Tax structuring is usually the number one reason for creating closed-end PIFs (most often, real estate PIFs).
Indeed, as long as the property is in the fund, income from operations with it is not subject to income tax or any other similar tax. However, as soon as the funds are withdrawn from the PIF (payment of income to the shareholders), this tax saving is not possible.
Therefore, it is advisable to create a PIF when it is clear where the income “within the fund” will be reinvested. Only aspects of different taxation regimes can be discussed, depending on who is the holder of shares (resident / non-resident, taxation regime, etc.).
In PIFs there are two levels of taxation. The first is the income of the PIF itself and they are completely exempted from taxes. The second level is the taxation of the shareholder, in these cases the tax rates will depend on the shareholder´s country of residence (from tax benefits to full exemption).
CRS and info exchange
Russia takes part in CRS reporting, however, information exchange on PIFs does not occur due to the peculiarities of the legislation of the Russian Federation.
Shareholder registries are closed and therefore not disclosed to the public.
When opening bank accounts, the trustee has to be indicated.
Solutions for Your Private Fund
Turning your family office into a multifamily office.
One Family Office wants to present its investment projects to other investors, such as friends and family.
The solution: Private fund
The advantages of this solution:
The structure of the fund allows you to extend the investment project to family members and external investors, and also to appoint transparent remuneration using a portfolio manager.
Liquidity and heritance planning
A large family business is for sale and the head of the family wishes to manage the liquid family assets on a consolidated basis. It is also necessary to emphasize beneficial ownership of the assets for individual family members of different generations as part of a comprehensive framework for succession planning.
The solution: private fund
Advantages of this solution:
The family assets remain in one fund, which distributes beneficial ownership in the form of fund shares or units among individual family members. An external portfolio manager or designated family members can manage assets according to the previously agreed parameters.
Turning a private investment company into a private fund
The investor uses a simple offshore investment company to manage his account, which leads to a complete dependence on the broker in assessing the portfolio, it brings liquidity and control problems, and lack of transparency when it comes to commissions.
Solution: private fund
Advantages of this solution:
Strengthening management through a professional investment structure with greater substance, independent evaluation and reporting, well-defined liquidity indicators and increased transparency.
An investment club wants to take a more professional approach
A group of friends wants to invest together. In order to avoid potential conflicts, they wish to establish clear rules and responsibilities within the investment structure.
The solution: private fund
The advantage of this solution:
The friends determine the investment strategy and risk profile of the fund together, and share investment responsibility with one member of the group. As shareholders and possibly directors of the fund, they can control the investment manager.
Closed-end funds in Russia, a solution for wealthy families and estate planning
Let us briefly recall what a closed end mutual investment fund is. Share investment fund (mutual fund, is a separate property complex consisting of (1) property transferred to the Fund by its Shareholders and (2) property received in the process of managing the Fund. A mutual fund is not a legal entity. Its structure is based on the following legal institutions.
The property of the Fund, including all generated incomes, de jure belongs to its Shareholders on the basis of the right of common shared ownership. The share of each of the Shareholders is certified by the Fund's security, which is an investment share.
By transferring property to the Fund, the Shareholder receives shares, and the size of its share in the Fund is determined by the number of shares owned by him (if the Fund has one Shareholder, then he or she owns 100% of the shares).
Investment units are traded in the market and are issued in non-document form. The rights over them are taken into account by the Registrar of the Fund. The property of the Fund owned by the Shareholders is managed by a specialized organization.
Moreover, the assets of the Fund are isolated as (a) from the personal property of the Shareholders, and (b) from the personal property of the manager companies. In this case the assets of the Fund are recorded on a separate balance sheet, cash and securities are kept in separate trust accounts.
The functioning of a specific closed-end investment unit is regulated by a special document.
The rules for
the Fund management, which are the equivalent of a charter, are subject to
registration by the Russian financial regulator.
The rules of the fund establish the terms of the fund management, including investment declaration, rights and obligations of the management company and the Shareholders, and regulate various procedures such as issue of shares, meeting of shareholders, information disclosure, etc.
The fund´s property, depending on its category, may contain the following types of valuable assets:
· Securities issued in Russian and outside of Russia;
· Shares in the authorized capital of Russian LLCs and foreign companies;
Real estate and real estate rights in Russia and abroad
(land; residential and
Commercial buildings, structures, premises; rental rights to real estate; rights to
obtaining real estate following the results of construction or reconstruction;
· Artistic values (paintings and drawings; sculptures and artistic compositions/ products; objects of worship, icons; philatelic, numismatic and book rarities; photo, background, film, video archives; unique musical instruments);
· Precious metals;
· Loans and credits issued;
· Money (rubles and currency, on accounts and in deposits / deposits).
