Conditions for paying out distributed profits / dividends under countersanctions restrictions
The BIRCH LEGAL team has prepared an overview of the conditions for paying out distributed profits / dividends under countersanctions restrictions.
As of April 15, 2024
The temporary procedure for paying out distributed profits / dividends is established by:
- Order of the President of the RF dated 05 March 2022 № 95 ”On the temporary procedure for fulfilling obligations towards certain foreign creditors” (hereinafter – “Order № 95”) in relation to operations in joint-stock companies, and
- Order of the President of the RF dated 04 May 2022 № 254 ”On the temporary procedure for fulfilling financial obligations in corporate relations towards certain foreign creditors (hereinafter – “Order № 254”) which extends the rules provided in Order № 95 to limited liability companies
Both Orders provide for a temporary procedure which allows Russian companies to fulfill their obligations towards their participants / shareholders that are Unfriendly persons.
*Unfriendly persons:
- foreign individuals and legal entities associated with unfriendly states[1] (including if such persons have the citizenship of such states or if they have their place of registration, place where they mainly conduct business or place where they predominantly generate profits from their activities in these states)
- persons under the control of foreign individuals or legal entities associated with unfriendly states irrespective of their place of registration or place where they mainly conduct business (i.e., including those located in the RF)[2]
Unfriendly persons do not include:
- persons whose ultimate beneficiaries are the RF, Russian individuals or legal entities, including if control over such persons is exercised through foreign legal entities associated with such foreign states and the information about such control has been disclosed to the Russian tax authorities
- persons under the control of individuals or legal entities whose personal law is the law of a foreign state that is not identified as an unfriendly state committing unfriendly actions provided that such control was established before 01 March 2022
- persons under the control of foreign states not identified as a foreign state committing unfriendly actions provided that such control was established before 01 March 2022
Temporary procedure
If a participant / shareholder of a Russian organization is a Russian or foreign person that is not an Unfriendly person, then payments for distributed profits / dividends may be carried out as usual.
If a participant / shareholder of a Russian organization is an Unfriendly person, then the procedure for paying out distributed profits / dividends depends on the size of the obligations.
In relation to obligations valued over RUB 10m in one calendar month or in an equivalent amount in a foreign currency (per the official exchange rate of the Bank of Russia established on the 1st of each month), the provisions of Orders № 254 and № 95 apply.
Smaller obligations are fulfilled in the general procedure in accordance with the provisions of Article 28 of the Federal Law “On limited liability companies” (hereinafter – “FL on LLCs”) and Article 42 of the Federal Law “On joint-stock companies” (hereinafter – “FL on JSCs”). Accordingly, if the amount of the payment of distributed profits / dividends does not exceed RUB 10m in one calendar month (or the equivalent in a different currency), then the payment is made under the general procedure.
For a one-time payment of distributed profits / dividends to an Unfriendly person in an amount exceeding the established threshold of RUB 10m, two options are provided for Russian companies:
-
making the payment to a special type “C” ruble account opened in a Russian bank with the corresponding restrictions on the withdrawal of funds and foreclosure on the funds deposited therein[3] in accordance with Order № 95
-
making the payment after receiving special permission from the Bank of Russia or the Ministry of Finance of the RF (depending on the specific activities of the Russian organization) in accordance with Order № 254
Nota Bene: Opening a type “C” account or receiving special permission is not required in instances when the ultimate beneficiary of a foreign participant of a limited liability company is a citizen of Russia and information on its control has been disclosed by said beneficiary to the tax authorities in accordance with the provisions of chapter 3.4 of the Tax Code of the RF [4], since such foreign participant is not recognized as an Unfriendly person[5].
Procedure for obtaining permission
The main criteria for the adoption of the decision to approve a transaction on the payment of distributed profits / dividends to Unfriendly persons are established by the subcommission of the Government Committee on Control over Foreign Investment in Russia (hereinafter – the “Government Commission”).
