The problem of dividing the rights of beneficiaries to property transferred to a foreign trust as common property of spouses

Patronova Anastasiya Ruslanovna Postgraduate student; Department of Private International Law; O. E. Kutafin Moscow State Law University 52k1 Vavilova str., Moscow, 119296, Russia patronova.anastasian@gmail.com

Disputes over the division of the common property of spouses are one of the most common categories resolved by the courts. At the same time, these disputes are among the most sensitive. Especially if, during the marriage between the spouses, a prenuptial agreement was not concluded, and the parties were unable to settle the dispute peacefully. Thus, the family conflict develops into a long-term litigation. Problems in dividing the common property of spouses in court arise not only because of the complication of this process by the emotional factor of its participants, but in some cases due to the unknown Russian legislation of a number of legal institutions that are part of the assets of the spouses.

Thus, the Moscow City Court, considering the plaintiff's appeal in civil case No. 33-2311/2016 (2-4315/15) on the claim of N.N. Potanina against the companies "Whiteleaf Holding Limited", "Oldfrey Holding Limited" and V.O. Potanin on the division of jointly acquired property of the spouses, indicated that the rights of beneficiaries to common corporate the assets of the spouses "cannot be attributed to property both in the civil law sense and in the family law sense" [The appeal ruling of the Moscow City Court dated 01/20/2016 in the case № 33-2311/2016 № 2-4315/15]. This dispute has been repeatedly the subject of research in various scientific papers, as it is a precedent that established the principle of the impossibility of recognizing beneficial rights as common property of spouses only on the basis of the obscurity of this construction to domestic law. In this study, we propose to analyze whether the impossibility of qualifying the beneficial rights of spouses to property transferred to a foreign trust, in accordance with the norms of Russian legislation, deprives the interested party of the right to judicial protection.

Since the collapse of the Soviet Union, due to the growing welfare of the population and the formation of the so-called oligarchic stratum, the transfer to a foreign trust has become a popular way of accumulating the common property of spouses among the citizens of our country. Many works of domestic authors have been devoted to the understanding of a trust as a foreign legal institution, where this construction is considered in comparison with the institute of trust management of property (V.S. Novikova ^[1], S.L. Budina ^[2], N.V. Sokolova ^[3]). At the same time, in most existing scientific works, the issues of dividing property transferred to a trust are studied using the example of the practice of foreign courts. One of the few authors who consider in their scientific works the problem of extending the regime of common property of spouses provided for by Russian law to assets transferred to a trust is V.A. Kanashevsky ^[4].

The classic definition of a trust is the following: "this is a legal relationship in accordance with which the founder of the trust (settlor) transfers property to one or more trustee, trustee, who manages the specified property in the interests of one or more beneficiaries" ^[5]. The main advantages of transferring property to a trust are: consolidation of property, transfer of property to the management of a professional manager, protection of property from creditors' claims, obtaining beneficial rights to property held in the trust. The situation becomes more complicated when the actual marital relations of the parties are terminated, and one of the spouses demands the division of the property transferred to the trust, or the recognition of beneficial rights by common property for the purpose of subsequent division.

Over the past decades, the courts of the Russian Federation have repeatedly faced cases on the division of such property at the claims of one of the spouses. Until 2022, citizens of the Russian Federation, along with citizens of European states, generally acted as founders of the trust in accordance with the legislation of the country where it was established. The situation has changed due to the adoption by the Parliament of the European Union of EU Regulation 2022/576 (Council Regulation (EU) 2022/576) [Council Regulation (EU) 2022/576 of 8 April 2022 amending Regulation (EU) No 833/2014]. Article 5m of the adopted Regulations actually prohibits Russian citizens from being founders or beneficiaries of European trusts, foundations or similar structures. Among the prohibitions adopted are: "the creation or management of trusts and similar structures in the EU for Russians as founders or beneficiaries, the provision of an address, as well as the services of a director, secretary or shareholder for such structures" ^[6]. The restrictions imposed, however, do not negate the relevance of the problem under consideration, since the courts of general jurisdiction of the Russian Federation are the preferred forum for resolving disputes on the division of common property, including those located abroad, due to the speed of legal proceedings and economic benefits for the parties compared with the courts of most European states.