Thus, the establishment of a Closed-End Investment Fund as a Family Fund in its most general form involves the establishment of one or a series of closed-end mutual investment funds (depending on the volume and type of the structured assets). The rights to these assets are determined by the investment shares, which are issued to the founder or founders of the Fund.
Let us explain in more detail how the Russian closed-end mutual investment fund provides solutions for wealthy families. Contact us to know more.
Consolidation and capitalization
When a family has a variety of properties, in different regions, with different values, etc., these properties may be organized under a single structure: the fund. The assets will be legally separated from the founders (shareholders) and from the fund manager.
Ownership of the state in the form of assets transferred to the Fund is represented by the shares. This closed-end mutual investment fund forms a structure aimed at improving the returns of a family´s capital, increasing its value due to income as well as preferential tax treatment. The profits are distributed among the Fund Shareholders in proportion to the number of shares they own.
Supervise your property
The presence of a fund management means that the property of the beneficiaries is under good custody. The management company is legally obliged to manage the assets in a continuous, reasonable and conscientious way, and solely in the best interest of the shareholders and founders.
This is especially important between the opening and the acceptance of the inheritance. Notary property management is formal and does not imply housekeeping. A Family Fund allows you to carefully control and supervise the family assets.
Being a licensed structure, it´s important to note that the management company is responsible for the proper management and administration of the Fund, and it´s responsible under civil law before the Shareholders.
The family is in control
The strongest point of the Russian fund is that the beneficiaries are in control. This control can be exercised through several different tools:
· General meeting of the fund´s shareholders. Coordination
of key conditions for managing the Fund and the ability to shift management to
· The Investment Committee also consists of Shareholders. This tool provides direct control over the assets since its function is to coordinate the transactions. The investment committee can be created only in funds for qualified investors, which, in our opinion is an advantage, rather than a disadvantage, for the HNWI.
· A Fund Investment Advisor is an affordable and interesting tool that can be introduced into the structure of any fund, for the purpose of direct control of the Fund’s affairs on behalf of any family member. Separation of ownership and management functions in closed-end mutual investment funds is convenient for cases when the position of the head of the family requires a formal “removal” from the property, but need to maintain asset management. In this case, if properly structured, the heads of the family can control the fund´s assets, despite the fact that the assets belong to all the members of the family.
Thus, the use of closed-end mutual investment funds as a family, provides a flexible system for both direct management and control, keeping the assets safe.
Protection from third parties
The assets remain safe under the fund for the following reasons: Accounting for rights of the shares; separation of beneficial ownership (shareholders) and the controlled function of the asset manager (management company), requirement for a license to manage the Fund; setting limits on access to information about the closed-end mutual investment fund and its shareholders, as well as the prohibition of foreclosure on property of the Fund for the debts of its Shareholders and, also, the management company.
The structure of
the closed-end mutual investment fund is such that seizure of the Fund’s assets
is extremely difficult. In addition, the closed-end mutual investment
fund is not subject to bankruptcy. It is possible to transfer the rights to the Fund’s property, to the
creditors through bankrupt procedures.
Accordingly, there are small chances that the assets protected under the fund can be seized by dishonest creditors.
Distribution of property between family members
Since the closed-end mutual investment fund is primarily an investment tool, the legislation does not contemplate direct instruments for setting the testator’s will. However, the distribution of marital status can still be set up in the context of a closed-end mutual investment fund.
When using a closed-end mutual investment fund as a family fund, the property of each member is defined by the number of shares they have. Accordingly, the distribution of family property is very clear and is determined by the number of shares distributed to and among each family member.
Such distribution may be made as (a) on the basis of inheritance institutions (for example, wills indicating the number of shares inherited by each member of the family), and (b) by transferring shares to family members during the testator´s lifetime on the basis of various agreements (by donation; in the form of a marriage contract, etc.).
Regarding the distribution of the current income of the Family Fund to the needs of family members, it should be noted that is not possible to introduce direct payments to non-unit holders. However, this can be solved by setting a structure of family accounts to which the profits are transferred.
However, if the head of the family transferred fund´s shares to any family member, then the fund´s profits can be sent directly to this member. Thus, the profits are easily distributed and the head of the family is still in control of the fund´s assets.
Simplification of inheritance process
The value of the assets of the Fund is expressed in the value of its shares. These shares certify the rights of each owner in relation to the fund´s property. Accordingly, there are some interesting options for inheritance implementation:
· Firstly, if the transfer of rights to certain types of valuable property (for example, real estate, shares in authorized capital) requires registration procedures, for transferring fund´ shares it is enough with transferring entries in the register of shareholders. The right to participate in the assets of the fund should also be transferred. If some of the assets are located abroad, the fund also provides solutions, as the transfer can be made through the transferring of shares. This will work as long as the foreign property is owned by the fund. This helps to simplify the process for the inheritance of foreign located assets.
