Donating Apartments and Property Shares in Russia: A Comprehensive Legal Overview

 

March 7, 2021

Anna Ivanova, Associate at BRACE Law Firm ©

 

Currently, transactions involving the disposal of apartments are of significant importance for most citizens due to high housing prices and the critical nature of the housing issue.

A common situation today involves an apartment owned by several people simultaneously. Sometimes, only one or several co-owners need to dispose of their share in the common property, which can lead to potential conflicts. As a rule, when kinship exists between apartment owners, a donation agreement (gift agreement) may serve as a tool for transferring a share in an apartment.

However, the donation of a share in an apartment entails many legal nuances depending on the specific situation. Furthermore, in practice, cases occur where a share in an apartment becomes the object of fraudulent activities and abuse of rights. Below, we examine the primary legal features of donating a share in an apartment and the potential problems that may arise when donating an apartment or a share therein.

Determining the Co-Ownership Regime (Common or Joint)

According to Article 572 of the Civil Code of the Russian Federation (the "Civil Code"), under a donation agreement, one party (the donor) gratuitously transfers or undertakes to transfer a thing to the other party (the donee) as property, or an economic right (claim) against itself or a third party, or releases or undertakes to release the donee from an economic obligation to itself or a third party. [1]

As a general rule under Article 131 of the Civil Code, the right of ownership and other real rights to immovable things, restrictions on these rights, their creation, transfer, and termination are subject to state registration in the Unified State Register of Real Estate (the "USRN") by the authorities performing state registration of rights to real estate and transactions therewith.[2] Article 18 of the Housing Code of the Russian Federation (the "Housing Code") contains similar provisions.

According to Article 244 of the Civil Code, property may be held in common ownership with the determination of each owner's share in the right of ownership (common ownership) or without the determination of such shares (joint ownership). The legal regime for the property of spouses is joint ownership.

Common ownership of property is considered common (share-based) ownership, except in cases where the law provides for the creation of joint ownership of such property.

For example, by virtue of Article 22 of the Family Code of the Russian Federation (the "Family Code"), the legal regime of spouses' property applies unless a prenuptial agreement (marriage contract) establishes otherwise. Common ownership also arises when property that cannot be divided without changing its purpose (indivisible things) or is not subject to division by law is acquired by two or more persons.

By agreement of the participants in joint ownership, or by a court decision if no agreement is reached, common ownership may be established for the property of these persons.

At the same time, the actual division of property is possible only if it is held in common ownership (Article 252 of the Civil Code). Such a division may be carried out either by agreement of the parties or by a court decision. For example, when dividing the joint property of spouses in court, a claim must be filed for the allocation of the marital share and the recognition of the right of ownership for one of the spouses. [3] It is important to note that entering a record in the USRN regarding the right of ownership of an apartment where one spouse is indicated as the titleholder does not cancel the legal regime of the spouses' property, unless it was changed based on a prenuptial agreement, an agreement on the division of jointly acquired property, or a court decision. [4]

However, if it is impossible to divide the property among all participants of the common ownership or to allocate a share in kind, the court, at the request of the allocating owner, may obligate the other participants in common ownership to pay him monetary compensation, upon receipt of which the co-owner loses the right to the share in the common property. In exceptional cases, when the share of a co-owner is insignificant, cannot be realistically allocated, and he has no significant interest in using the common property, the court may, even in the absence of the consent of this co-owner, obligate the other participants in common ownership to pay him compensation. The court decides whether a participant in common ownership has a significant interest in using the common property in each specific case based on an assessment of evidence confirming the need to use this property due to age, state of health, professional activity, presence of children, other family members, including disabled ones, etc. [5] These clarifications from the Supreme Court of the Russian Federation are related to the fact that legislation does not regulate the situation where a donor of a share abuses his right and may donate his share in an apartment to third parties when it is impossible to allocate it, thereby putting the other participants in common ownership in an extremely disadvantageous position.

Notarial and Simple Written Forms of the Donation Transaction for an Apartment and a Share in an Apartment

As a general rule, the donation agreement itself is concluded in simple written form. State registration of the agreement in Rosreestr is not performed; only the state registration of the transfer of the right of ownership is carried out. However, several changes have been made to current legislation regarding the necessity, in some cases, to notarize a donation agreement for a share. In accordance with Articles 53 and 54 of the Fundamentals of Legislation of the Russian Federation on Notaries, approved by the Supreme Court of the Russian Federation on February 11, 1993, No. 4462-1, a notary certifies transactions for which Russian legislation establishes a mandatory notarial form. At the request of the parties, a notary may also certify other transactions. In doing so, the notary must explain to the parties the meaning and significance of the draft transaction presented by them and check whether its content corresponds to the actual intentions of the parties and does not contradict the requirements of the law. [6]

