Russian Law Developments

Regulation of Transactions in Relation to Russian LLCs

The Russian Federal Law No. 14-FZ “On Limited Liability Companies” (the LLC Law) has been subject to substantial revision and modernization during the last few years. Another set of changes to the LLC Law came into force on January 15, 2016.

Under the amendments to the LLC Law, as a general rule, the title to a participation interest in the charter capital of a Russian limited liability company passes to an acquirer of that participation interest at the moment the relevant record of that transfer is made by the state registration authority in the Unified State Register of Legal Entities. The general requirement for the notarization of transactions involving title transfer remains unchanged.

As a result of these amendments, the moment of transfer of title to a participation interest now falls outside the control of the parties to a sale and purchase agreement. Accordingly, completion mechanisms where the payment of the purchase price and the transfer of title in an LLC could previously be achieved simultaneously no longer work in this manner.

The LLC Law further establishes the long-awaited procedure for the exercise of an option to purchase a participation interest in an LLC: the relevant agreement can be exercised by means of notarial certification of an irrevocable offer and (subsequently) by notarial certification of its acceptance. The irrevocable offer is deemed accepted as of the day of notarial certification of its acceptance. It is provided that the exercise of an offer may also be made subject to fulfilment of certain conditions.

In addition, the amendments change the time periods for performance of various registration actions by notaries. In particular, it is now possible to extend (upon the agreement of the parties) the term for filing an application for state registration of the transfer of title to a participation interest in the charter capital of an LLC (the statutory term being two business days).

Statutory Inspections of Joint Stock Companies

With effect from January 2016, the Russian Central Bank introduced regulations in relation to the manner and grounds for conducting official inspections and audits over joint stock companies, shareholders and some other categories of participants of corporate relationships (Instruction of the Bank of Russia No. 3795-У, dated September 13, 2015). The aim of the regulations is to ensure compliance of the target companies and persons with the applicable corporate and securities legislation. The regulations provide for distant and field inspections which are differentiated depending on the scope and purposes of the audit. In particular, field inspections may involve the authorities visiting the place where a general shareholders’ meeting is being held to verify the compliance of the procedural aspects of such a meeting with applicable legal requirements. The regulations do not affect limited liability companies.

Disclosure of Ultimate Owners of Real Estate

Following recent amendments to the Russian tax legislation, foreign companies which own immovable property in Russia are now obliged to notify the Russian tax authorities of the owners of such companies and their beneficiaries and managers in the manner prescribed by tax legislation. The same requirement relates to owners of Russian real estate who do not constitute a legal entity. Failure to notify exposes the relevant person / entity to an administrative fine that may be equal to the amount of respective property tax (which in certain cases may be quite significant).

Identification of Foreign Investor’s Control over Russian Subsoil User

The Decree of the Russian Government No. 1155, dated October 28, 2015 (the Decree), which came into force on November 11, 2015, specified the mechanism of determination of the existence or absence of foreign control over subsoil users involved in conducting geological exploration works under a combined license with respect to the subsoil plots of federal significance in Russia. The Decree also stipulates the procedure for determining whether the subsoil user itself is a foreign investor.

It is envisaged that the subsoil users shall file with the Russian Federal Agency of Subsoil Use (Rosnedra) an application seeking the Government’s permission for detailed prospecting and mining. Such applications will be accompanied by an extensive set of documents which provide details of the persons directly or indirectly controlling the subsoil user, the participation of such persons in management of the subsoil user’s activities and their ultimate beneficiaries. In order to detect cases of foreign control, the Decree introduces more stringent requirements regarding the information to be provided in order to determine whether subsoil users are either legal entities controlled by a foreign investor or are foreign investors themselves.

The Russian Federal Antimonopoly Service (FAS) is now the authority entitled to confirm cases of foreign control. Accordingly, where FAS establishes that the subsoil user is neither a legal entity controlled by a foreign investor nor a foreign investor itself, Rosnedra shall notify the subsoil user that it is allowed to proceed with detailed prospecting and mining of minerals on the subsoil plot of federal significance without the permission from the Russian Government. In the event that foreign control has been identified by FAS, the application for obtaining the Government’s permission for detailed prospecting and mining is to be considered by the relevant state authorities in the prescribed manner.

