The procedure for converting branches and representative offices of foreign legal entities into business entities has been established

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Pepeliaev Group advises that the Federal Law[1] (the “Law”) has been adopted, which establishes the procedure for converting branches (representative offices) of foreign legal entities into limited liability companies.

The Law took effect on 25 July 2022.

In accordance with the rules introduced, a branch or representative office (the “branch”) of a foreign legal entity may be transformed if such a foreign legal entity simultaneously meets the following requirements:
  • it has not more than 50 members (shareholders);
  • at least 25% of its membership interest (shares) are owned by members (shareholders) associated with Russia (i.e. meets the criterion specified in article 5(1)(1) of the Law);
  • it is not a public company whose shares circulate freely or are traded on an organised exchange; and
  • it has the right (a licence) to use subsoil resources or owns facilities of cross-border gas transportation infrastructure in Russia.

A branch of a foreign legal entity associated with "hostile states", by a decision of a state commercial court, may be transformed into an LLC with the transfer to such LLC of items of civil rights, and the rights and obligations of the foreign legal entity, as well as licenses and other permits. Such a decision may be made if one of the grounds specified in articles 6(3) or 6(4) of the Law is present (these, among other things, include the actual termination of the management of the branch, a decision to liquidate the branch, a public statement on the termination and/or suspension of activities in Russia, etc.).

The members (shareholders) of a foreign legal entity associated with Russia and owning in aggregate at least 25% of the membership interests in the issued capital (shares) of a foreign legal entity, as well as the sole executive body of the foreign legal entity and the last head of the branch, have the right to apply to the court. The State Commercial Court for Moscow Region examines cases relating to the transformation of branches into LLCs in accordance with the rules of the Russian Commercial Procedure Code and the specifics established by the Law.

The State Commercial Court has the right to take interim measures aimed at preventing damage to Russian citizens, companies, the public and the Russian Federation.

A judicial decision of the state commercial court on the transformation of a branch of a foreign legal entity into an LLC is the basis for registration of a newly formed business company by the registering authority and making appropriate changes to the Unified State Register of Legal Entities. The amount of the issued capital is determined by a decision of the state commercial court in the amount of the minimum issued capital established by Russian legislation for an LLC; however, the court, at the request of the applicant, may establish a larger amount of the issued capital.

The first single-member executive body is appointed by the head of the relevant branch or, if such head has left Russia, has actually ceased to perform his/her duties and exercise his/her powers or does not agree with the appointment, another person who has submitted a statement of readiness to perform the functions of the single-member executive body of such business entity.

The members of the company are the members (shareholders) of a foreign legal entity, in respect of which proper evidence has been provided of their membership interest in the issued capital (shares), and the composition of which is determined as at the date of acceptance by the state commercial court of the application for the transformation of the branch, with the retention of a membership interest in percentage terms similar to the participation of the relevant persons in the issued capital of the foreign a legal entity.

It should be noted that the following are transferred to the newly created company: the rights to items of civil rights, including real estate of a foreign legal entity located in Russia, shares owned by a foreign legal entity, membership interest (units) in the issued (pooled) capital of Russian companies, funds in the accounts of the foreign legal entity in Russian credit institutions, as well as other property in accordance with article 12(9) of the Law.

Within one year from the date when the decision to transform the branch enters into force, the general meeting of participants of the newly created company is not entitled to make a decision to reorganise or liquidate it.

It should be noted that the specified procedure for converting branches does not apply to companies implementing projects for the production of liquefied natural gas being implemented under production sharing agreements.

What to think about and what to do

With regard to the amendments introduced by Federal Law No. 320-FZ, it is necessary to take into account the risks of a possible claim for the transformation of a branch or representative office of a foreign legal entity when the signs described above are present. Such risks are seen to be particularly high due to the mass departure of foreign business from the Russian Federation, and therefore the provisions of the new law must be taken into account when planning actions related to such departure.

Help from your adviser

Pepeliaev Group’s specialists are carrying out real-time monitoring of amendments in corporate legislation. They are ready to provide support in preparing the necessary documentation for holding meetings of a legal entity's members and to provide recommendations on how to choose the optimal business solutions for any issues of corporate law.

[1] Federal Law No. 320-FZ "On Amendments to the Federal Law "On the privatisation of state and municipal property”, individual items of Russian legislation and on establishing the specifics of regulating property relations” dated 14 July 2022.

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