In accordance with the Extract from the decision of the Government Commission dated 07 July 2023 № 171/5 (hereinafter – “Extract № 171/5”), regulators take into account the following criteria when adopting a decision to approve the payment of distributed profits / dividends to Unfriendly persons:
- the amount of distributed profit / dividends is no more than 50% of the net profit for the previous year
- accounting for the amount of distributed profit / dividends and the procedure for their payment for previous periods
- the readiness of the Unfriendly person to continue commercial activities in Russia
- positions taken by the relevant ministries (agencies) and Bank of Russia regarding the importance of the Russian organization’s activities for the technological and industrial sovereignty of the Russian Federation as well as the socio-economic development of the Russian Federation and/or its constituent entities
- the Russian organization has met its key performance indicators as confirmed by the relevant ministry (agency) or the Bank of Russia
- the possibility of distributed profits / dividends being paid out on a quarterly basis provided that key performance indicators are met
In addition, the Extract from the minutes of the meeting of the subcommission of the Government Commission dated 09 August 2023 № 182/5 (hereinafter – “Extract № 182/5”) established that the criteria from Extract № 171/5 are not applicable when granting permission for the payment of distributed profits / dividends to Unfriendly persons in certain situations.
Exemptions are applied in accordance with Extract № 182/5 to Unfriendly persons who made investments in the Russian economy after 1 April 2023 (including the expansion of production volumes in the Russian Federation and the development of new technologies), and the payment of distributed profits / dividends is carried out in an amount not exceeding the volume of such investments.
Other practical issues
What liabilities are taken into account for the purpose of calculating the liability threshold?
For the purposes of paying distributed profits / dividends, “liabilities” means the total amount of all obligations of the debtor to all foreign creditors in a calendar month, e.g., settlements on loans and financial instruments with Unfriendly persons[6].
When distributing profits / dividends, the Russian company is a tax agent and must independently determine if it is subject to paying taxes to the budget of the Russian Federation and at what rate. Please note that the provisions of Orders № 254 and № 95 do not regulate whether the amount of tax payable is taken into account when calculating the liability threshold. Conservatively interpreted, the profit / dividend distribution threshold includes the amount of tax payable. Furthermore, certain banks lean towards a broad interpretation providing for the payment of taxes in excess of the maximum amount of liabilities (payment of necessary taxes in excess of the maximum amount of a lump sum payment of distributed profits / dividends in the amount of RUB 10m).
Are there restrictions on payments of distributed profits / dividends to unfriendly persons in foreign currencies?
The payment of distributed profits / dividends to foreign non-residents is a currency operation[7], and since there are generally no restrictions on currency operations between residents and non-residents[8], making payments in a foreign currency to a foreign participant / shareholder who is an Unfriendly person is allowed.
Orders № 95 and № 254, like other countersanctions regulations, also do not impose any restrictions on making payments in a foreign currency with the exception of the liability threshold of RUB 10m in one calendar month.
Can the amount of distributed profits / dividends exceed the liability limit?
Current legislation does not contain restrictions on specifying any limit on the amount when deciding on the distribution of profits / dividends. The agreed amount of profit distribution or dividend payment is not tied to the limit of RUB 10m per calendar month established by the current countersanctions regulations.
If the LLC’s Articles of Association or a resolution of the general meeting of the LLC’s participants does not stipulate otherwise, the term for paying part of the organization’s distributed profits to participants is 60 days[9]; for JSCs – no more than 10 business days for payments to nominal holders and trustees who are professional participants in the securities market registered in the register of shareholders; to other persons registered in the register of shareholders – 25 business days from the date on which the persons having rights to receive dividends are determined[10].
For companies, the possibility of partial payment of profits / dividends is provided for, which allows payments to be made within the established monthly limit up to the full repayment of the amount of debt on distributed profits / dividends to participants and shareholders, respectively.
Nevertheless, there is no single answer to this question in practice. Servicing banks may take into account the threshold of RUB 10m for all payments in total instead of in regard to each payment. In other words, if the company pays distributed profits / dividends in several tranches, the threshold may apply to all payments cumulatively (on an accrual basis).
What is the protection mechanism in case of a foreign bank’s refusal to credit distributed profits / dividends?
When paying out distributed profits / dividends, companies can run into the situation where transferred funds are returned due to the internal policy of a particular bank. On the company's balance sheet, receivables are formed in relation to persons who have not received the declared dividends.
