The status of an international company has been enshrined in Russian law

Pepeliaev Group advises that Federal Law “On international companies” (the “Law”) came into full force on 3 August 2018. The Law establishes a regime for foreign companies allowing them to change their personal law and obtain the status of international companies.

The international company is a unique phenomenon for Russian law. A foreign legal entity is recognised as an international company if it is a commercial corporate organisation (similar to an LLC or a JSC) and it has decided to change its personal law according to the procedure established by such personal law. As a result of the change of personal law, in a number of situations, foreign law may also be applied to such legal entity simultaneously with Russian law.

An international company may carry out any activity permitted by Russian law, except for the activity of credit and non-credit financial institutions, payment system operators, and payment infrastructure services operators.

It is important to emphasise that an international company in fact is not created anew; it only changes its country of registration. Therefore, having been registered in Russia, a company keeps all its previous rights and obligations, including rights from licences and permits of state authorities, corporate rights and rights to securities. Moreover, the change of personal law is not: a ground for the obligation to arise to perform its obligations ahead of time; a circumstance that worsens the financial position of the company; a significant change of circumstances within the framework of contractual relationships; or a ground for recovery of losses. Members (shareholders) of an international company also keep the same volume of their participation rights.

A foreign company may obtain the status of an international company if it complies with the following conditions:

• the company carries out business activity in Russia (directly or through controlled organisations or branches and representative offices);
• the company has filed an application to participate in special administrative districts (“SADs”), i.e. Russky Island and Oktyabrsky Island;
• the company undertook to make investments in Russia of at least RUB 50 million within no more than six months;
• the company was established in a member state of the FAFT (Financial Action Task Force) or MONEYVAL (Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism).

With respect to complying with the conditions to obtain the status of international companies, a group of companies which filed applications to obtain the status of an international company is considered by the Law to be a single subject: the obligation to make investments can be either allocated between members of the group of companies or imposed on one of its members. In addition, for a group of companies it is enough when only a controlling party complies with the condition of carrying out business activity in Russia.

International companies are registered through the SAD’s management company. The documents for registration should be submitted to the SAD’s management company and it makes a decision on whether to transfer these documents to the registering authority (with respect to joint-stock companies after the Russian Central Bank (the “Bank of Russia”) confirms registration of the share issue or the prospectus of the shares) or to refuse such transfer. The grounds to refuse a transfer are associated with the failure to comply with the above conditions for obtaining the status of an international company, or with the provision of inaccurate or contradictory information.

Also the SAD’s management company acts as an intermediary between a joint-stock company and the Bank of Russia when an issue or a prospectus of securities are registered in connection with the joint-stock company’s intent to obtain the status of an international company.

As for the termination of the status of an international company, this is possible both voluntarily and forcibly if a company violates the conditions for obtaining this status and fails to remedy these violations within six months from the date when the SAD’s management company serves a corresponding notice.

Also the status terminates as a result of a reorganisation in the form of a merger, absorption, split-off and spin-off.

As a result of the termination of the status of an international company, such legal entities act subsequently as simple LLCs or JSCs. The loss of the status does not influence the rights and obligations which had arisen before the status was lost.

An international company is entitled to change the personal law according to the redomiciliation procedure with the prior consent of the Russian Government. The change of the personal law in such a case does not entail a change of the company’s rights with respect to its property, and rights and obligations of the company and parties having rights and obligations with respect to this company.

Please note that for the purposes of taxation of international companies a new term international holding company (the “IHC”) has been invented for Russian tax legislation.

In accordance with the changes introduced, an international company is recognised as an IHC if it was established before 1 January 2018 and registered in the SAD according to the redomiciliation procedure (the change of the country of registration).

In order to obtain the status of an IHC an international company should, within 15 days after its registration, provide the tax authorities with the following:

• financial statements prepared in accordance with the rules of IFRS or rules of the personal law;
• the auditor's report on the financial statements;
• information about controlling parties of the international company[1];
• a notification of membership of foreign organisations[2] with respect to membership interests in foreign organisations (unincorporated foreign structures) as at the date of the state registration of such international company.

It should be noted that, to obtain the status of an IHC, the current entity needs to undergo the redomiciliation procedure which rules out the possibility of establishing new companies in the SAD. Moreover, in accordance with concepts and terms enshrined by tax legislation as of the present date, IHCs are treated as Russian organisations for taxation purposes.

If a controlling party participates in a foreign company through direct or indirect participation in a public company which has been recognised as an IHC, then such party is automatically treated as a controlling party of the foreign company. Such procedure will be in force during the transition period until 1 January 2029. After this date a party which participates directly or indirectly in a foreign company through a public company that is an IHC will not be treated as the controlling party of such foreign company, similarly to the current rules on controlled foreign companies (CFCs) for Russian public companies.

In accordance with the changes introduced to the Russian Tax Code, the profit of the IHC’s controlling parties is fully exempted from tax for CFCs. However, if the IHC itself is a controlling party of other foreign companies, then the income in the form of CFC profit of such IHC is exempted from taxation from 1 January 2019.

In addition to the profit exempted from the CFC tax, IHCs have received significant tax benefits which are coming into force from 1 January 2019. Thus, the IHC is covered by a ‘significant membership’ beneficial tax regime in the form of a 0% profit tax rate for income in the form of dividends.

This regime applies provided that an IHC has held in its uninterrupted ownership for at least 365 days a minimum of 15% of the contribution (membership interest) in the issued (pooled) capital (fund) of the company which is paying out the dividends or by depository receipts which grant the right to receive dividends in the amount corresponding to at least 15% of the total amount of dividends the company pays. In addition to the above conditions, an IHC is obliged to provide representations to the paying party, a tax agent, that the company receiving the dividends is an IHC. It should be noted that if the company paying dividends is a foreign company, then for the purposes of applying this regime such company should not be a resident of a country which is included in the ‘Offshore List’ of the Russian Ministry of Finance.