According to Part 1 of Article 42 of Federal Law No. 218-FZ dated July 13, 2015, On State Registration of Real Estate (the "Registration Law"), transactions involving the alienation or mortgage agreements for shares in the right of common ownership of real estate are subject to notarial certification, with the exception of transactions for the alienation or mortgage by all participants in common ownership of their shares in a single transaction, transactions related to property constituting a mutual investment fund or acquired for inclusion in a mutual investment fund, transactions for the alienation of land shares, transactions for the alienation and acquisition of shares in the right of common ownership of real estate upon concluding an agreement providing for the transfer of ownership of a residential premise in accordance with the Law of the Russian Federation No. 4802-1 dated April 15, 1993, On the Status of the Capital of the Russian Federation (except for the case provided for in Part 12 of Article 7.3), as well as mortgage agreements for shares in the right of common ownership of real estate concluded with credit organizations. [7]

Thus, the current version of the Registration Law does not provide for the mandatory notarial certification of a transaction if a share in real estate is alienated (including under a donation agreement) when there is only one owner (it is not held in common ownership), or if the alienation of shares by all participants of common ownership occurs within a single transaction. [8]

This recent innovation regarding the notarial certification of the alienation of shares is associated with additional measures to protect the rights and legitimate interests of the parties to the transaction.

Also, by virtue of Part 2 of Article 54 of the Registration Law, transactions related to the disposal of real estate under guardianship conditions, as well as transactions for the alienation of real estate belonging to a minor citizen or a citizen recognized as having limited capacity, are subject to notarial certification. Thus, if a share in an apartment belonging to a minor is donated, the notarial certification of such a transaction is mandatory.

For the notarial certification of a transaction for the donation of a share in an apartment, notarial fee amounts are established. According to Article 22 of the Fundamentals of Legislation of the Russian Federation on Notaries, for performing notarial acts for which the legislation of the Russian Federation provides for a mandatory notarial form, a private notary charges a notarial tariff in an amount corresponding to the amount of the state duty provided for performing similar acts in a state notary office, taking into account the specifics established by the legislation of the Russian Federation on taxes and fees. In accordance with Subparagraph 5 of Paragraph 1 of Article 333.24 of the Tax Code of the Russian Federation (the "Tax Code"), for the certification of other agreements whose subject is subject to valuation, if such certification is mandatory, a state duty of 0.5 percent of the agreement amount is paid, but not less than 300 rubles and not more than 20,000 rubles. To calculate the amount of the notarial tariff for the notarial certification of a donation agreement for a share in an apartment, either the cadastral or market value of the specified property may be used at the taxpayer's choice.[9]

Features of Donation Transactions Involving Minors

It is important to note that when donating a share in an apartment to a minor, if he has not reached 14 years of age, the agreement is signed by the child's legal representatives; if the minor is between 14 and 18 years of age, the agreement is signed with the consent of the legal representatives (Paragraph 1 of Article 26 and Paragraph 1 of Article 28 of the Civil Code).

However, in practice, questions arise as to whether a minor's parent can act as the donee's representative when donating his share in the apartment to the minor. In this case, the parent actually signs the agreement on both sides (on behalf of the donor and on behalf of the minor under 14). According to the clarifications of the Federal Notarial Chamber, when concluding a donation agreement where a parent donates real estate belonging to him to his young child, despite the parent acting on both sides of the agreement, he acts on the donor's side in his own name and on the donee's side on behalf of the minor and in his interests. Acting on the side of the minor donee only as a legal representative, the parent creates (changes and terminates) the civil rights and obligations of the donee. Therefore, concluding agreements where a child's parent is the signatory on both sides is permissible and lawful.[10] If a share in an apartment belongs to a minor under 14, then by virtue of Article 575 of the Civil Code, the donation of the share in the apartment is explicitly prohibited.

At the same time, after the age of 14, such a donation may be carried out only with the consent of the guardianship authorities, as according to Part 3 of Article 60 of the Family Code, when parents exercise their powers to manage a child's property, they are subject to the rules established by civil legislation regarding the disposal of a ward's property. A guardian is not entitled, without the prior permission of the guardianship and curatorship authority, to give consent to the performance of transactions for the alienation, including the exchange or donation, of the ward's property. [11]

Coordination of the Donation of a Share in an Apartment with Other Co-Owners. The Problem of Fighting "Professional" Neighbors

According to Article 246 of the Civil Code, a participant in common ownership is entitled, at his discretion, to sell, donate, bequeath, or pledge his share, or otherwise dispose of it, provided that the rules set forth in Article 250 of the Civil Code are observed during its onerous alienation. In accordance with the specified article, when selling a share in the right of common ownership to an outside person, the other participants in common ownership have a preemptive right to purchase the share being sold at the price for which it is being sold and on other equal terms. Thus, when donating a share in an apartment, other participants in common ownership do not have a preemptive right to acquire the share, while the owner of the share is entitled to donate it to any third party without the consent of the other co-owners.

