Structuring the investmenti Acquisition structures
There are two main structures for the acquisition of real property: asset purchase (acquisition of real property directly from its owner) or share purchase (acquisition of a holding company that owns relevant real property).Asset purchase
Where a deal is structured as an asset transfer, the target's liabilities, including tax liabilities and penalties, should not (subject to careful structuring) transfer to the purchaser.
An asset purchase is not, however, a perfect solution for the following reasons:
- there remains a risk that the Russian tax authorities could recharacterise the asset transfer as a 'sale of an enterprise' under which historic liabilities would be treated as transferring to the purchaser; and
- the authorities may attempt to establish that an asset transfer constitutes a fraud against creditors if it is proved that it was designed to evade historic liabilities.
In addition to these risks described, the key disadvantages of a sale of assets are as follows:
- administratively, they are more cumbersome than an acquisition of shares;
- the acquisition may require obtaining new licences and permits, novation or assignment of contracts; and
- the acquisition may lead to Russian VAT being payable.
A typical sale and purchase transaction is a two-stage process involving the execution of a sale and purchase agreement and registration of the transfer of title in the Unified State Register of Real Estate. The sale and purchase agreement must be a single written document.
The handover of the property is effected by completing a document that formally conveys the property from the seller to the buyer (an act of transfer and acceptance).
As a general rule, if a building or other immovable facility and the underlying land are owned by the same person, a sale of the building without the underlying land (and vice versa) is not allowed. If the land is owned by someone other than the owner of the building, the building can still be sold, and the new owner will enjoy the same rights to use the respective part of the land plot underlying the building as the previous owner of the building.Share purchase
Share purchases are still a very popular way to acquire real property in Russia. The major risk of a share acquisition is, of course, that a buyer will also assume all of the target's existing liabilities (subject to any contractual apportionment and post-acquisition risk mitigation strategies). This means that thorough due diligence of the historic activities of the target are crucial.
There are, nevertheless, numerous advantages in a share purchase structure, chief among which are avoiding the need to reapply for licences and permits, a less complex and burdensome acquisition process, no Russian VAT and the avoidance of business interruption.ii Acquisition vehicle
If the target company does not have a dedicated offshore holding company, it may be advisable to set up a holding company to make the acquisition or, in the case of an asset transfer, to create an offshore holding company with a wholly owned Russian subsidiary (the latter being the recipient of the transferred assets). The choice of jurisdiction will largely be driven by tax issues and corporate considerations.iii Tax implications of acquiring an interest in property
Generally, commercial property transactions are subject to VAT (the standard VAT rate was increased from 18 to 20 per cent effective from 1 January 2019). Currently, the sale of land and residential property transactions are not subject to VAT.
The sale of shares of a company by its foreign parent entity is subject to withholding tax in Russia if the assets of this company directly or indirectly consist of more than 50 per cent of real estate located in Russia and of derivative financial instruments from these shares, with the exception of shares in circulation.
Subject to the following restrictions, real property can be purchased or leased by foreign individuals and companies for their own use or as an investment:
- foreign individuals and entities are not allowed to own land in areas adjoining the borders of Russia or land located within the boundaries of a seaport; and
- foreign individuals and entities, as well as Russian entities with over 50 per cent foreign participation, may not own agricultural land (which is a specific category of land under Russian law).
There are no specific restrictions that apply to the lease of land, or the ownership or lease of buildings and facilities by foreign nationals.