· Secondly, with the transfer of rights to shares to family members, they become owners not of a specific asset, but of a share of the whole family capital.
Liquidation of the Fund before the previously set
termination date is possible. However, this requires the unanimous consent of
shareholders, and the early exit of individual shareholders is limited.
This specificity of a closed mutual investment fund helps minimize family conflicts about rights to specific property and reduces the risks of litigation related to the family assets. Thus, the whole inheritance process becomes simple, straightforward, and hassle-free.
Moreover, it is possible to create a fund for each of the potential heirs, with clearly defined assets.
Tax structuring and planning
One of the closed-end mutual investment fund best possibilities is tax optimization, which leads to higher profit.
Since the task of the Family Fund is the long-term capitalization of the family capital, this tool allows you to significantly increase the efficiency of investment components in the long term.
that are not transferred to shareholders as interim payments, and are
capitalized in the Fund and not subject to tax
due to the absence of tax payments to the budget, it is formed essentially additional profitability.
Thus, the closed-end mutual investment fund offers legitimate and legal tax optimization possibilities, protecting the family assets from tax erosion.
Protection against dissipation
The misuse of family property is one of the most painful topics in inheritance. The closed-end mutual investment fund is structured in such a way that the heir, becoming the beneficiary of the Fund, acquires the condition with protective mechanisms against waste.
· The fund is created for a certain period of time, this means you can transfer assets or shares when your children become adults.
· Early exit from the Fund is possible in exceptional cases, a minority share and only in cash. In such a case, this person will not be able to benefit from any part of the family´s property, unless all the shareholders and the management company authorize him.
· If the Fund has several successor-shareholders, the fate of the Fund is decided jointly by them (at the Meeting of shareholders), which excludes the separatism of individual heirs.
· The family control tools also continue to operate in The Fund, for example, an investment adviser may be appointed. This person can be a member of the family or a third party.
An heir-shareholder can leave the Fund by selling shares.
However, it´s worth noticing that under the conditions for a fund with
experienced investors, it is possible to fix the mandatory consent of the
management company for the sale of shares to persons not being shareholders (i.e. de
facto consent to sale shares to non-family members).
Thus, property that is part of the Family Fund is more protected from dilapidation, since the assets are not in direct possession of the heirs.
Protect your information
One of the best advantages of a closed end mutual fund is confidentiality
· Firstly, information about the shareholders is non-public
information and it´s stored in the register of shareholders, which is
maintained by a trusted registrar. Moreover, it is possible to establish a
multi-level nominal structure.
· Secondly, information about the owners of the fund´s
property in public state registers are indicated in an anonymous way, without
the names being published.
As we mentioned before, the information of the ultimate beneficiaries, including shareholders and holders of bearer shares, are not stated in any public records.
· Thirdly, if the Fund was created in the “only for
qualified investors” mode, then the management company may not disclose
information about the Fund to other private individuals, except to holders of investment shares.
Thus, the creation of the Family Fund in the form of a closed-end mutual investment fund allows establishing acceptable levels of confidentiality on family property and beneficiaries of the Fund.
Wat can we use this for and what can we do to help you?
Everything that we have discussed in this section, in our opinion, shows that there are quite real prospects for creating family funds in the Russian Federation, as alternative offer to foreign structuring of family capital. The idea of creating Family Funds on the basis of a closed-end mutual investment fund will be useful for the following candidates:
Management companies whose activity is to develop
business opportunities and manage funds. From our side, we are ready to provide
business support to interested managers.
not only intellectually, but also in the form of a reliable and professional special depository service. The process of creating the Fund for the Client can be accelerated. Ready-made real estate and private equity funds are in our product line.
Private Bankers and Family Offices, for whom the
expansion of the line of instruments is one of the key competitive advantages.
For these cases, we are ready to offer creation and maintenance.
Wealthy individuals, for whom the creation of the Family
Fund is one of the tools
for effective estate management, and who can benefit from the advantages of a Russian fund like described above.
For the purposes of structuring and investing family
capital, we present
a line of consulting and a full cycle of infrastructure services, including Private Label Funds, for the creation and maintenance of Family Funds based on a closed-end mutual investment fund.
· To senior politicians, especially those in need of Russian financial and investment tools for managing family and personal property. We provide services for asset structuring with a confidential scheme for the benefit of designated beneficiaries.
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