This legal norm, which allows the gratuitous alienation of a share in an apartment, often leads to situations where so-called "professional neighbors" move into an apartment. These individuals may intentionally create poor living conditions for other participants in common ownership to force them to "sell" their shares in the apartment on extremely unfavorable terms. Such a scheme is popular among "black realtors", and a legal protection mechanism for bona fide participants in common ownership has not yet been developed. As a result of such actions, bona fide owners, especially elderly people and other socially vulnerable categories of citizens, may lose their apartments.

Currently, the State Duma of the Russian Federation is considering a draft law on amending the Housing Code of the Russian Federation, which proposes to establish a general rule that a share in the right of common ownership of a residential premise may be created provided that the size of each co-owner's share ensures the possibility of moving into the residential premise while observing the accounting norm for living space area. However, according to the draft law, this rule will not apply to cases where a share in the right of ownership of a residential premise arises as a result of privatization or inheritance, nor to cases where the right of common ownership arises by operation of law.

The draft law also provides for restricting an owner's right to move third parties into a residential premise belonging to him if, as a result of such moving in, there will be less than the accounting norm of living space per person. If there is less than the accounting norm per person, moving in will be permitted only if there is a court decision recognizing the person as a family member of the owner or in cases where the person's residence in the residential premise is permitted in accordance with the law.

We believe that adopting these amendments to the Housing Code will limit the activities of persons who abuse their rights when acquiring a share in an apartment. At the same time, we believe that the provisions of the draft law do not fully protect participants in common ownership from cases where a share in an apartment is donated to a third party by the heir of a deceased co-owner.

However, currently, the specified draft law has not been adopted, and the resolution of all controversial issues regarding the fight against "professional neighbors" is left to the discretion of the courts and law enforcement agencies, and also directly depends on the actions of the bona fide participants in common ownership. It is important to note that bringing unscrupulous participants in common ownership to criminal responsibility requires a long and painstaking collection of evidence, repeated appeals to law enforcement agencies, etc. At the same time, precedents for initiating criminal cases against participants in common ownership who force other participants to sell their shares at an undervalued price exist in solitary numbers. For example, the case of the so-called "Makarov gang" [12] or the case of Viktoria Epifantseva. [13] In both cases, the proceedings were initiated under Article 179 of the Criminal Code of the Russian Federation (Compulsion to Perform a Transaction or to Refuse its Performance). Video and audio recordings of negotiations confirming the compulsion to conclude transactions were used to prove their guilt. Nevertheless, not every bona fide owner in such a situation will be able to competently build a corresponding line of defense for his rights on his own.

Furthermore, it is not always possible to qualify the acts of an unscrupulous owner of a share in an apartment as a criminal offense, even though he sometimes creates unbearable conditions for other shareowners to live in the apartment. In some cases, there are judicial precedents where courts satisfied the plaintiffs' claims to recognize the co-owners' shares as insignificant and terminate their rights to them by paying the corresponding market value of such shares. However, to defend their rights, the plaintiffs had to reach the Supreme Court of the Russian Federation, which determined that, according to Paragraph 36 of the Resolution of the Plenum of the Supreme Court of the Russian Federation and the Plenum of the Supreme Arbitration Court of the Russian Federation No. 8 dated July 1, 1996, On Certain Issues Related to the Application of Part One of the Civil Code of the Russian Federation, if it is impossible to divide property among all participants in common ownership or to allocate a share in kind to one or more of them, the court, at the request of the allocating owner, may obligate the other participants in common ownership to pay him monetary compensation, upon receipt of which the co-owner loses the right to the share in common property. In exceptional cases, when the share of a co-owner is insignificant, cannot be realistically allocated, and he has no significant interest in using the common property, the court may carry out the allocation of a share in an apartment even in the absence of consent. The argument that the legal situation in question belongs to the exceptional case mentioned above was supported by the fact that the defendants never moved into the apartment, did not reside there, were not registered in it, did not have a kinship or family relationship among themselves, and had another permanent place of residence and other residential premises in their ownership; the shares in the right of ownership of the apartment in dispute were transferred to them through gratuitous transactions. The court also concluded that it was not possible to allocate isolated rooms corresponding to the share in the right of each of them to the defendants. A weighty argument in rendering the decision in favor of the plaintiffs was that the defendants themselves had previously offered to the plaintiffs to buy out their shares in the right of ownership of the apartment but did not reach an agreement regarding the buyout price. [14]