On the contrary, a tax rate of 5% will be applied to foreign persons/entities receiving income in the form of dividends from IHCs that are public companies. A party which receives dividends must provide an IHC with confirmation of the actual right to the income before the date when the dividends are paid. This 5% rate will be also applied starting from 1 January 2029.

Also the new developments grant a beneficial regime when shares and membership interests of Russian or foreign companies belonging to an IHC are sold or otherwise disposed of. A 0% tax rate is applied with this tax regime. The use of such regime is possible only when all the following conditions are met simultaneously:

• the shares and membership interests have been held in the uninterrupted ownership of the IHC for at least 365 calendar days and constitute at least 15% of the contribution to the issued capital of the company being sold;
• more than 50% of the shares and membership interests does not consist of immovable property directly or indirectly;
• the shares and membership interests have not been acquired or contributed within the framework of reorganisation within 365 calendar days before or after the date when such company was registered as an international company.

Similarly to the application of the 0% tax rate, when paying dividends, when selling shares and membership interests of foreign company belonging to an IHC, such company should not be a resident of a country that is included in the ‘Offshore List’ of the Russian Ministry of Finance.

The tax status of an IHC covers both public and non-public companies, which allows controlling parties to concentrate assets at the level of the IHC with no tax exposure. Moreover, any Russian company (except for companies which became Russian tax residents in accordance with article 246.2 of the Russian Tax Code), irrespective of whether it is an LLC or a JSC, has an opportunity to apply a beneficial tax rate of 0% for dividends provided that the Russian company has held in its uninterrupted ownership for at least 365 days a minimum of 50% of the contribution (membership interest) in the issued (pooled) capital (fund) of the IHC (article 284(3)(1) of the Tax Code). Such a procedure gives an opportunity to Russian business to return assets to the territory of the SAD almost with no tax exposure.

A set of amendments to the Tax Code establishes two periods for forming the value of property (property rights) of an IHC and foreign companies which voluntarily declared themselves Russian tax residents.

The first period, specifically for IHCs registered before 1 January 2019, is characterised by the possibility to reflect the value of securities and membership interests solely according to the market value.

Then the second period (after 1 January 2019) provides for reflecting assets solely based on the value confirmed by documents (the balance sheet value) as at the date preceding the date when the IHC was registered, but such value should not exceed the market value. If the value of assets is reflected in a foreign currency, then it is converted into roubles at the rate of the Bank of Russia effective on the date when the international company was registered.

The first tax (reporting) period for an IHC is the period starting from the date when the company was registered as an IHC.

Also the new developments provide for a possibility to lose the status of an IHC. In addition to cases when a company loses the status of an international company in accordance with the Law, an international company also loses IHC status in the following cases:

• a reorganisation in the form of an absorption or merger with a company which does not meet the IHC criteria;
• a new controlling party emerges within 365 calendar days from the date of state registration of the IHC;
• the above conditions do not apply to international public companies and to IHCs with an aggregate direct or indirect membership interest of public companies in an amount of 100%.

What to think about and what to do

In connection with the change of personal law, a foreign company can face certain specific issues associated with the special status of international companies.

Registration specifics

When filing documents to register as an international company, a foreign legal entity may face issues associated with the need to comply with Russian legislation.

For instance, owing to the fact that Russian law applies to international companies, a foreign legal entity may need to change the structure of its internal bodies and their competence, requirements for the capital and reflect all this in the articles of association in accordance with which the international company will act after the registration.

A company may face certain difficulties with determining which person acts on its behalf without a power of attorney in connection with current Russian employment and migration legislation.

An important specific aspect of the registration of international companies is the unworkable nature of the provisions that require the prior approval of the antimonopoly authority and in connection with performing activity of strategic importance in accordance with Russian legislation.

Disclosing information about beneficial owners

With respect to information about beneficial owners, the Law establishes ambiguous regulation. On the one hand, there is an obligation to provide information about the beneficial owners of a foreign legal entity when filing documents for registration. To compare, under the general rule, Russian legal entities are obliged only to keep such information and to provide it only at the request of a competent state authority.

On the other hand, the Law establishes that access to information about the members and the CEO of an international company can be restricted for third parties.

Securities of an international company

Bonds and other financial instruments of foreign legal entities are traded in Russia as securities of a foreign issuer. Foreign law will be still applied to these securities, including with respect to performing obligations under them.

Shares of the foreign legal entity itself are treated as the shares of the international company from the date of state registration of this international company only with the state registration of the issuing of them. Such registration is a mandatory condition for a joint-stock company to obtain the status of an international company.

When the state registration of the issuing of a share is performed, the share should be brought into compliance with Russian legislation. At the same time the number of shares and volume of rights under them should remain unchanged, and their nominal value should be reflected in roubles in an equivalent amount.

The composition of shareholders and the number of shares owned by each of the shareholders as well as the rights under these shares should not change; at the same time subsequently it is not allowed to additionally issue shares under which the volume of rights contravenes Russian legislation.

A foreign company may be registered as an international company simultaneously obtaining the status of a public company. For this purpose it should ensure the following:

• shares of the foreign company should be listed on a Russian stock exchange, and
• a prospectus of shares should be registered by the Bank of Russia and an agreement for listing the shares of the international company should be entered into with such Russian stock exchange.

Certain exclusions from the application of Russian legislation on securities market are established for international companies. Examples are with respect to the payment of dividends under depositary receipts, with respect to the shares of such company, the procedure of placing such shares abroad, execution being levied on securities, etc.