24 May 2023

Investments in a Russian Company: Legal Restrictions & Rules

May 24, 2023

BRACE Law Firm ©

The Strategy for the Development of the Russian Financial Market until 2030, approved by the Government Order of the Russian Federation No. 4355-r dated December 29, 2022, establishes that the Russian Federation aims to deepen the integration of the Russian financial market with the international market, even under sanctions restrictions, while simultaneously creating incentives for non-residents to invest in Russian financial instruments.

One way foreign investors participate in the Russian economy is by acting as founders of Russian legal entities.

Foreign investors participate in Russian business entities by establishing a company with foreign investments in the territory of the Russian Federation or by acquiring shares (stakes) in the authorized capital of existing organizations. The foreign investor may pay for shares (stakes) in the authorized capital in cash or other property, which is valued in the currency of the Russian Federation (rubles). From the day a foreign investor joins the participants of the company, the company obtains the status of a commercial organization with foreign investments [1].

As a general rule under Art. 4 of Federal Law No. 160-FZ dated July 9, 1999, On Foreign Investments in the Russian Federation (the "Law No. 160-FZ", the "Law on Foreign Investments"), a commercial organization with foreign investments may be created in any organizational and legal form provided by Russian legislation. Such organizations are created and operate in accordance with Russian law.

However, the creation and organization of the activities of such companies in Russia have several specifics and restrictions. This article examines the main ones, focusing on such business entities as limited liability companies and joint-stock companies.

Creating a Commercial Organization with Foreign Investments

Article 20 of the Law on Foreign Investments regulates the specifics of creating and liquidating a commercial organization with foreign investments. Thus, the creation and liquidation of a commercial organization with foreign investments are carried out under the conditions and in the manner provided by the Civil Code of the Russian Federation and other federal laws.

In particular, according to Art. 11 of Federal Law No. 14-FZ dated February 8, 1998, On Limited Liability Companies (the "Law on Limited Liability Companies", the "Law on LLC"), the establishment of a limited liability company is carried out by the decision of its founders or founder. The decision on the establishment of the company must reflect the voting results of the founders and the decisions they adopted on the establishment of the company, the determination of the company's firm name, the company's location, the size of the authorized capital, the approval of the charter (or that the company acts based on a standard charter approved by the federal executive body authorized by the Government of Russia), the election or appointment of the company's management bodies, as well as the formation of an audit commission or election of an auditor, if such bodies are provided for by the charter or are mandatory.

In accordance with Art. 7 of Federal Law No. 208-FZ dated December 26, 1995, On Joint-Stock Companies, a joint-stock company may be created through establishment or through the reorganization of an existing legal entity (merger, division, spin-off, transformation).

Thus, organizations with foreign investments are created and operate in accordance with Russian legislation. There are three types of such enterprises:

with equity participation of foreign investors, including their subsidiaries and branches;
wholly owned by foreign investors, as well as their subsidiaries;
branches and representative offices of foreign legal entities.

The first two cases are most often formalized by opening joint-stock companies or limited liability companies. This is because the authorized capital of a joint-stock company is comprised of the nominal value of shares acquired by shareholders, and the authorized capital of a limited liability company is comprised of the nominal value of the stakes of its participants. Furthermore, payment for stakes in the authorized capital of a limited liability company may be made in money, securities, other things, or property rights or other rights having a monetary valuation.

According to Art. 6 of the Law on Foreign Investments, the valuation of capital investment is carried out in the currency of the Russian Federation (in rubles). As noted by accounting specialists, if the obligation to make a contribution to the authorized capital is fulfilled by foreign partners in foreign currency, this operation may lead to exchange rate differences. In accordance with paragraphs 13 and 14 of PBU 3/2006, the exchange rate difference associated with settlements with founders for contributions to the organization's authorized capital is subject to crediting to the additional capital and is reflected in Account 83 "Additional Capital" [2].

In addition, in the opinion of the Ministry of Finance, if the authorized capital is paid in foreign currency, the VAT amounts charged when acquiring bank services for currency control in the territory of the Russian Federation are deductible based on invoices issued by service sellers, after being accepted for accounting and given the availability of relevant primary documents [3]. The founder's debt for payment, arising from the moment the authorized capital amount is reflected in accounting, upon its payment in currency, is subject to recalculation on the date of the operation in foreign currency, as well as on the reporting date [4].