Another scheme used by unscrupulous acquirers of shares in an apartment is performing a donation as a sham transaction (simulated transaction). This occurs when a donation agreement is submitted to Rosreestr to register the transfer of rights to a share in an apartment, but the "donor" and "donee" actually conduct settlements under a purchase and sale agreement. Typically, a preliminary purchase and sale agreement is concluded in simple written form for this purpose, and after the funds are transferred under it and the application for registration of the transfer of rights based on the lease agreement is filed, this agreement is destroyed. Other schemes may also be used to transfer funds from the share buyer to the seller who decided not to disclose the actual purchase and sale and present it as a donation. In this case, the legal mechanism for protecting the rights of bona fide participants in common ownership will be to file a claim in court to recognize the donation transaction as a sham transaction.

A significant position for practice is that of the Supreme Court of the Russian Federation, which recognized a transaction as a sham where the plaintiff himself, being in a difficult financial situation, was forced to sell part of an apartment (a share in an apartment) with an installment payment plan from the buyer, while submitting a donation agreement to Rosreestr under the pretext of difficulties in receiving the first payment from the buyer's relative rather than from the buyer himself. As a result, the buyer evaded paying the remaining part of the apartment's cost to the seller, which forced the plaintiff to go to court. The court was guided by witness testimony when considering the case. [15]

Also, in some cases, bona fide participants in common ownership who are not direct participants in the donation transaction may seek to challenge the donation transaction due to its sham nature. In particular, in one court decision, the court recognized the donation of a share in an apartment as a sham transaction based on a claim by a co-owner of the apartment, because the specified transaction was carried out by another owner of a share in the apartment to repay a monetary debt to a third party, which resulted in the alienation of the share in violation of the plaintiff's preemptive right to purchase it. [16]

A similar decision recognizing a transaction for the donation of a share in an apartment as sham was rendered by the court because a share in the apartment was partially acquired as a gift, and subsequently, the main part of the share held by the seller was transferred to the buyer under a purchase and sale agreement. Thus, the court, rejecting the arguments of the defendant who filed counterclaims, proceeded from the fact that the actions of the share seller to first transfer 1/90 of the apartment to the defendant as a gift and the subsequent sale of 29/90 shares of the disputed real estate to her under a purchase and sale agreement testified to the defendants' purposeful intention to deprive other co-owners of the preemptive right to purchase the share belonging to the seller. The court concluded that an abuse of rights was committed upon concluding the challenged transactions, and therefore these transactions are invalid (void). At the same time, the court pointed out that the agreement for the donation of 1/90 of the share in the right of ownership of the disputed apartment is a sham transaction because it does not meet the criterion of gratuitousness and was intended to allow the buyer to acquire 1/3 of the share in the right of ownership of the apartment by bypassing the rights of other owners. [17]

Thus, if a situation arises where an unscrupulous owner of a share in an apartment has donated it to so-called "professional neighbors", bona fide shareowners are recommended to act as follows:

• record all negotiations conducted with the new acquirer of the share and/or its seller using audio or video recording;
• collect evidence aimed at proving the sham nature of the transaction (its onerous nature and the seller's receipt of funds from the buyer);
• collect evidence that the share buyer has no significant interest in using the common property in cases where the new owner's share is insignificant and cannot be realistically allocated;
• appeal to law enforcement agencies for any unlawful actions by the "professional neighbor".

Donation with the Condition of Retaining the Right of Residence for the Donor or Third Parties in the Apartment

A fairly common case is when a donor wishes to donate his share in an apartment on the condition that he retains a life estate (the right of lifelong residence) in the apartment. There are still disputes regarding the possibility of concluding this type of agreement because, on the one hand, according to the general rule of Article 432 of the Civil Code, if the parties have reached an agreement on all its material terms, the agreement is considered concluded. On the other hand, a question arises as to how lawful the conclusion of such an agreement is, since according to Article 572 of the Civil Code, if there is a counter-transfer of a thing or right or a counter-obligation, the agreement is not recognized as a donation and the rules on sham transactions apply to it.

