OFAC updated its FAQ on “exit tax”

On 30 March 2023, the US Treasury Department’s Office of Foreign Assets Control (“OFAC”) issued an update to its FAQ No 1118OFAC’s website (“Updated FAQ”) in relation to the payment of the so-called “exit tax” (according to the OFAC wording). Please be reminded that the “exit tax” payment is one of the conditions for obtaining the Sub-CommissionSub-Commission of the Government Commission on Monitoring Foreign Investments in the Russian Federation (“Sub-Commission”)’s clearance for the divestment of assets by entities related to “unfriendly” jurisdictions.

Our previous legal update in relation to FAQ 1118 is available in the Russian language on our website.

Updated FAQ

The key amendments published by OFAC can be summed up as follows.

Requirement to obtain a licence from OFAC

According to the Updated FAQ, US PersonsUnited States citizens, permanent resident aliens, entities organised under the laws of the US or any jurisdiction within the US, and their foreign branches and representative offices (“US Persons”) whose divestment of assets in the Russian Federation will involve the payment of the “exit tax” are required to seek a special licence from OFAC.

Previously, FAQ 1118 read that Persons “may obtain” a specific licence.

Content of request filed with OFAC

Applications for an OFAC Licence should include information, inter alia, the following information:

• the amount of the exit tax;
• the amount of taxes that would otherwise be paid to the Government of the Russian Federation if the seller were not divesting the asset (in our experience, OFAC may also request or will expect to be provided with information on the amount of taxes paid during the three years before the transaction);
• the impact of a failure to pay the “exit tax” (and the seller’s exit) on the employees in Russia;
• the economic activity conducted by the exiting company in Russia; and
• the impact on the Russian Federation (i. e., Russian economy, sector, etc.) of the foreign company’s exit.

In our view, in reviewing applications, OFAC will seek to strike a balance between (1) allowing the “exit tax” payment (which, in OFAC’s opinion, might be contrary to the goal and spirit of sanctions as it serves as an additional source of revenue for the Russian budget) and (2) the need and timing of exit/continued operations of “unfriendly” investors in Russia. For instance, one cannot rule out that, when reviewing applications, OFAC will analyse whether it would be preferable (from a sanctions perspective) to freeze activities or continue restricted activities in respect of a Russian asset (and pay taxes on a limited basis in the ordinary course of business) rather than pay a one-off “tax on profits” and divestment of the Russian asset.

Turnaround for applications

OFAC says it will expedite its review of such requests. However, OFAC notes that all applications will be considered on a case-by-case basis.

Therefore, the time needed for OFAC to review such applications will depend on a case-by-case basis. As a reminder, there is no statutory time limit for OFAC’s review of applications, and the deadlines can vary between one month and a year or more.

Given OFAC’s heavy workload, it cannot be ruled out that OFAC may prioritise certain applications at its discretion, which could have a negative impact on the turnaround of applications made in relation to “profits tax.”

No need to seek a separate licence from OFAC for the buyer to submit an application to the Commission

OFAC commented that the Sub-Commission includes officials of government agencies and persons subject to US sanctions.

However, OFAC clarified that no licence from OFAC is required for the Russian buyer to submit an application to the Sub-Commission.

In our view, the Updated FAQ only concerns the possibility of submitting an application to the Sub-Commission and does not affect OFAC’s position on the need for a licence in connection with the transaction.

Role of the Updated FAQ

In general, the Updated FAQ reflects OFAC’s practice since the publication of FAQ 1118.

In particular, US Persons (notwithstanding the previous, more general wording of the FAQ) have in practice often applied for a license from OFAC despite the fact that the “exit tax” is paid by the Russian purchaser.

Furthermore, the requirements for the content of the application to OFAC set out in the Updated FAQ also reflect those questions that OFAC already asked when reviewing the applications.

Therefore, the Updated FAQ and OFAC practice are an additional factor that should be considered when structuring and implementing transactions on the divestment from Russian assets by “unfriendly” sellers.