The transfer of the jointly acquired property of the spouses to a foreign trust means the conscious subordination of the trust to the legal regime of a foreign state based on the concept of split ownership, when one part of the owner's powers (management and disposal of allocated property) belongs to the trustee, and the other part (receiving income from the exploitation of property) belongs to the beneficiary. Analyzing the essential nature of the trust, V.A. Kanashevsky notes that: "the title of ownership under common law (legal title) belongs to the trustee, and the title under equity (equitable title) belongs to the beneficiary (beneficiaries). That is why a trust is defined as "a right that can be enforced by equity" ^[7]. Accordingly, the property transferred to the trust by one of the spouses cannot be divided between them only in accordance with the rules of Russian legislation, since the institution of trust is unknown to Russian law, and there is no equity law in Russia as an independent legal system regulating relations between trust entities.

The legislation of the Russian Federation proceeds from the principle of community of property acquired by spouses during marriage (Article 34 of the Family Code of the Russian Federation) [Family Code of the Russian Federation dated 12/29/1995 No. 223-FZ]. In accordance with the provision of the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 05.11.1998 No. 15 "On the application of legislation by courts when considering divorce cases", the property to be divided includes the common property of the spouses that they have available at the time of consideration of the case or held by third parties [Resolution of the Plenum of the Supreme Court of the Russian Federation from 05.11.1998 No. 15 (as amended on 02/06/2007) "On the application of legislation by courts when considering cases of divorce"]. Thus, the literal interpretation of the current legislation and the explanations of the highest court mean that only the property belonging to them at the time of the dispute is subject to division between the spouses.

The design of a trust in which one of the spouses or both spouses are its founders assumes that the jointly acquired property transferred to it leaves the possession of the spouses and becomes the property of the trustee of the trust, who in turn exercises the rights of the owner in the interests of the beneficiary on the terms prescribed in the trust deed agreement.

The difficulty lies in the fact that the Russian legal system proceeds from the impossibility of dividing the statute of ownership. All three powers of the owner, namely the right of ownership, the right to use and the right to dispose of property, are concentrated in the hands of one person. While common law countries proceed from the possibility of such a division, which makes it possible for the institution of trust to exist: the entire triad of owner's rights belongs to the trustee, while the right to receive income from property management, as well as the possibility of receiving property transferred to the trust in the future belongs to the beneficiary. This complex structural model is based on the concept of "splitting" property rights historically established in the countries of the Anglo-Saxon legal system. Moreover, these powers of the owner "have independence and even in a fragmented form are sufficient for the person endowed with them to be considered the owner of the property" ^[8].

Despite the fact that the concepts of trust and beneficial ownership are unknown to Russian law, spouses who have transferred common property to a foreign trust of which they are beneficiaries cannot be denied judicial protection only on the above basis. According to Part 2 of Article 1187 of the Civil Code of the Russian Federation (hereinafter – the Civil Code of the Russian Federation), "if, when determining the law to be applied, legal concepts requiring qualification are not known to Russian law or are known in a different verbal designation or with a different content and cannot be determined by interpretation in accordance with Russian law, then when they are qualifications may be applied by foreign law" [Civil Code of the Russian Federation (Part Three) dated 11/26/2001 No. 146-FZ]. It is this provision that the law enforcement officer should be guided when considering disputes about the division of the common property of spouses transferred to a foreign trust.

As established by Part 1 of Article 1191 of the Civil Code of the Russian Federation, the ex officio court is the body that establishes the content of the norms of foreign law. Thus, having identified the presence of a foreign element in the dispute under consideration, the court must turn to the stage of choosing the applicable law. As a general rule, when determining the law to be applied, the interpretation of legal concepts is carried out in accordance with Russian law. However, in the case of a trust, as a concept unknown to the Russian legal system, already at the stage of qualification of legal concepts, that is, the choice of applicable law, foreign law should be applied, recognizing such a construction as a trust.