There is no clear legislative regulation on this issue, and the court evaluates it individually in each specific case. For example, in one court decision, the court concluded that the condition to transfer a gift under certain conditions (the donor retaining the right to reside in the donated apartment) does not indicate an onerous nature, as it is not counter-performance. [18]

However, disputes regarding residence in a residential premise often arise after the donor's death. Thus, in one case, a court of general jurisdiction satisfied the donee's claims to evict third parties from the residential premise who had previously been moved into the apartment at the initiative of the deceased donor. The court concluded that since the defendants are not family members of the new owner of the apartment, their residence in the apartment violates his rights to use and dispose of his property. The transfer of the right of ownership to a residential premise is grounds for terminating the right to use the apartment by family members of the previous owner. [19]

However, there is also opposite practice where courts conclude that the right of lifelong possession is preserved during subsequent alienations of the housing, including in cases where this is not specified in the agreement between the donee and the buyer and subsequent agreements. This is justified by the court's opinion that a donation agreement with residence represents a mixed contract including components of a gratuitous use agreement, the rules of which are subject to application. Providing residence cannot be perceived as counter-performance in a donation. The donee cannot provide the right of residence because at the time of signing the agreement, he is not the owner and is not endowed with such a right. Gratuitous residence does not make a donation agreement onerous.[20] A similar opinion is set out in a ruling of the Moscow City Court, according to which providing the donor with such a right (residence) is not counter-performance by the donee. Specifically, this condition in the donation agreement does not contradict the nature of the donation agreement, since in this case, the donee's obligation to ensure the donor's ability to reside in the apartment for life is not a counter-obligation within the meaning of Paragraph 2 of Clause 1 of Article 572 of the Civil Code. His assumption of this obligation is a condition for transferring the apartment as a gift, not a form of counter-performance (Article 423 of the Civil Code). [21]

In some cases, courts must evaluate the situation from the perspective of the fairness and validity of the parties' claims, as sometimes the donee himself tries to evict the donor from the apartment, and the donor, in turn, tries to recognize the donation agreement as invalid. Thus, the court, in refusing the plaintiff (donee) to satisfy the claims to recognize the donor as not having acquired the right to use the residential premise and for his eviction, took into account that the donation agreement preserved the defendant's right to use the residential premise; therefore, when concluding the agreement, the plaintiff agreed to this condition. The plaintiff's reference to the fact that she signed the agreement on the terms specified therein to legalize the ownership of this apartment is untenable, as no evidence confirming these circumstances was presented. However, there are also no grounds for recognizing this apartment donation agreement as invalid; therefore, the court reasonably refused the defendant's counterclaim to recognize the apartment donation transaction as invalid.

The argument that the apartment in dispute was not donated gratuitously, but on the condition that the defendant would be granted a lifelong right of use and residence in this apartment in return, and therefore the plaintiff took on a counter-obligation, which is impermissible in a donation, is untenable. The inclusion of a clause in the agreement on preserving the defendant's right to reside in the apartment in dispute is permissible and does not indicate counter-performance. An agreement does not become onerous from counter-performance that is symbolic in nature. The donor's right to reside in the apartment alienated by him may be counter-performance if the transfer of the residential premise as a gift itself is made dependent on this performance; however, the agreement concluded by the parties indicates its gratuitousness, and the defendant's right to reside in the alienated apartment is indeed an element of a gratuitous use agreement for the property, not being counter-performance. [22]

The specified judicial act further confirms the importance of using correct wording in a donation agreement so that the donor's right to reside in the residential premise is not interpreted as counter-reimbursement.

Additional disputes are caused by apartment donation transactions with the condition of residence of third parties or the donor due to the lack of practice in registering corresponding encumbrances with the Rosreestr authorities. A situation may arise where, on the one hand, it is necessary to protect the rights of the person being evicted from the apartment, as well as to protect the rights of a bona fide acquirer of the apartment who could not have known about the existence of the corresponding encumbrance. Effectively, legislative regulation of this issue that would clearly establish the possibility of indicating the condition for preserving the right of residence in an apartment for donors or third parties in a donation agreement is lacking. In this regard, the resolution of arising disputes is based on the conclusions made by the court depending on the evidence presented by the parties.

An alternative to donating apartments (a share in an apartment) with the condition of the donor or third parties residing in them may be making a will (testamentary disposition), as according to Article 1137 of the Civil Code, a testator is entitled to impose on one or more heirs by will or by law the performance of some obligation of an economic nature at the expense of the inheritance in favor of one or more persons who acquire the right to demand the performance of this obligation. In particular, a testator may impose an obligation on the heir to whom a residential house, apartment, or other residential premise passes to provide another person, for the period of that person's life or for another term, with the right to use this premise or a specific part of it.

However, a will, unlike a donation, implies that the heir can dispose of the property bequeathed to him only after the testator's death. Until that moment, the rights to the share in the apartment cannot be acquired by him. Moreover, the testator is entitled at any time to change or revoke the will without notifying the heirs.

