BALAYAN GROUP in RBC Pro (RosBiznesConsulting): 3 serious threats to business that a personal fund protects against

In an exclusive article for one of Russia's leading business publications, RBC Pro, Irina Avetisyan, counselor of BALAYAN GROUP, explained why a personal fund is becoming the main tool for entrepreneurs in the face of growing risks.

A relatively new legal instrument - the personal fund - is attracting more and more attention. It works according to the principle “everything that is not expressly prohibited is allowed” and offers a solution not only to the obvious tasks of asset management, but also helps to eliminate serious risks for business. 

1. The risk that heirs will lose the business

Many Russian entrepreneurs still underestimate the complexities associated with inheriting a business. It is commonly believed that it is enough to make a will and the business will automatically pass to the heirs “as is”. In practice, this is not the case. If we are talking, for example, about a share in an LLC, its receipt by the heir may be impossible without the consent of other shareholders or in principle due to the presence in the charter of the LLC of a prohibition on the transfer of the share to the heirs. Such a condition is often stipulated in the articles of association with a plurality of participants, including investment funds, strategic companies or other professional players. These participants are not interested in having in their membership people who do not understand business and with whom in the future will have to be reckoned with when making decisions (for example, in the case of attracting investments and the admission of third parties to the membership). But it is rarely paid attention to by in-house lawyers and business owners themselves.

As a result, if the share of a deceased participant cannot be transferred to the heir or is prevented by other participants, it is transferred to the company itself, and the heir is paid its actual value or given property in kind corresponding to such value. Such “compensation” to heirs, as a rule, does not reflect the real market value of the deceased's share in the business. As a result, the heirs lose not only the value of the share, but also future income from the business.

Creating a personal foundation allows assets to be transferred in advance in a customized scenario and ensures that control and heirship remain outside of corporate charters. Assets transferred to a personal foundation remain in the ownership of the foundation even after the death of the founder. The foundation founder's heirs, acting as beneficiaries, benefit from the operation of the business transferred to the personal foundation in advance.

At the same time, they do not have to personally bear the debt obligations. All debt-related risks remain at the level of the personal foundation, which makes this structure particularly attractive for inheritance management. By comparison, in a classical inheritance, not only the assets but also the debts of the deceased are transferred to the heirs. The founder of the personal foundation can also restrict access to the assets - for example, when children can only acquire rights to them after reaching a certain age or under other conditions.

2. Increasing tax burden

From 2025, changes to the tax system in Russia will come into force, among them an increase in rates. In this situation, a personal fund becomes a convenient tax planning tool.

Key tax advantages of a personal foundation:

Reduction of the income tax rate: the tax rate is 15% rather than 25%, provided that at least 90% of the foundation's income is passive (dividends, income received as a result of the distribution of profit or property of organizations, income from the lease/sale of immovable property, interest income from debt obligations of any kind, etc.);
Exemption of the beneficiary from personal income tax: during the lifetime of the founder of the foundation - if the founder of the foundation or his close relative is the beneficiary and at the same time a tax resident of the Russian Federation, then his income
Here is an example. Dmitry receives dividends, which are generally subject to personal income tax at the rate of 13-15%. He can establish a personal fund, contribute his share in the LLC as an asset and, having appointed himself as a beneficiary, receive dividends without paying personal income tax. Members of Dmitry's family can do the same. At the same time, while Dmitry is alive, both he and his close relatives must be tax residents of the Russian Federation. After Dmitry's death, when receiving income from the fund from personal income tax, non-residents are also exempt from personal income tax.

An important point: let's assume that the founder of a personal foundation owned the house for one year, after which he transferred it to a personal foundation, which owned it for another three years. After that, the founder took the house from the foundation (received it as a beneficiary from the foundation) and sold it a year later. For tax planning purposes, the founder will be deemed to have owned the house for 5 years, meaning the term is not interrupted.

3. Sanctions risks

After the EU and the US imposed sanctions against Russia, many entrepreneurs transferred their business here to trusted parties. This approach is high-risk for two reasons. First, setting up a company on a nominal person is punishable by a fine of up to 500,000 rubles or imprisonment for up to five years. Secondly, the trusted person can take away the business, and it will be almost impossible for the real owner to assert his rights. The best way out: transfer the assets to a personal fund. In this way, the founder will ensure the confidentiality of data about both himself and the beneficiaries. This will eliminate sanctions risks in “unfriendly countries”. The founder of a personal foundation may also prohibit changes to the documents of the personal foundation, which will further protect its assets. This is particularly relevant in the context of challenging foreign sanctions, as it confirms the actual loss of control over the assets. In addition, the founder of the foundation will retain control over the assets and their fate. He or his beneficiaries will be able to join collegial bodies to control the activities of the fund manager.

A personal foundation is a flexible asset management mechanism that addresses a wide range of objectives, from protecting heirs and tax planning to ensuring privacy and countering external threats. Entrepreneurs who try out this mechanism first - now, when it is just gaining popularity - will have a strategic advantage.

Source: RBC PRO