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Edict No. 737 and clarifications by the Ministry of Finance: New restrictions and clarifications added

18 October 2022
Law Messenger
Presidential Edict No. 737, adopted on October 15, and the clarifications of Edict No. 618, issued by the Ministry of Finance on October 13 establish a new framework for transactions with companies linked to persons from "unfriendly" countries:
  1. Transactions that require approval from the Government Commission include (a) the transfer of a stake to another company participant or a third party, (b) a stake buyout by a company, © a participant’s withdrawal from a company, (d) the transfer of a stake to an investment fund, (e) appointment of a managing company, (f) an agreement between a company’s participants, (g) a convertible loan, (h) a pledge of ownership interest or a contract to manage a pledge of ownership interest, (j) company reorganization, (k) a joint operating agreement, (l) a fiduciary management agreement, agency contract and other transactions that modify title to ownership interests in an LLC directly or indirectly (paragraph 10 of the clarifications by the Ministry of Finance).
  2. The Ministry of Finance clarified that a transaction approved in accordance with Edict No. 81 (approvals for transactions with securities and real estate) may also require approval of the Government Commission under Edict No. 618 if it indirectly modifies title to ownership interests in an LLC. However, the Ministry of Finance indicated that approval of the Government Commission is not required for a transaction ordered by the court against a person’s will. For instance, no approval is required to foreclose on pledged stakes or redomicile a company to an SAR.
  3. The clarifications by the Ministry of Finance do not refer to liquidation directly. However, Edict No. 737 provides that payments in excess of RUB 10 million per month to persons from "unfriendly" countries involving a reduction in charter capital, a legal entity’s liquidation or bankruptcy procedures can be transferred abroad only with individual permission from the Ministry of Finance (the Central Bank for financial institutions), while payments under the general rules are made to C accounts. Therefore, it can be concluded that liquidation of a company controlled by persons from "unfriendly" countries is permitted by the regulator, but its stakeholders will not automatically receive liquidation payments. In practice, liquidation procedures may be complicated by difficulties in notarizing the required documents.
  4. Edict No. 737 extended Edict No. 618's rules for transactions with ownership interests in LLCs to transactions with shares in joint stock companies (except for financial institutions). Therefore, all transactions listed above and involving joint-stock companies also require approval of the Government Commission, as well as approval of the Ministry of Finance/Central Bank for payments leading to a reduction in share capital or in cases of liquidation or bankruptcy procedures.
  5. Financial institutions (creditors, insurers, private pension funds, microfinance companies, private pension fund management companies and investment funds) need permission from the Government Commission for any transactions with more than 1% of shares involving or benefiting persons from "unfriendly" countries. The requirement does not apply to transactions carried out under Edict No. 520 (strategic companies targeted by a ban on transactions until the end of 2022) or to transactions with shares/stakes controlled by Russian persons or persons from friendly countries.
  6. It is important to note that paragraph 3 of the clarifications by the Ministry of Finance provides that the disclosure of control of a foreign entity by Russian persons for the purposes of Edict No. 618 is disclosure in the sense of Article 25.14 of the Tax Code. In other words, only beneficiaries that are Russian tax residents are eligible for the exemption.
Authors:
  • Georgy Kovalenko
    Partner
    Law Group
  • Vasily Makovkin
    Director
    Law Group
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