Jurisdictional Immunity Restrictions

On November 3, 2014 the Russian President signed the Federal Law No. 297-FZ “On Jurisdictional Immunities of a Foreign State and Property of a Foreign State in the Russian Federation” (Immunity Law) which came into force on January 1, 2016.

The Immunity Law is primarily aimed at discouraging foreign states from diminishing the immunity of Russian property located abroad. In particular, the Immunity Law introduced the principle of reciprocity in issues regarding the application of jurisdictional immunities. The jurisdictional immunities of a foreign state in Russia may be restricted based on this principle should it be established that the foreign state imposes restrictions with respect to the immunities of Russia or its property in the foreign state's territory.

Among the key aspects of the Immunity Law are, inter alia, the establishment of a single principle of the relative immunity of a foreign state for all types of court proceedings in Russia; providing for a list of relationships with respect to which a foreign state does not possess immunity from suit; setting a legal framework of immunity from measures of constraint and enforcement of judgment. In addition, the Immunity Law sets forth a list of property that is deemed connected with the exercise of sovereign powers by a foreign state.

Arbitrability of Corporate Disputes

Russian court practice during the last decade treated disputes concerning ownership of shares / participation interests in Russian companies (including the disputes arising out of foreign-law governed share purchase agreements) to fall within the exclusive jurisdiction of Russian state courts.

Under the recent amendments to Russian law, disputes arising out of transactions with respect to the shares / participation interests in Russian companies will become arbitrable starting from 1 February 2017. However, such disputes will need to be administered by a registered arbitral institution and the legal seat of arbitration must be in Russia. There is a statutory provision that arbitration clauses with respect to such disputes may only be concluded starting from February 1, 2017.

Amendments to “Thin Capitalization” Rules

Significant amendments to the Russian “thin capitalization” rules will be introduced from January 1, 2017.

Prior to the amendments, the rules primarily targeted three situations involving the amount of deductible interest paid to: (1) a foreign shareholder controlling over 20% of capital of a Russian borrower; or (2) its affiliated company; or (3) any third party (provided the 20% foreign shareholder or its affiliate guaranteed the repayment).

As a result of the amendment, the scope of the “thin capitalization” rules will become substantially wider and the rules themselves more sophisticated. Accordingly, the 20% shareholder and its affiliate (acting as creditors) are substituted, respectively, with “foreign party related to borrower” and “party related to foreign related party” – both acting as creditors. As before, the rules continue to apply to third party loans guaranteed by the two parties mentioned above whose definitions are restated. The newly introduced concepts of a “foreign party related to borrower” and a “party related to foreign related party” are, generally, based on similar notions initially designed for the Russian transfer pricing regulations.

It is worth noting that the Russian court may hold an arrangement formally not covered by the above rules as being subject to these rules in cases where it is established that an interest under a loan is ultimately due to the companies covered by the rules.

Certain interest is excluded from the rules, in particular: (i) interest paid by a Russian company to a foreign SPV issuing publicly traded bonds, (ii) interest paid to a Russian party related to a foreign related party if the Russian party does not have comparable debt obligation to the foreign party it is related to (this is aimed at excluding back-to-back arrangements), etc.

Alloyed Gold and Gold Containing Concentrate Taxed as Minerals

From January 1, 2016 the Russian Tax Code has been amended to clarify whether alloyed gold and gold containing concentrates constitute pre-product to be taxed with the Mineral Extraction Tax (MET). Previously the Russian Tax Code simply stated that pre-products containing precious metals are subject to MET. This unclear definition has led to questions regarding the calculation of MET’s base, the applicability of MET to producers of alloyed gold and concentrates containing precious metals, etc. The Federal Tax Service, the courts and taxpayers have at times taken opposing views on the matter. This uncertainty is now eliminated by the clear definition that alloyed gold which corresponds to national technical standards (or technical standards of the taxpayer) and gold containing concentrates are mineral resources the extraction of which is taxed with MET.