In this regard, when donating a share in an apartment with the condition of the donor or third parties residing in it, it is necessary to approach the written consolidation of agreements between the donor and donee responsibly or resort to other legal instruments for regulating legal relationships associated with the transfer of a share in an apartment.

Donor's Refusal to Perform a Donation Agreement, Revocation of a Donation, Invalidation of a Transaction by the Donor

Articles 577 and 578 of the Civil Code provide for cases where it is possible to revoke a donation or refuse to perform a donation agreement. Thus, a donor is entitled to refuse to perform an agreement containing a promise to transfer a thing or right to a donee in the future or to release the donee from an economic obligation if, after the conclusion of the agreement, the donor's economic or family situation or state of health has changed so significantly that the performance of the agreement under the new conditions will lead to a significant decrease in his standard of living. Such a refusal by the donor to perform the donation agreement does not give the donee the right to demand compensation for damages.

Revocation of a donation presupposes the existence of more weighty grounds:

• The donee's attempt on the life of the donor or any of his family members or close relatives.
• Intentional infliction of bodily harm on the donor.
• The donor is also entitled to demand in court the revocation of the donation if the donee's handling of the donated thing, which represents a great non-economic value to the donor, creates a threat of its irreparable loss.

In the event of the revocation of a donation, the donee is obligated to return the donated thing to the donor.

Judicial practice regarding the revocation of a donation is based on an assessment of each specific case. In particular, in judicial practice, there is a position of the courts that a sufficient ground for the revocation of a donation is the donee's intentional violation of the donor's physical integrity, regardless of the nature and severity of the bodily harm. [23]

Moreover, there are court decisions concluding that the mere fact of terminating a criminal case due to the decriminalization of an act does not mean the absence of a crime in the donee's act and does not refute the donor's arguments about the intentional infliction of bodily harm on him. [24]

However, courts do not always accept the donor's evidence of bodily harm inflicted on him by the donee (even when the donor presents medical documents). For example, the Moscow City Court, considering a case on the revocation of a donation, concluded that the mere fact of initiating a private prosecution criminal case does not testify to the fact that the donee committed unlawful acts against the donor. No court verdict in the criminal case against the donee was issued. To support the claims filed, the plaintiff presented medical documents. However, the court concluded that the documents presented did not establish a connection between the bodily harm diagnosed in the donor and the circumstances described in the statement of claim. [25]

Consequently, a court verdict rendered against the donee who committed unlawful acts against the donor is an important factor for the revocation of a donation. Nevertheless, even in the absence of a corresponding verdict, the donor is recommended to present to the court all available evidence of the donee committing unlawful acts against him (medical certificates, appeals to law enforcement agencies, etc.).

In addition to cases of revocation of a donation by the donor, another legal tool for protecting the donor's rights is challenging the transaction as being performed as a result of misleading the donor or performing a transaction on extremely unfavorable terms.

In some cases, the court takes into account that the fact that the object of the donation was the donor's only housing constituted unfavorable conditions for concluding the transaction for the donor. This circumstance was qualified by the court as being performed on extremely unfavorable terms for the plaintiff and may lead to the recognition of the donation agreement as invalid. [26] However, there are court decisions where the court adheres to the opposite point of view that the mere fact that the donor alienated his only housing in favor of the donees does not testify to a defect in the donor's will and is not evidence of the invalidity of the concluded agreement. [27]

Misleading the donor, according to judicial practice, can be seen as the donor's lack of understanding of the legal nature of the transaction being performed (for example, a desire to conclude a life annuity agreement rather than a donation agreement), which is grounds for recognizing such an agreement as invalid. [28]

In most cases, courts conclude that the donor's personal participation in formalizing the transaction and his signature on the agreement do not testify to the absence of a mistake on his part. The primary requirement for a donation agreement is the good will of the persons upon its signing. [29]

At the same time, when challenging a donation agreement because the donor could not account for his actions, very weighty evidence must be presented (psychiatric examination conclusion, health disorder affecting the donee's understanding of the essence of the actions he is performing).

Thus, in one case, the court concluded that the mere fact of the donor abusing alcoholic beverages does not testify to the fact that on the day of the transaction he could not account for his actions and direct them. To resolve the issue of the donor's ability — suffering from a disease caused by alcohol abuse — to understand the significance of his actions and direct them, the court must appoint a forensic examination. [30] If, upon concluding the agreement, the donor was aware and could direct his actions and was not recognized as incapacitated, and no evidence to the contrary has been presented to the court, there are no grounds for challenging the agreement on the grounds of invalidity. [31]

Thus, when concluding a donation agreement, it is extremely important to approach its legal assessment and the understanding of the consequences of the transaction responsibly. Otherwise, challenging the transaction or refusing the donation will be carried out in court and will require a long collection of evidence and a laborious construction of a legal position to defend the donor's rights.