In this case, said persons have the right to demand the payment of dividends or distributed profits within 3 years from the date of expiration of the dividend payment period or within another period established by the company’s Articles of Association, but, in any case, within a period of 3 to 5 years from the date of expiration of the dividend payment period. Once said period is over, unclaimed payments are added to the undistributed profit of the company[11].
Are there any special conditions for paying out distributed profits / dividends to non-Unfriendly persons?
At present, the restrictions do not extend to operations conducted between Russian persons and persons not included in the list of Unfriendly persons. At the same time, certain stipulations are provided for crediting profits / dividends denominated in foreign currency to foreign bank accounts.
From 05 June 2022, residents are prohibited from transferring and crediting foreign currency to accounts (deposits) in foreign banks in cases, in particular, where funds are received in the form of dividends on shares of Russian joint-stock companies or in the distribution of profits of Russian LLCs with the exception of individuals crediting these funds to accounts (deposits) in banks outside the territory of the Russian Federation that are subsidiaries of authorized banks[12].
Can complications with servicing banks arise?
In the context of the application of countersanctions measures, the solution to certain practical issues should be coordinated with the specific banks servicing the accounts of both the Russian company planning to make a decision on the distribution of profits / dividends and the Unfriendly person in whose favor the payment is planned.
Are any double tax treaties (DTTs) in effect?
In accordance with Order of the President of the RF dated 08 August 2023 № 585, several DTTs were suspended on the territory of the Russian Federation. Before the provisions regarding the suspension of the DTTs came into effect, lower tax rates were applied to the operations in question (for example, the agreement with the US provided for rates of 5% and 10% of the gross amount of dividends[13], with Switzerland – 5% and 15%[14], with Great Britain – 10%[15]). Now, when paying dividends to a foreign organization – a resident of a state with whom certain provisions of the taxation agreement are suspended – the tax agent, a Russian organization, must calculate, withhold and transfer to the budget the tax at source in regard to the payment in accordance with the procedure outlined in subpara. 1, para. 1, Article 309 of the Tax Code of the RF.
Generally, a tax rate of 15% is applied[16]. When paying profits / dividends to foreign participants and shareholders, it is necessary to consider the current tax rate, since the threshold amount available for payment depends on the rate taking into account the conservative approach of banks.
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[1] The list of foreign states and territories committing unfriendly actions in relation to the Russian Federation, Russian legal entities or individuals was confirmed by Order of the Government of the RF dated 05 March 2022 № 430-r
[2] The criteria for establishing control over Unfriendly persons were listed in parts 1–2.1 of Article 5 of the Federal Law dated 29 April 2008 № 57-FZ “On the procedure for carrying out foreign investments into businesses of strategic significance for the defense of the country and state security”
[3] The rules for type “C” accounts are established by the Decision of the Board of Directions of the Bank of Russia dated 24 June 2022
[4] para. 46 Clarifications of the Bank of Russia “Application of the Order of the President of the RF establishing interventions (counteractions) aimed at ensuring the financial stability of the RF”
[5] In accordance with paragraph 8 of the Order of the President of the RF dated 18 марта 2022 № 126 “On additional temporary economic measures to ensure the financial stability of the Russian Federation in currency regulation”, paragraph 12 of Order № 95
[6] Clarifications on issue 4 Letter of the Bank of Russia dated 08 June 2022 № 12-4-2/5091
[7] Part 9, Article 1 of Federal Law dated 10 December 2003 № 173-FZ “On currency regulation and control” (hereinafter – the “Law on currency regulation”)
[8] Part 1, Article 6 of the Law on currency regulation
[9] Part 3 Article 28 of the Law on LLCs
[10] Part 6 Article 42 of the Law on JSCs
[11] Part 9 Article 42 of the Law on JSCs; Part 4 Article 28 Law on LLCs
[12] para. 1 Letter of the Bank of Russia dated 19 August 2022 № 03-12/7976
[13] Article 10 DTT Russia – USA
[14] Article 10 DTT Russia – Swiss Confederation
[15] Article 10 DTT Russia – Great Britain
[16] para. 1 Letter of the Federal Tax Service of Russia dated 29 November 2023 № ShYu-4-13/14936@
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