“External Management” Taxes on Foreign-Invested Enterprises in Russia

Protect your Russian business and assets under sanctions and new national regulations

Many international companies, mostly top brands, have left Russia as a shareholder, national government and media pressures on them have persuaded many that for now, Russia is too hot a political potato to handle. Others have opted out, but may also face changes in their business operations based on their performance.

Russia is soon to pass laws to incentivize this, issuing regulations on a draft law titled “On External Administration for the Management of the Organization.” These describe the conditions under which the Russian management can proceed with the management of large companies with foreign capital that have decided to leave the Russian market after the start of the sanctions or whose performance is declining.

The bill, which is expected to be adopted by the State Duma in a few days, assumes that the external management will be appointed by court order for organizations “of significant importance” for the Russian economy, and will include all companies with a minimum of 25% of the shares held by foreigners.

External management in Russia

“External management” can be applied to almost any company whose turnover has decreased before the end of June 2022 and has been put in place to prevent any deliberate stripping of assets or any other reduction in the overall operations of the company.

The draft law introduces the possibility of imposing an external management board in almost all organizations with foreign participation. The main thesis of the bill suggests that if companies do not return to their previous capabilities by the end of December 2022, then external management can be applied to most companies, and especially if sales volumes drop by at least 30 %.

The deadlines for conducting legal proceedings to impose external management have also been considerably reduced. The external managers appointed by the courts will be remunerated by the organization itself according to the rules established by the government.

This management can be assigned in two ways:

  1. A transfer of shares of the organization to the management of the trust
  2. A transfer of powers from the head of the organization to external management.

Termination of external management agreements in Russia

These forms of management will be valid for 18 months, after which they can be extended for the same period. However, external management can be terminated earlier than expected:

  1. At the request of the owners of the company if they plan to sell their shares or eliminate the circumstances due to which they were appointed to the external management.
  2. In the event of liquidation of the company. In the event of the opening of bankruptcy, the bill proposes to transfer the powers of the liquidator or the manager of the bankruptcy to the external administration. In addition, he will have a right of first refusal to acquire shares or interests in the organization, as well as its assets.

It should also be noted that in accordance with Decree of the President of the Russian Federation No. 81 of March 1, 2022, Government Decree No. 295 of March 6, 2022 was adopted, requiring the permission of the Russian Government Commission for the Foreign Investment Control to oversee transactions made by Russian nationals with foreigners. He is required to coordinate transfer operations of securities and real estate. Transactions with shares of the LLC will also require permission from the government commission.

Ongoing global changes in sanctions and the imposition of new regulations mean that foreign investors in Russia need to make decisions about their future activities in Russia as soon as possible.

Sell ​​Russian investment

This may include actively seeking Russian partners to transfer the business to external management, or to sell their business to companies from non-sanctioned countries (such as China, India or most Asian countries) who are willing and ready to enter the Russian market without spending money and time to build their own business infrastructure.

A later return to Russia

For many foreign business executives of foreign-invested enterprises in Russia, the priority right now may not be profit making which is most important, but the issue of preserving assets and maintaining the subsequent ability to return to the Russian market.

In this case, companies may consider transferring their assets to fiduciary management, selling to a controlled beneficiary, or transferring control of the company to a third party with the possibility of redemption.

Companies that have decided to leave Russia completely can transfer control to their partners when a profitable offer to sell the company arises. This step was taken by the German company “Obi GmbH”, (a network of construction stores). The company was transferred to the trust management of the Russian consulting group “Audit Group” for the subsequent search for a buyer and the sale of the business.

Another example is Renault, which decided to transfer its assets under a “purchase for 1 ruble” with the right to later return to the Russian market for similar considerations. Obviously, such transactions must be made with trusted advisors.

Foreign investors with assets or interests in Russia should make decisions based on the options currently available (reduction of the shareholding in the company’s capital, transfer to fiduciary management, sale of the company, sale of company with the possibility of buyout) as soon as possible. possible.

Dezan Shira & Associates have long-term relationships with Russian-based partners who can act as trustees and own assets in Europe or elsewhere that can be traded and posted as collateral. We also have an extensive Asian network of companies interested in the Russian market. Our President, Chris Devonshire-Ellis will be available in Russia in June to discuss these requirements and to liaise with attorneys to help facilitate these introductions and transactions. He can be contacted confidentially at [email protected]

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About Us

Briefing Russia is written by Dezan Shira & Associates. The company has 28 offices across Eurasia, including China, Russia, India and ASEAN countries, assisting foreign investors in the Eurasian region. Please contact Maria Kotova at [email protected] for Russian investment advice or assistance with market information, legal, tax and compliance issues throughout Asia.

Shirlene J. Manley