In February 2026, the court adopted a precedent-setting decision in the case of Signal-Invest LLCDecision of the Arbitrazh Court of the Saratov Region dated 17 February 2026 in case No. А57-327/2025.. Under this decision, for the first time the issue concerning the tax consequences of the gratuitous distribution of participation interest redeemed by the company upon the withdrawal of one participant among the remaining participants was considered.
Based on the provisions of article 41 and clauses 1 and 2 of article 211 of the Russian Tax Code, and article 105.3 of the Russian Tax Code, the court recognised that the gratuitous transfer by the company to the remaining participants of the property right (participation interest) of the former participant results in income in kind, where the taxable base for personal income tax is determined in a manner similar to that provided for transactions between related parties, i.e., at market value.
Position of the Russian Ministry of Finance
In its clarifications on the issue of taxation of individuals when participation interest of a former participant is being distributed, the Russian Ministry of Finance adhered to a generally uniform approach and recognised the receipt of taxable income in kind by the remaining participants, for which article 23 of the Russian Tax Code does not provide grounds for an exemptionLetters of the Russian Ministry of Finance No. 03-04-05/78157 dated 20 August 2024, No. 03-04-06/112947 dated 18 November 2022, No. 03-04-05/50514 dated 25 June 2021, No. 03-04-06/48973 dated 22 August 2016, No. 03-04-05/38557 dated 5 August 2014, No. 03-04-06/8031 dated 15 March 2013, No. 03-04-06/5947 dated 28 February 2013, No. 03-04-05/3-226 dated 27 February 2012, No. 03-04-06/2-26 dated 9 March 2010, No. 03-04-06-01/360 dated 25 October 2007..Guided by the provisions of Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998 (“LLC Law”), the Russian Ministry of Finance also clarified the methodology for calculating the tax base for income in kind for personal income tax purposes based on the actual value of the former participant’s participation interest and the received portion of the relevant participation interestLetters of the Russian Ministry of Finance No. 03-04-06/7991 dated 9 February 2018, No. 03-04-06/105281 dated 2 December 2020, No. 03-04-05/5074 dated 29 January 2019, No. 03-04-07/88812 dated 6 December 2018..
Nevertheless, the Russian Ministry of Finance has repeatedly presented its position on determining the tax base for personal income tax under the rules of article 105.3 of the Russian Tax Code, i.e., based on market valueLetters of the Russian Ministry of Finance No. 03-04-06/112947 dated 18 November 2022, No. 03-04-05/50514 dated 25 June 2021, No. 03-04-07/61655 dated 2 December 2014., and has also explained the basis for its calculation.
Signal-Invest LLC case
Following the results of a desk tax audit of the amended calculation of personal income tax amounts assessed and withheld by the tax agent, submitted by Signal-Invest LLC (“Company”), according to Form No. 6-NDFL for 2022, the tax authority assessed additional personal income tax on the Company as the tax agent.According to the tax authority, the participants of Signal-Invest LLC received taxable income in kind as a result of the proportional distribution of participation interest in the Company’s charter capital among them. The participation interest itself was acquired from a former participant (founder) of the Company based on the Company’s exercise of its right of first refusal to purchase the participation interest offered to third parties.
Due to the fact that, after the distribution, the remaining participants in the Company increased their participation interest sizes, the tax authority, based on the market value of the participation interest, determined the amount of income of such participants, from whom the Company did not withhold personal income tax.
Signal-Invest LLC disagreed with the tax authority’s decision and filed a claim in court.
In support of its claim, the Company stated that, if the actual value of the participant’s participation interest remains unchanged before and after distribution, no taxable income in kind arises in relation to the Company as a result of the proportional distribution of such participation interest among the participants. Therefore, there is no economic benefit to the participants, as required by article 41 of the Russian Tax Code when defining the concept of “income”.
Among its arguments, the Company also noted that since the Russian Tax Code does not establish a procedure for determining the tax base for income received in kind in the form of participation interest in the Company’s charter capital, the economic benefit from such a distribution should be assessed as the difference between the acquired and previously held property rights, and such rights cannot exceed the actual value of the participation interest, calculated based on the Company’s net assetsClause 2 of article 14, clauses 6.1 and 8 of article 23 of Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998..
The court of first instance upheld the tax authority’s position.
Considering that a property right is recognised as a participant’s right to participation interest in the Company’s charter capitalRuling of the Supreme Court of the Russian Federation No. 18-V10-53 dated 4 August 2010., and guided by the provisions of clause 1 of article 41, clause 1 of article 210, and clauses 1 and 2 of article 211 of the Russian Tax Code, the court recognised the accrual of taxable income in kind to the remaining participants of the Company as a result of the gratuitous distribution of the redeemed participation interest among them as legitimate.
The court concluded that the gratuitous distribution of the participation share, taking into account the principle of compensation for such participation, is effectively recognised as payment by the Company for the remaining participants of their property right.
The court also agreed with the tax authority’s approach regarding determining, in accordance with the procedure established by article 105.3 of the Russian Tax Code, the market value of the distributed participation interest based on the cost of its acquisition by the Company from the former participant.
Nevertheless, the court noted that, in the matter under consideration, the tax authority’s position regarding the recognition of taxable income in kind for the remaining participants in the event of the gratuitous distribution of participation interest and determining the market value based on the price of the Company’s purchase of the participation interest from the former participant does not contradict the position reflected in Resolution of the Constitutional Court of the Russian Federation No. 2-P dated 21 January 2025, in the Uspekh and N case.
Conclusions: the fate of participation interest owned by the Company
The LLC Law provides for several possible options for a company itself to acquire shares in its own charter capital, for example, as a result of a participant’s withdrawal from the company or the mandatory buyout of the participant’s participation interest.In this case, the fate of the participation interest received by the company must be subsequently determined within a year by a resolution of the general meeting. In particular, according to clauses 2 and 5 of article 24 of the LLC Law, such participation interest may be:
- distributed among the participants; or
- offered for acquisition to the participants or third parties (unless prohibited by the charter); or
- repaid by reducing the charter capital.
Therefore, when faced with a choice, such transactions require a thorough analysis in respect of tax and non-tax consequences arising for the company and its remaining participants, and a balanced approach when choosing one or another option.
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The Denuo team has extensive experience consulting in corporate restructurings and optimising tax consequences. We are ready to assist in structuring transactions and selecting the optimal structure, including assessing the tax risks of the chosen approach and providing appropriate recommendations for mitigating them.