In practice, in the vast majority of cases, the courts, when faced with the concept of beneficial ownership, refuse to recognize it as the common property of the spouses with reference to the provisions of the family legislation of the Russian Federation and the Resolution of the Plenum of the Supreme Court of the Russian Federation dated 05.11.1998 No. 15. In the previously mentioned dispute over the claim of Potanina N.N. to the company "Whitelife Holding Limited", the company "Oldfrey Holding Limited", Potanin V.O. on the division of jointly acquired property, the courts of both instances (first instance and appeal), refusing to divide the beneficial rights of the spouse in offshore companies, pointed out that the beneficiaries rights cannot be attributed to "property" both in the civil sense (Article 128 of the Civil Code of the Russian Federation) and in the family legal sense (paragraph 2 of Article 34 of the IC of the Russian Federation), including property to be divided between spouses (Article 38 of the IC of the Russian Federation). According to the courts, taking into account the fact that the plaintiff's claims for the division of common property were declared in respect of shares owned by companies, and not by the former spouse Potanin V.O., there are no legal grounds for satisfying claims for the division of common property of the spouses.

In accordance with the definition of the Moscow City Court, "Article 34 of the IC of the Russian Federation extends the regime of community of property of spouses only to such property that directly belongs to one or both spouses. Neither this article nor any other norm of family law includes in the composition of the common property of the spouses that property that does not belong to the spouses or one of the spouses. <..Neither the family legislation of the Russian Federation nor the civil legislation of the Russian Federation know the concept of "beneficial ownership" and do not attach any legal significance to this concept. Such property is not a subjective civil right, therefore its attribution to the common property of the spouses and division between the spouses is impossible" [The Moscow City Court's Appeal ruling of 01/20/2016 in the case № 33-2311/2016 № 2-4315/15]. The plaintiff's cassation complaint against the judicial decision of lower instances was not submitted for consideration to the board of the Supreme Court of the Russian Federation [Ruling of the Supreme Court of the Russian Federation dated 10/24/2016 in case No. 5-KG16-164].

It is obvious that these court rulings run counter to the rules of qualification of legal concepts unknown to Russian law. With this approach of the courts, in the case of the transfer of common property by an enterprising spouse to a foreign trust before the impending dissolution of marriage, the conscientious spouse will be left without a part of the property due to him by law. In foreign countries, the transfer of property by a spouse to a trust immediately before initiating the divorce process is the basis for recognizing such a transfer as invalid ^[9].

Nevertheless, at the same time (2015-2016), Russian courts are forming a diametrically opposite judicial practice on a similar issue to the Potanin case. Thus, in the case of Sergeeva A.A.'s lawsuit against Dubin M.L., the Supreme Court of the Russian Federation pointed out the need to prove the ownership of property held in trust to a certain person: "Due to the special legal regime of companies registered in offshore zones and the non-public ownership structure of these companies, the independent presentation of evidence about the beneficial owner of Tripleton International Limited companies"and Manford International Limited was difficult for Sergeeva A.A., in connection with which, in accordance with Article 57 of the Civil Procedure Code of the Russian Federation, she appealed to the court with a corresponding petition, which was granted. However, by the time the decision was made and its review on appeal, the information on the request had not been received by the court. The reasons for the non-fulfillment of the request and information on the progress of its execution by the courts were not established. In such circumstances, the refusal to satisfy the claims of Sergeeva A.A. due to the lack of proof of the fact that the above-mentioned companies belong to Dubin M.L. indicates a violation by the courts of the right to a fair trial guaranteed by paragraph 1 of Article 6 of the Convention for the Protection of Fundamental Human Rights and Fundamental Freedoms, as well as Article 123 of the Constitution of the Russian Federation" [Definition of the Supreme Court of the Russian Federation dated 07.07.2015 in case No. 5-KG15-34].

