Countersanctions requirements for real estate transactions

Countersanctions regulations on real estate transactions

A special procedure for performing real estate transactions was introduced by Presidential Decree No. 81 “On additional temporary economic measures to ensure the financial stability of the Russian Federation” dated 01 March 2022.

The special procedure entails obtaining permission from the subcommittee of the Governmental Commission on controlling foreign investments in the RF (the “Governmental Commission” or the “Govcommission”) in regard to transactions (operations) whose execution gives rise to ownership rights to real estate which are carried out by: (1) residents with Unfriendly persons* or (2) residents with foreign persons that are not Unfriendly persons if the subject of the transaction (operation) is real estate acquired after 22 February 2022 by said foreign person from Unfriendly persons.

*Unfriendly persons:

• foreign natural persons and legal entities associated with unfriendly states^[1] (including if such foreign persons have their place of registration, primary place of conducting economic activities or earning profit in such states, or have the citizenship of such states)
• persons that are under the control of foreign natural persons or legal entities associated with unfriendly states regardless of their place of registration or primary place of conducting economic activities (including those located in the RF)

Unfriendly persons do not include:

• persons whose ultimate beneficiaries are the RF or Russian natural persons / legal entities, including if their control is carried out through a foreign legal entity associated with such foreign states but whose information about said control over such entities has been disclosed to the tax authorities of the RF;
• persons under the control of natural persons or legal entities whose personal law is the law of a foreign state that is not committing unfriendly actions provided that such control was established before 01 March 2022
• persons under the control of a foreign state that is not committing unfriendly actions provided that such control was established before 01 March 2022.

Set of documents for submission to the Governmental Commission

The following documents must be submitted to the relevant ministry:

• application in Minfin’s recommended format
• application for a permit to carry out (execute) a transaction (operation) containing information about the purpose, subject, content and essential conditions of the transaction (operation) as well as about the planned validity period of said permit that is addressed to the Government Commission and drawn up in any form. The application must provide a general description of the transaction and its parties, the amount of the transaction (several transactions), the price (the procedure for determining the price), discounts to the market price and the corresponding justification (if any), an indication of third parties related to the transaction or its implementation, and the justification for the need to approve the transaction (positive effects resulting from the transaction’s implementation, negative effects in case of refusal)
• document confirming the state registration of the applicant, e.g., the state registration of a legal entity (a foreign organization that is not a legal entity in accordance with the legislation of the state in which it is established) or that of a natural person as an individual entrepreneur
• applicant’s passport—natural person
• resident’s accounting balance sheets as of the latest reporting period preceding the date of the application’s submission^[2]
• information on the resident’s book value of assets as of the latest reporting period preceding the date of the application’s submission
• written consent from the foreign participant with the main conditions of the transaction (scanned copies)
• a sale and purchase agreement or other agreement aimed at transferring the relevant asset. If the agreement has not been signed by the time the set of documents has been submitted, the set of documents is usually accompanied by a draft agreement agreed upon by the parties which is as close as possible to the version that the parties will be ready to sign
• report on the independent appraisal of the market value of the asset conducted by an appraiser engaged in private practice and included in the list of appraisers (appraisal companies) recommended by the subcommittee of the Governmental Commission^[3]
• expert opinion prepared by an expert or experts from a self-regulating organization of appraisers included in the list recommended by the Governmental Commission^[4]
• letter of guarantee containing the obligation to make a voluntary contribution to the federal budget in an amount not less than 15% of the market value of the acquired asset specified in the independent appraisal
• description of the attached documents

Please note that the additional conditions which must be met to obtain permission to perform transactions (operations) in relation to the Extract from the minutes of the meeting of the subcommittee of the Govcommission dated 7 July 2023 No. 171/5 with the amendments introduced by the Extract from the minutes of the meeting of the subcommittee of the Govcommission dated 26 September 2023 No. 193/4 are applicable only to transactions (operations) with securities and shares, i.e., they are formally inapplicable to transactions (operations) with real estate.

In particular, the formal submission of the appraisal report on the asset being acquired is only necessary for transactions with shares. However, we have encountered in our practice several requests for such appraisal report conducted by the relevant department for other kinds of transactions as well, including real estate transactions. In this regard, we recommend preparing the appraisal report on the subject of the transaction along with the main set of documents in order to successfully complete the approval process for the transaction as well as to minimize time costs.

Furthermore, due to the fact that the assessment report is currently the only basis for calculating the voluntary contribution to the budget, there is no basis for determining the amount of the specified contribution in its formal absence. At the same time, in practice, we know of cases where the payment of the voluntary contribution for real estate transactions was not carried out even with an assessment report attached.

Completing the set of documents

The application and documents may be submitted either on paper or electronically, i.e., an electronic document signed using a digital signature. In practice, we recommend submitting the documents in paper form. Also, documents requested additionally by the relevant department of the ministry in charge of the particular industry can be sent in either paper form or electronically when interacting with them.

The application and the documents are to be submitted in Russian. If original documents attached to the application are drawn up in a foreign language, then it is necessary to submit a duly notarized translation.

The documents must be bound and certified by the applicant’s seal (if any). If the applicant is a natural person, the documents are to be certified by said natural person’s signature.

The application may be submitted by the applicant’s representative who has a notarized power of attorney or another document authorizing said representative to do so.

A description of the attached documents must be sent along with the application.

Timeframe for the adoption of a decision

It is somewhat difficult to assess the criteria and timing of the adoption of a decision on such approval since the regulation is relatively new and there is no established practice yet.

Based on our experience, the consideration and approval of a transaction takes from 4 to 6 months.

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^[1] The list of foreign states and territories committing unfriendly actions against the Russian Federation, Russian legal entities and individuals was approved by the Order of the Government of the Russian Federation dated 5 March 2022 No. 430-r.

^[2] In the absence of the specified balance sheet in the state information resource of accounting (financial) reporting provided for in Article 18 of the Federal Law “On Accounting”. This document is pertinent to real estate transactions.

^[3] The current list of appraisal organizations is posted on the Ministry of Finance’s website at the following link: https://minfin.gov.ru/ru/permission/79-81?id_57=301496-perechen_otsenshchikov_otsenochnykh_organizatsii_rekomendovannykh_dlya_provedeniya_otsenki_rynochnoi_stoimosti_aktivov

^[4] The current list of self-regulatory organizations is available on the website of the Ministry of Finance at the following link: https://minfin.gov.ru/ru/document/?id_4=301783