over activities of foreign agents is currently performed by the Ministry of Justice of Russia.
[9] Civil Code of the Russian Federation.
[10] Where it is not possible to identify the beneficiaries or other persons entitled to distribution of assets remaining upon liquidation of the foundation in accordance with the foundation management terms.
[11] Federal Law of December 29, 2015, No. 382-FZ, “On arbitration (arbitration proceedings) in the Russian Federation”.