In development of the provision on the need to prove the figure of the beneficial owner, the Judicial Board for Economic Affairs of the Supreme Court of the Russian Federation notes that "the legal regime of property belonging to a foreign legal entity is determined by the law of the relevant foreign jurisdiction" [Definition of the Judicial Board for Economic Affairs of the Supreme Court of the Russian Federation dated March 31, 2016 in case No. 305-ES15-14197]. Thus, it is impossible not to agree with O. Sirazhetdinova's conclusion that in the case of qualification of a legal concept and choice of applicable law, the fact that the beneficiary of a foreign company is a citizen of the Russian Federation does not have legal significance.

Case No. A63-5209/16 is also a precedent-setting case on the claim of citizens of the Russian Federation, in particular, against a trust company located in the Republic of Cyprus, for invalidation (void) of share subscription agreements. When considering this case, the Supreme Court of the Russian Federation recognized the ownership of the property transferred to the trust for the beneficiaries-citizens of the Russian Federation, in connection with the trust being under their control and management. Moreover, the court applied the provisions of Article 1012 of the Civil Code of the Russian Federation governing the trust management agreement to the relations in question [Definition of the Judicial Board for Economic Disputes of the Supreme Court of the Russian Federation dated May 31, 2017 No. 308-ES17-1916]. Also, the Court of Appeal and the Supreme Court of the Russian Federation based the court rulings on the interpretation of the norms of foreign law given in the opinion of the lawyer of the Bar Association of the Republic of Cyprus.

It should be noted that in addition to the problem of determining the legal nature of the beneficiaries' rights to property transferred to a foreign trust, the courts face significant difficulties in distributing the burden of proof in such a category of cases. A legally significant circumstance in resolving claims for the division of beneficial rights to property transferred to a foreign trust is the possibility for the court to familiarize itself with the trust creation agreement and other corporate documents in order to study the ownership structure of the property. However, according to the provisions of the legislation of most jurisdictions that are popular for creating a trust due to the special tax regime, the figures of the founder and beneficiaries of the trust are confidential. The scientific literature indicates that the beneficiaries of the trust are protected by a well-developed set of legal norms that establish very strict restrictions on the management of trust property ^[10]. The ownership structure of the property is also non-public and is not subject to disclosure without the request of the authorized body. As O. Sirazhetdinova notes, courts need to send requests for information about the beneficiaries of companies to the relevant public authorities of foreign countries, as well as involve this foreign legal entity in the case ^[11]. However, at the moment there are high risks that disputes about the division of assets of a foreign organization based on claims by Russian citizens will not be able to be considered objectively and fully by domestic courts due to the low enforceability of judicial requests by competent foreign authorities.

Thus, the beneficial rights of the spouses to the property transferred to a foreign trust are actually existing claims secured by economic benefits. According to the current legislation of the Russian Federation, all property acquired by spouses during marriage is their joint property and can be declared for division in court. Despite the fact that beneficial rights as such are not property due to the literal interpretation of this concept, they consolidate the real property interest of the spouses (one of them) in the property transferred to a foreign trust. Therefore, a fair division of common property without taking into account the actual well-being of the spouses, including property rights, is impossible.

The lack of knowledge of the concept of beneficial ownership and trust in domestic law cannot be a reason for refusing judicial protection of the rights of an interested party. In the current situation of disparate judicial practice, it seems necessary to adopt explanations from the highest judicial instance of Russia indicating the court's obligation to refer to the provisions of foreign legislation when considering cases complicated by a foreign element. In practice, the court has effective ways of establishing the content of foreign law. Due to the interest of the parties in proving the circumstances of the case, they most often submit various legal opinions, affidavits interpreting the norms of foreign law.

Thus, the correct evidence base, namely, proving the opponent's property interest in the property transferred to the trust, tracing the chain of transfer of property are essential factors for recognizing disputed assets as common property of the spouses and their subsequent fair division.