By: Ivo van Rhijn
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Real estate in Russia; a seller’s perspective
The question I want to address in this post is: what are the main things one should take into account when selling real estate in Russia as a natural person?
Both fiscal residents and fiscal non-residents of Russia are taxed when they sell their Russian real estate, but at different rates and different rules apply to them.
A fiscal resident of Russia has to pay personal income tax: 13%.
But, when a fiscal resident has held ownership of an object for a certain priority of time, he does not need to pay Personal Income Tax on the sale of the real estate object. Until January 1st, 2016 this period was 3 years, now it has been extended to 5 (art. 217.1 par. 4 of the Russian Tax Code).
There are however a few exceptions to this ‘5-year rule’:
- If one acquired the apartment by way of inheritance, this period is still 3 years.
- If ownership was acquired as a gift from a close family member, the period is also 3 years.
- If ownership was acquired by way of privatization the minimal period of ownership is also 3 years.
- If ownership was transferred to the owner on the basis of a contract on the support of the livelihood of the former owner, this period is also 3 years.
This period of ownership should be calculated from the moment ownership was entered into the official register by Rosreestr, not from the moment the contract to buy the apartment was concluded. Here there are also a few exceptions however:
- If the object is acquired by way of inheritance, one should count from the day the testator passed away.
- If you’re dealing with a housing cooperation: from the moment the member of the cooperation has fully paid his contribution and acts of acceptance have been signed.
Two methods available for fiscal residents
If you are a fiscal resident of Russia you can choose between several ways that you can be taxed:
- Reduction of your tax base. When selling an apartment, fiscal residents have a right to reduce their tax base with their yields, but to a maximum of 1 million rubles (art. 220, par. 2, sub 1 Russian Tax Code). So, if for example they sell an apartment for 3 million rubles and apply this method they will have to pay 260 thousand rubles Personal Income Tax (3 million, minus 1 million= 2 million x 13%.
- Yields minus Costs. According to this method, the yield from the sale of the apartment is subtracted with the price paid for it, when it was acquired ( this, of course, has to be documented). For example, an apartment is sold for 3 million rubles and was bought for 2,5 million. Consequently, the tax base is 3 million, minus 2,5 million= 500 thousand rubles, times 13%, that makes 65 thousand rubles. So, almost 200 thousand rubles less, even though the apartment was sold for the exact same price as in the above example.
If you are a fiscal non-resident of Russia, however, all of the above does not apply to you. You will have to pay 30% Personal Income Tax on the yield of the apartment. So, if we take the same example of an apartment being sold for 3 million rubles, as a fiscal non-resident you will have to pay 900 thousand Rubles Personal Income Tax! The above-mentioned ways to diminish one’s tax, or even entirely reduce it to zero, do not apply to fiscal non-residents.
Who is a fiscal resident of the Russian Federation?
According to art. 207 par. 2 of the Russian Tax Code a fiscal resident of Russia is ‘a natural person, who within the last 12 months has spent 183 days or more in Russia”. So, which citizenship a person has is of no importance here. What matters is actual presence.
The 12 month period referred to in this article does not have to coincide with the start of the calendar year, it can start to run at any time in principle. But for real estate deals, you have to be a fiscal resident within the period of one calendar year, in order to be able to use the above mentioned lower rate and possible benefits.
Besides the 183 days requirement, one’s stay in Russia, of course, also has to be lawful. One can not become a fiscal resident of the Russian Federation by overstaying one’s visa.
Is there no way out of paying this 30%?
Not if you are not a fiscal resident. But maybe you have the possibility to stay in Russia for half a year during a calendar year and become one.
Beside that, on the basis of art. 217, par. 18.1 part 2 of the Russian Tax Code gifts between close family members (spouses, kids (also adopted ones)) are not taxed. So, if you have a close family member who is a fiscal resident of Russia you can give him your real estate tax-free. He can then either sell it right away and pay 13% (after using the deduction method), or hold ownership for 5 years and sell it free of tax.
There might be other legal ways to avoid this tax that I am not yet aware of though. If you know them, please leave a comment.
As I mentioned in my article about the second hand real estate market it used to be common practice to indicate a lower price in the sales contract, although this has always been illegal.
The fiscal authorities are fighting this phenomenon. According to new legislation, if a real estate estate object is sold for less than 70% of its cadastral value, the fiscal authorities will ‘correct’ the price in the contract up till 70% of the cadastral value. Besides that, they will probably impose a fine on you of about 20% of the difference between 70% of the cadastral value and the price according to the contract. Unfortunately corrections are only made upwards, if you indicate a price higher than the cadastral value in the contract, you can not lower your tax base by making an appeal to the cadastral value.
Ivo van Rhijn is a lawyer and a slavist. He specializes in consulting foreign individuals and companies in matters related to Russian law, in a broad sense.