New procedure for distributing profit (dividends) to “unfriendly” members (shareholders) of Russian companies

Newly introduced (parallel) profit (dividend) distribution approval procedure

The Subcommission of the Government Commission for Control over Foreign Investment in the Russian Federation issued their minutes of the meeting No. 182/5 dated 9 August 2023 (“Minutes”) establishing that foreign “unfriendly” shareholdersFrom here onwards including members and shareholders may be entitled to receive profitsFrom here onwards including dividends of Russian companies (limited liability companies and joint-stock companies) in circumvention of the special procedureA limit of RUB10 million per month or an “S”-type account and without the approval of the Ministry of Finance of Russia (“New Procedure”):

• provided the foreign shareholders invested in the Russian economy after 1 April 2023 (including the expansion of production in the Russian Federation and the development of new technology); and
• to an amount not in excess of such investment.

What qualifies as investment?

According to Russian lawArt. 1 of Federal Law No. 39-FZ dated 25 February 1999 “On Investment Activity in the Russian Federation Carried out in the Form of Capital Investment”, art. 2 of Federal Law No. 160-FZ dated 9 July 1999 “On Foreign Investment in the Russian Federation” and art. 2 of Federal Law No. 69-FZ dated 1 April 2020 “On the Protection and Promotion of Capital Investment in the Russian Federation”, investment is generally understood to mean the funds, securities, other assets, including property rights and other rights of monetary value, as may be invested in entrepreneurial and/or other activities to receive profit and/or achieve another useful effect.

No official clarifications have been released so far as to what specifically qualifies as an investment for the purposes of the Minutes.

According to unofficial comments of the Ministry of Industry and Trade of the Russian Federation, investment should be understood as investments in fixed assets, including intangible assets, namely not simply any investment, but capital investmentArt. 1 of Federal Law No. 39-FZ dated 25 February 1999 “On Investment Activity in the Russian Federation Carried out in the Form of Capital Investment”. The Ministry of Industry and Trade are themselves waiting for clarifications of the Ministry of Finance of Russia.

Who should make the investment?

A literal interpretation of the Minutes suggests that the investment refers to an investment to be made by foreign shareholders themselves. However, according to the unofficial comments of the Ministry of Industry and Trade, capital investments made by Russian companies that are controlled by “unfriendly” shareholders will also qualify as investments. A separate question is that of the need to document the will of the shareholders to make such investments.

Restrictions of the New Procedure and how it correlates with other procedures

It is important to note that the Ministry of Finance of Russia unofficially advised that the New Procedure should apply only to the portion of the profit that was not distributed under the special procedure (RUB 10 million per month).

A resident keeps the right to obtain clearance from the Ministry of Finance of Russia in respect of the distribution of part of the profit under the clearance procedure.

As the procedure of obtaining clearance under the New Procedure also includes filing an application with the relevant ministry, all of the issues described above will, to a large extent, depend on the ministries’ position.

For example, the Ministry of Industry and Trade explains that where a resident has sufficient retained earnings (inter alia, from past periods), clearance can be given in respect of the distribution of profit to the full amount of the investments.

Existing profit distribution clearance procedure

Last year, by Decrees No. 95 of 5 March 2022 and No. 254 of 4 May 2022 the President of the Russian Federation introduced restrictions on profit distributions — by Russian companies to shareholders from “unfriendly” jurisdictions — in excess of RUB 10 million per month.

Generally, such distributions must be made to a special “S”-type account opened in the name of a foreign shareholder (“Special Procedure”) unless the Russian company, who is the payer, has obtained separate clearance from the Ministry of Finance of Russia to distribute profit in circumvention of the Special Procedure (“Clearance Procedure”).

During the past year, the Ministry of Finance and other relevant ministries’ requirements for residents to receive such clearance were constantly changing and were finally formalisedMinutes of the meeting of the subcommission of the Government Commission for Control over Foreign Investment in the Russian Federation No. 118/1 dated 22 December 2022 and No. 171/5 dated 14 June 2023/7 July 2023 (no more than 50% of the last year’s net profit, a consistent dividend policy, the readiness to continue doing business in Russia, and compliance with the key performance indicators (KPIs) only in December 2022.

The initial assessment of the resident’s position and business is caried out by the relevant ministry (usually the Ministry of Industry and Trade of the Russian Federation) which must negotiate and “defend” the residents’ clearance application before the Ministry of Finance of Russia.

Each of the relevant ministries (and departments inside the ministry) have varying opinions on the abovementioned criteria; furthermore, the specified criteria are constantly changing.

For example, in spring 2023, some of the departments of the Ministry of Industry and Trade of Russia required that companies must necessarily provide a forecast in relation to one key performance indicator (KPI) only and a statement on the intention to further continue doing business in the Russian Federation could be signed by the resident’s general director. However, currently the requirements include a forecast in relation to two KPIs as a minimum and the statement on the intention to further continue doing business in the Russian Federation must be signed by nobody else, but the foreign shareholder itself.

It is also important to note a change in the position of the Ministry of Finance regarding the Special Procedure (either RUB 10 million per month or an “S”-type account) and Clearance Procedure.

Before now, the Ministry of Finance and other relevant ministries would not reduce the amount of profit in respect of which clearance is given for distribution in circumvention of the Special Procedure (50% of the past year’s net profit) by the amount of profit distributed within the limits of RUB 10 million per month.

Currently, the unofficial position of the Ministry of Finance is such that the amount of profit in respect of which clearance is given should be reduced by RUB 10 million as are payable in profit per month.

However, if the profit of RUB 10 million is paid not from the last year’s profit, but, for example, from the profit of prior periods, and the resident can prove this (which is a separate problem), then there should be no reduction in the amount of profit to be approved as described above.

The clearance of the Ministry of Finance to distribute profit in circumvention of the Special Procedure is to be obtained on an annual basis, while the distribution of the approved amounts of profit occurs on a quarterly basis, in four instalments.

Before each such distribution the relevant ministry will check whether the resident complies with the KPIs and where the KPIs have not been achieved (even RUB 1 less), the relevant clearance in respect of the relevant quarter will be revoked and it will no longer be possible to pay profit for that quarter.

This empathises the importance of giving quite conservative forecasts in relation to KPIs.

Considering the absence of an official position and certain discrepancies in the opinions of the Ministry of Finance and the relevant ministries, we expect the Ministry of Finance to release official (addressed to residents) or unofficial (for the relevant ministries) clarifications by the end of the year.

We have extensive experience of assisting businesses with obtaining their profit distribution clearances from the Ministry of Finance, which we would be happy to share while discussing the details of particular cases.