Specifics of Taxation upon the Donation of a Share in an Apartment

As a general rule under the Tax Code, the donee is obligated to pay Personal Income Tax ("PIT") upon receiving real estate as a gift. This rule also applies to a share in an apartment transferred under a donation agreement. The tax base for real estate received through donation is determined based on the cadastral value entered in the USRN and subject to application from January 1 of the year in which the state registration of the transfer of the right of ownership to the share in the apartment was carried out. The tax rate for residents of the Russian Federation (individuals located on the territory of Russia for at least 183 calendar days within 12 consecutive months) is 13%, and for non-residents, it is 30%. [32]

To pay PIT, a tax return using form 3-PIT must be filed with the tax authority at the place of residence by April 30 of the year following the year the donation occurred (registration of the transfer of right). The tax payment deadline is July 15 of the year following the year the donation transaction was performed.

According to Paragraph 2 of Clause 18.1 of Article 217 of the Tax Code, income received through donation is exempt from taxation if the donor and the donee are family members and (or) close relatives in accordance with the Family Code of the Russian Federation (spouses, parents and children, including adopters and adoptees, grandfather, grandmother and grandchildren, full and half siblings having a common father or mother). [33]

Situations are quite common where, to avoid paying PIT due upon the donation of a share in an apartment between persons who are not close relatives, the parties to the transaction formalize a purchase and sale agreement with the subsequent use of the right to a property tax deduction. However, when performing this transaction, the consent of all participants in common ownership is required, and there are risks of challenging the specified transaction as sham in the event of a conflict between the donor and donee, as well as the violation of the interests of third parties. In addition, with the introduction of amendments to the Tax Code, if a taxpayer's income from the sale of a share in an apartment turns out to be less than its cadastral value multiplied by a reduction coefficient of 0.7, for taxation purposes, the taxpayer's income from the sale is taken as equal to the corresponding cadastral value multiplied by the reduction coefficient of 0.7.[34]

Clause 17.1 of Article 217 of the Tax Code establishes that income received by individuals who are tax residents of the Russian Federation for the corresponding tax period from the sale of a donation between close relatives held in the taxpayer's ownership for 3 years or more is not subject to taxation (is exempt from taxation).

If, after the donation of a share in an apartment, the donee decides to sell it, he will be obligated to pay PIT if he has owned the share for less than 5 years (except for donations between close relatives, in which case this period will be 3 years). At the same time, when selling a donated share in an apartment after January 1, 2019, the taxable income may be reduced by the amounts from which PIT was paid upon receiving this property, or by the donor's expenses for its acquisition which he did not previously take into account for taxation. [35]

Thus, when calculating the tax from the donation of a share in an apartment, it is necessary to consider whether the donor and the donee are close relatives, the cadastral value of the apartment, and the periods of ownership of the apartment (if the donee decides to sell the share received as a result of the donation).

Conclusions and Recommendations for the Donation of a Share in an Apartment

Upon the donation of a share in an apartment, the donee is recommended to:

• Clarify information about the position of other participants in common ownership regarding the alienation of the share;
• Check for any encumbrances on the property acquired based on the lease agreement;
• Clarify information about the presence of minors registered at the place of residence in the apartment, and whether any minors are owners of shares in the apartment;
• Verify compliance with the form of the donation transaction (in cases where mandatory notarial certification of the donation of the share is required);
• Avoid acquiring a share whose size is so small that it does not presuppose the possibility of allocating the share and/or actual moving in;
• Perform an assessment of tax risks upon receiving a share in an apartment under a donation agreement (if the donee and the donor are not close relatives).

Upon the donation of a share in an apartment, the donor is recommended to:

• If there are oral agreements that the alienation of the share will be carried out on an onerous basis, refuse to conclude a donation agreement;
• Understand the legal consequences of the donation agreement regarding the transfer of ownership rights to the share in the apartment to the donor (and, as a consequence, the creation of the right of possession, use, and disposal of said share);
• If there is a desire to retain the right of residence in the apartment after the donation, it is possible to conclude a donation agreement with a corresponding condition or consider other possibilities for transferring the share in the apartment (will, life annuity, purchase and sale);
• Notify the donee of any possible encumbrances on the property, a share in which will become the subject of the donation agreement;
• Carefully approach the choice of the donee from the perspective of his good faith.

