Land rights for foreign investors in Russia

1) Can a foreign company/foreigner acquire land in the host country, and what forms are permitted: ownership, long-term lease, sublease, servitude?

Foreign nationals may acquire land plots within the territory of the Russian Federation subject to statutory restrictions (Clause 2, Article 5; Clause 2, Article 15 of the Land Code of the Russian Federation).

In particular, foreign nationals are prohibited from owning the following categories of land plots (Clause 3, Article 15 of the Land Code of the Russian Federation; List approved by Presidential Decree No. 26 of January 9, 2011; Part 2, Article 28 of Federal Law No. 261-FZ of November 8, 2007; Article 3 of Federal Law No. 101-FZ of July 24, 2002):

• land plots located in border territories, the list of which is established by the President of the Russian Federation;
• land plots situated within the boundaries of seaports;
• agricultural land.

Land legislation doesn't establish a prohibition on the acquisition of land plots by foreign persons under leasehold rights.

At the same time, foreign nationals and legal entities are prohibited from entering into contracts of sale and purchase, donation, lease, gratuitous use, trust management agreements, or other transactions providing for the transfer of rights of ownership, possession and/or use with respect to land plots granted to citizens under Federal Law No. 119-FZ of May 1, 2016 “On Specific Features of Granting to Citizens Land Plots in State or Municipal Ownership Located in the Arctic Zone of the Russian Federation and Other Territories of the North, Siberia and the Far East of the Russian Federation, and on amendments to certain legislative acts of the Russian Federation,” as well as land plots formed therefrom, including in the course of subsequent transactions.

2) Are there restrictions on land categories (agricultural/non-agricultural, border areas, strategic plots, coastal zones) and on size/duration of ownership/use?

Russian law imposes certain restrictions on acquisition of land plots by foreign investors. Foreign persons are prohibited from owning land plots in the border territories and within the boundaries of seaports. In addition, foreign investors and legal entities controlled by them by more than 50% may only possess leasehold rights in relation to agricultural land. There are no specific restrictions on the duration or size of the land use for foreign investors as general rules applicable to all land users apply.

3) What is the best way to structure the transaction: purchase of shares in a local landholding company, direct land acquisition, long-term lease through an SPV, concession, or PPP?

The choice of a specific structure depends on the project's goals, the category of land, and the investor's acceptable level of risk and control. 

The most universal method for a foreign investor is to acquire shares in a Russian company that owns the land; this allows them to avoid direct legislative restrictions on the acquisition of land by foreigners and minimizes risks associated with obtaining approval from state authorities. 

A direct purchase of a land plot is only possible for categories of land not withdrawn from circulation or not restricted in circulation, however, it is fraught with the necessity of obtaining approval from the Government Commission for Control over Foreign Investments. Long-term lease through an SPV or within the framework of a concession agreement and PPP appears to be a viable option for implementing infrastructure projects.

4) What approvals and permits are required (government, municipality, land commission, antimonopoly authority), and how long does the process usually take?

The key authority for direct transactions involving restricted land plots is the Government Commission for Control over Foreign Investments: its preliminary approval is required for the acquisition of agricultural land or plots located in border territories. The obtaining process in practice takes from 6 months and involves the preparation of a voluminous package of documents and justifications.

In a number of cases, transactions require mandatory approval from the Federal Antimonopoly Service (FAS). For instance, when acquiring more than 20% of shares in the charter capital of a Russian company that owns any land (including those restricted in circulation); or when the transaction exceeds the financial thresholds established by current legislation.

The complete list of necessary approvals and the permitting process fundamentally depends on the land category (especially agricultural or border territories) and the chosen transaction structure (direct purchase, acquisition of a share in a company, lease).

5) How is land due diligence conducted: boundaries, cadastre, encumbrances, servitudes, disputes, mortgages, designated use, environmental and urban planning restrictions?

It is not possible to list every nuance of a legal due diligence process, as it depends on the basis for acquiring rights to the land plot and a number of other factors. However, the most critical information about a land plot (cadastral registration, physical characteristics, boundaries, registered rights, encumbrances, etc.) can be obtained from the official portal https://nspd.gov.ru/map?thematic=PKK. This portal provides data contained in the Unified State Register of Real Estate (USRE). Furthermore, it is essential to obtain an official Extract from this Register.

The title documents and other records required for analysis must also be requested from the counterparty to the transaction. Furthermore, a comprehensive due diligence includes a review of the current territorial planning and urban zoning regulations. This analysis determines the urban development regulations applicable to the plot and identifies whether it is located within any zones with special conditions of use (e.g., conservation zones, easements).

