Certain transactions in intangible assets may require Government Commission clearance

Draft amendments to clause 1 of Presidential Decree No. 81 of 1 March 2022 (“Decree 81”) were published on the federal portal of regulatory acts on 7 December 2023.

Essence of suggested amendments and practical comments

The draft suggests supplementing Decree 81 with a new category of transactions requiring clearance from the Government Commission for Control over Foreign Investment in the Russian Federation (“Government Commission”).

This includes transactions involving the alienation or pledge of exclusive rights over intellectual property (“IP”) or means of individualisation.

Alienable IP and means of individualisation transactions which may fall within the scope of the amendments include, but are not limited to:

• computer software;
• databases (including their protection from unauthorised extraction and the reuse of their contents);
• integrated circuit layouts;
• inventions, utility models and industrial designs;
• successful varieties;
• trade secret (know-how);
• trademarks and service marks, business names; and
• scientific, literary and artistic works (see article 1259 of the Russia Civil Code), performances, audio recordings, messages of cable and on-air broadcasting organisations (see article 1304 of the Russian Civil Code).

The suggested amendments to Decree 81 imply that it is necessary to obtain clearance from the Government Commission only in relation to two types of transactions:

• the alienation of an exclusive right and
• the pledge of exclusive rights.

Considering this, licence and sublicence agreements (even those with exclusive licences) as well as commercial concessions agreements (franchising agreements) should not fall within the scope of the new regulations.

If the regulations that are now under consideration in relation to the abovementioned transactions are passed, they will come into force beginning from the day of the official publication of the relevant decree introducing such amendments to Decree 81.

Transactions with parties from which jurisdictions will fall within scope of restrictions under Decree 81?

The specific procedure described above will apply only to transactions made with:

• foreign persons who are the residents of “unfriendly” states; or
• persons controlled by foreign persons who are the residents of “unfriendly” states.

A person will be recognised as “unfriendly” if that foreign person is the national of an “unfriendly” state, his/her/its place of registration or primary place of doing business or making profit is an “unfriendly” state (Presidential Decree No. 844 dated 8 November 2023).

In this context, it is worth noting that persons simultaneously meeting the following requirements are not recognised as “unfriendly” (clause 12 of Presidential Decree No. 95 dated 5 March 2022):

• condition one — such person is controlled by Russian legal entities or individuals (being its ultimate beneficiaries).
  
  For the purposes of Presidential Decrees (including clause 12 of Decree 81), an entity is deemed to be under control if it satisfies one of the characteristics specified in article 5 of Federal Law No. 57-FZ dated 29 April 2008 “On the Procedure of Making Foreign Investment in Business Entities that are of Strategic Importance for National Defence and State Security” (clause 1.1 of Official Clarification No. 2-OR of the Central Bank of Russia dated 18 March 2022). More specifically, such characteristics include:
• the right to directly or indirectly control more than 50% of the total votes attributable to the voting shares (participation interest);
• the right or authority to determine the decisions made by the controlled entity; and
• the right to appoint the sole executive body and/or more than 50% of the collective executive body of the controlled entity and so forth.

A controlled entity is also considered to be under control if the controlling person has the right to directly or indirectly manage 50% or less of the total votes attributable to the voting shares (participation interest), provided that based on the voting shares (participation interest) owned by that person, such person is able to determine decisions made by the controlled entity.

• condition two — information on control over a foreign person was disclosed to Russian tax authorities according to the rules on controlled foreign companies (“CFC”).
  
  According to Russian CFC rules, disclosure of information on control over a foreign company implies, among other things, the service — by the controlling persons of such company — of:
• notifications of participation in a foreign company (as at the date of its incorporation or a change in the participation interest); and
• CFC notifications, with financial statements enclosed therewith.

The controlling persons must have copies of these notifications with the tax office’s notes of acceptance thereof.

The list of “unfriendly” states was approved by Russian Government Ordinance No. 430-r dated 5 March 2022.

Potential consequences of carrying out such transactions without Government Commission clearance

If the mentioned transactions are carried out without clearance from the Government Commission, they may be found invalid in court. There have already been a few court decisions concerning violations of Decree 81. For example, by virtue of Ruling of the Arbitrazh Court for the Moscow District No. F05-22512/2023 dated 23 October 2023 in respect of case No. А41-101031/2022 (the Bauer Technology case) a property sale and purchase transaction was for the first time held to be invalid because the parties had failed to obtain clearance from the Government Commission. The seller of the property was a Russian company whose sole shareholder on the transaction date was a resident of an “unfriendly” jurisdiction (namely, from Germany). The court ruled that for illegal purposes, with a view to carrying out illegal financial transactions, the parties acted in circumvention of the law and regulatory requirements governing the disputed relations as were in force at the transaction date. The court found the transaction invalid. The purchaser must, accordingly, give back the property received under the agreement to the claimant and the seller must pay back the funds so received.

Therefore, persons planning such transactions must assess the risks and the level of influence of the proposed amendments on relations with the contracting parties who are residents of “unfriendly” jurisdictions (or are controlled by “unfriendly” persons). It is also important to assess such transactions from the perspective of the compliance of their commercial and financial terms with the arm’s-length range (inter alia, taking into account the significant amendments to Russian transfer pricing rules that will come into effect on 1 January 2024).

The Denuo team will be pleased to assist you with assessing the effect of these amendments on the current structures and planned transactions involving assets from the mentioned list. We will be happy to make a review of corporate and contractual structures and financial and economic conditions of such transactions to determine whether they may potentially fall within the scope of the restrictions stipulated by Decree 81 (considering the amendments being analysed).