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References

[1] Civil Code of the Russian Federation (Part 2) No. 14-FZ dated January 26, 1996.

[2] Civil Code of the Russian Federation (Part 1) No. 146-FZ dated July 31, 1998.

[3] Letter of the FAS Russia No. KV-4-14/6053@ dated April 9, 2020, On Sending the Review of Judicial Practice on Disputes involving Registration Authorities No. 1 (2020).

[4] Letter of the Ministry of Economic Development of Russia No. D23i-2959 dated June 26, 2015.

[5] Review of Judicial Practice of the Supreme Court of the Russian Federation No. 4 (2018), approved by the Presidium of the Supreme Court of the Russian Federation on December 26, 2018.

[6] Fundamentals of Legislation of the Russian Federation on Notaries, approved by the Supreme Court of the Russian Federation on February 11, 1993, No. 4462-1.

[7] Federal Law No. 218-FZ dated July 13, 2015, On State Registration of Real Estate.

[8] Letter of the Department of the Federal Service for State Registration, Cadastre, and Cartography for Moscow No. 08-1110/2018 dated July 17, 2018.

[9] Letter of the Ministry of Finance of Russia No. 03-05-06-03/19840 dated March 29, 2018.

[10] Letter of the Federal Notarial Chamber No. 2664/06-08 dated June 21, 2017, On the Donation of Real Estate to a Minor.

[11] Family Code of the Russian Federation No. 223-FZ dated December 29, 1995.

[12] "Be my share. How swindlers amass a fortune using 1 square meter in someone else's apartment". Ivan Petrov, Anastasia Chepovskaya (February 28, 2018, Izvestia Newspaper).

[13] "In Moscow today, so-called 'professional neighbors' were taken into custody. Viktoria Epifantseva, a mother of many children, moved into apartments with five children and pressured the co-owners, forcing them to buy out her share or sell theirs" (NTV Channel, February 26, 2018, 14:22).

[14] Ruling of the Supreme Court of the Russian Federation No. 5-KG17-51 dated May 25, 2017.

[15] Ruling of the Supreme Court of the Russian Federation No. 5-KG20-44 dated August 11, 2020.

[16] Ruling of the Judicial Collegium for Civil Cases of the Supreme Court of the Russian Federation No. 33-KG18-4 dated August 21, 2018.

[17] Ruling of the Judicial Collegium for Civil Cases of the Supreme Court of the Russian Federation No. 50-KG17-27 dated January 9, 2018.

[18] Appellate Ruling of the Ulyanovsk Regional Court in case No. 33-604/2014 dated February 25, 2014.

[19] Ruling of the Judicial Collegium for Civil Cases of the Supreme Court of the Russian Federation No. 58-KG17-6 dated June 27, 2017.

[20] Ruling of the Supreme Court of the Republic of Karelia in case No. 33–2292/2012 dated August 3, 2012.

[21] Appellate Ruling of the Moscow City Court in case No. 33-1137/17 dated January 12, 2017.

[22] Ruling of the Lipetsk District Court in case No. 33-1459/2012 dated June 9, 2012.

[23] Ruling of the Moscow City Court in case No. 2-522/2018 dated October 26, 2018.

[24] Appellate Ruling of the Moscow City Court in case No. 33-38097/2018 dated August 30, 2018.

[25] Appellate Ruling of the Moscow City Court in case No. 33-50797/2018 dated December 4, 2018.

[26] Appellate Ruling of the Moscow City Court in case No. 33-41091/2018 dated September 24, 2018.

[27] Appellate Ruling of the Moscow City Court in case No. 33-7163/2019 dated February 18, 2019.

[28] Ruling of the Moscow City Court No. 4g-1278/2019 dated February 12, 2019.

[29] Ruling of the Moscow City Court No. 4g-13939/2018 dated November 8, 2018.

[30] Ruling of the Supreme Court of the Russian Federation No. 58-KG16-18 dated November 15, 2016.

[31] Appellate Ruling of the Moscow City Court in case No. 33-46618/2018 dated October 24, 2018.

[32] Tax Code of the Russian Federation (Part Two) No. 117-FZ dated August 5, 2000.

[33] Letter of the Ministry of Finance of Russia No. 03-04-05/59521 dated August 7, 2019.

[34] Federal Law No. 372-FZ dated November 23, 2020, On Amending Part Two of the Tax Code of the Russian Federation in Terms of Taxation of Incomes of Individuals Exceeding 5 Million Rubles for the Tax Period.

[35] Federal Law No. 325-FZ dated September 29, 2019, On Amending Parts One and Two of the Tax Code of the Russian Federation.