A new draft law produced by the Russian Government proposes certain restrictions on transactions with immovable property by a foreign legal entity or a foreign person or a stateless person (“Foreign Persons”) and by a Russian legal entity in which Foreign Persons hold fifty or more percent
Real Estate & Construction
Draft Federal Law Restricts Real Estate
Transactions by Foreigners
A new draft law1 produced by the Russian Government proposes
certain restrictions on transactions with immovable property by a foreign
legal entity or a foreign person or a stateless person (“Foreign
Persons”) and by a Russian legal entity in which Foreign Persons hold
fifty or more percent of the charter capital.
What draft law says
According to the draft law, Foreign Persons and Russian legal entities
in which Foreign Persons hold fifty or more percent of the charter
capital will need to obtain a prior permit from an “authorized” federal
state authority (the “Authority”) for the purchase of, or acquisition of “a
right to use,” any immovable property in Russia.
It is unclear whether a permit will be required for a lease. As a lease
gives a tenant “the right to use” property it should require a permit.
However, under the draft law, encumbrances over real estate do not
require a permit and, as a matter of Russian law, a lease qualifies as an
encumbrance. This inconsistency in the wording of the draft law may
result in numerous problems for the lease market.
The permit will be valid for three years. The draft law gives the Authority
the right not to grant a permit if it considers that ownership of the asset
in question by a Foreign Person threatens national security. The draft
law lacks any criteria (for persons or assets) on the basis of which the
Authority can decide that the transaction will threaten national security,
as its intent is clearly to give the Authority as much discretion as
possible in deciding whether to grant a permit or not. At the same time,
the draft law gives an applicant the chance to contest a refusal to grant
a permit in court, however doing so would pose considerable difficulties.
No permit is required for the purchase of shares (stock) in a Russian
company owning real estate. There are some other exemptions from
the requirement to obtain a permit but they are irrelevant for the vast
majority of real estate transactions or unclear (e.g., “encumbrances
over real property”). According to the draft, the law will apply to relations
arising after the law enters into force.
While the prospects of this draft law are unclear and it has been widely
criticized in the media as anti-liberal and counter-productive, the fact
1 The draft federal law “On the Specifics of Immovable Property Transactions involving
Foreign Persons and Amendments to Federal Law No. 122-FZ of 21 July 1997 ‘On State
Registration of Rights to Immovable Property and Transactions Therewith’.”
2 Legal Alert November 2013
that this draft law was introduced by the Russian Government makes us think that it has real prospects of being considered and adopted (in some form) by the Russian Parliament.
Although this law is currently only a draft, because of the significant changes it would introduce we feel it is worth warning our clients about it now. If a legal entity or an individual covered by the requirements in the draft law is contemplating a real estate transaction in the future it is advisable to factor in this new possible requirement.
This LEGAL ALERT is issued to inform Baker & McKenzie clients and other interested parties of legal developments that may affect or otherwise be of interest to them. The comments above do not constitute legal or other advice and should not be regarded as a substitute for specific advice in individual cases.