6) Is it possible to change the designated use of land (re-zoning) for the project, what is the process, timing, risks of refusal, and possible appeals?

Under Russian law, the designated use of land is defined by its classification into a specific category (e.g., lands of settlements, agricultural lands) and its permitted use type (e.g., commercial retail facilities). It is crucial to distinguish between changing the land category and changing its permitted use type, as these are distinct legal procedures.

Changing the land category is a significantly more complex process, permitted only in specific circumstances defined by law. It requires an application to the authorized public authorities. The procedure for changing a land category typically takes 6 to 12 months on average.

Permitted use types are classified as primary, auxiliary, and conditionally permitted. Right holders can independently select primary and auxiliary use types without requiring additional permits or approvals. However, a permit for a conditionally permitted use type must be obtained from the local municipal government. The process for obtaining this permit also typically takes 6 to 12 months on average.

The primary grounds for a denial to change a land category or to grant a permit for a conditionally permitted use include: 

• Direct legal restrictions or prohibitions.
• Failure to comply with the established application procedure.
• A negative opinion from the State Environmental Expert Review (if such a review is mandated by federal law).
• Inconsistency with the approved territorial planning and zoning documentation.
• Non-conformity of the application or supporting documents with legal requirements. 

A refusal to change a land category or to grant a permit for a conditionally permitted use can be appealed in court.

7) What mechanisms exist to protect rights: registration of title, title insurance (if available), contractual penalties, international arbitration, investment agreements/stabilization clauses?

Protection of foreign investors' rights to the land plots in the Russian Federation is ensured through the same mechanisms available to the Russian entities. The key instrument is the state registration of ownership in the Unified State Register of Real Estate. In case of a rights violation, a foreign investor may file a claim in court to protect its rights. In addition, recovery of damages and contractual penalties in accordance with applicable laws and terms of the concluded agreements is available as well as application to the law enforcement agencies. Foreign owners may also arrange for title insurance from a Russian insurance company.

8) What are the tax and payment aspects: land tax, lease payments/indexation, VAT/profit tax on disposal, incentives for priority investment projects, transfer pricing in land transactions?

Land Tax: A foreign legal entity with a permanent establishment in the Russian Federation that uses immovable property in the course of its activities is subject to property tax at the general rates established by the regional legislation of the location of the property.

Lease Payments / Indexation: Civil law allows the parties to independently determine the price and terms of the contract, including the mechanism for rent adjustments, even if one of the parties is a foreign legal entity. Rent indexation is not mandatory and may be applied to reflect inflation or exchange rate fluctuations if expressly stipulated in the contract.

VAT: The sale of immovable property located in the territory of the Russian Federation is subject to VAT, except for transactions involving land plots (or shares therein). If the foreign seller has a permanent establishment in the Russian Federation, it must calculate and pay VAT and file the relevant tax return. If no permanent establishment exists: in the case of a sale to a legal entity, the purchaser acts as a tax withholding agent and remits VAT to the state budget concurrently with the payment to the seller. In the case of a sale to an individual, the foreign entity itself is responsible for paying the VAT.

Profit Tax: Where a foreign legal entity maintains a permanent establishment in the Russian Federation, it independently pays profit tax on income derived from the sale or lease of real estate in Russia. Where no permanent establishment exists, the Russian purchaser or lessee acts as a tax agent and withholds the profit tax from the foreign entity’s income.

Incentives for Priority Investment Projects: A priority investment project is one in which the total volume of foreign investments amounts to at least RUB 1 billion, or a project in which the minimum contribution of foreign investors to the charter (equity) capital of a commercial organization with foreign participation amounts to at least RUB 100 million. Under the applicable laws of the Russian Federation, foreign investors are guaranteed the observance of their rights and lawful interests in taxation matters, and tax and customs benefits may be granted in connection with foreign investments. The scope of such benefits is determined on a case-by-case basis, depending on the industry, the scale of the project, and the region of its implementation.

Transfer Pricing in Land Transactions: Transfer pricing is the establishment of market prices between related parties (for example, within a corporate group) as if they were independent parties. The purpose of transfer pricing is to prevent artificial underpricing or overpricing aimed at reducing the tax base or shifting profits to jurisdictions with lower taxation. If the tax authorities establish that the transaction price deviates from the market level by more than 20%, they will assess additional taxes and penalties based on the market price.

Authors: Pavel Balyuk, Elena Sayapina, Oksana Afanasyeva, Juliya Zhadan, Artem Kritsky, Vyacheslav Khorovskiy, Aleksandra Levenkova.