In practice, certain issues may arise regarding the registration of foreign participation in Russian companies due to varying interpretations of the law by the registering authority. For instance, a refusal to register a business entity was successfully challenged in court. The refusal was based on the premise that under Article 12 of Federal Law No. 129-FZ dated August 8, 2001, On State Registration of Legal Entities and Individual Entrepreneurs, and Articles 2 and 20 of the Law on Foreign Investments, only a foreign legal entity, not a foreign citizen, could be a founder of an organization with foreign investments. However, the court concluded that foreign investors have the right to invest in the territory of the Russian Federation in any form not prohibited by legislation, including by creating a legal entity. In particular, foreign investors who have submitted documents confirming their legal capacity and capability, including those issued by the competent authority of a foreign state, are admitted to investment activities in the Russian Federation in the form of creating a legal entity.

From the provisions of the cited norms, it follows that the admission of foreign investors—both individuals and legal entities — to make investments in the Russian Federation in the form of creating a business entity is conditioned upon confirmation of their legal capacity (capability), determined based on the personal law of the relevant person (Articles 1196 – 1197, 1202 of the Civil Code of the Russian Federation), as well as confirmation of their right to invest in the territory of the Russian Federation in accordance with the legislation of said state. In this regard, the decision was made that the registering authority's refusal was unfounded [5].

Thus, effectively, the procedure for registering the participation of a foreign citizen or legal entity in Russian business entities is similar to the standard procedure for establishing Russian legal entities. However, it may be complicated by currency operations when paying the authorized capital, as well as the need for notarized translation of documents certifying the identity of a foreign citizen or constituent documents, as well as documents confirming the legal capacity of a foreign legal entity.

According to Art. 55 of the Civil Code of the Russian Federation, a representative office is a separate subdivision of a legal entity located outside its location, which represents the interests of the legal entity and protects them. A branch is a separate subdivision of a legal entity located outside its location and performing all its functions or part of them, including the functions of a representative office.

In accordance with Part 2 of Art. 21 of the Law on Foreign Investments, within 12 months after the decision to create or open a branch or representative office of a foreign legal entity in the territory of Russia, such foreign legal entity (except for a foreign legal entity carrying out activities in the field of civil aviation) is obliged to submit an application for accreditation. This application must include information on the number of foreign citizens who are employees of these branches or representative offices, certified by the Chamber of Commerce and Industry of the Russian Federation, and documents for the accreditation of the branch or representative office of the foreign legal entity to the Federal Tax Service.

According to Clause 7 of the Procedure for Accreditation, Introducing Changes to Information Contained in the State Register of Accredited Branches and Representative Offices of Foreign Legal Entities, and Termination of Accreditation of a Branch or Representative Office of a Foreign Legal Entity Carrying Out Activities in the Territory of the Russian Federation, approved by Order of the Federal Tax Service of Russia No. ED-7-14/691@ dated July 27, 2021, the following must be attached to the application for accreditation of a branch or representative office of a foreign organization:

constituent documents of the foreign legal entity;
an extract from the register of foreign legal entities of the country of registration or another document of equal legal force confirming the legal status of the foreign legal entity;
a document issued by the authorized body of the country of registration of the foreign legal entity confirming its registration as a taxpayer in that country with the tax code (or tax code equivalent), or a document from said body confirming the absence of such a code (or its equivalent);
the decision of the authorized body of the foreign legal entity to create a branch or representative office in the territory of Russia;
regulations on the foreign branch or representative office;
a power of attorney granting the head of the foreign branch or representative office in the territory of the Russian Federation the necessary powers, valid as of the date of submission;
a document confirming payment of the state duty;
an inventory of submitted documents (in two copies).

Within the framework of accreditation, foreign branches and/or representative offices are subject to tax registration. The Federal Tax Service of Russia notes that a foreign organization carrying out activities in the territory of Russia is subject to registration with the tax authority at the place where such activities are carried out through a separate subdivision. Recall that under Clause 2 of Art. 11 of the Tax Code of the Russian Federation, a separate subdivision of an organization is understood as any territorially separate subdivision of that organization where stationary workstations are equipped [6].

Often, when determining the feasibility of investment projects in Russia, foreign companies negotiate with Russian partners and potential counterparties. A question arises regarding the need for accreditation in this case.

Most lawyers believe that such a necessity is absent until the foreign company decides to conduct its activities in Russia. Thus, using a division of a foreign organization solely to conduct negotiations with customers and agree on contract terms (along with the fact that contracts will be concluded directly with the German company rather than the head of the subdivision) indicates the presence of preparatory and auxiliary activities, and therefore, the absence of a permanent establishment [7].

Specific features of the activities of organizations with foreign investments are established in the territories of closed administrative-territorial formations. Thus, according to Law of the Russian Federation No. 3297-1 dated July 14, 1992, On Closed Administrative-Territorial Formation, the creation and activity of organizations with foreign investments in the territory of a closed administrative-territorial formation are permitted in the manner prescribed by the Government of the Russian Federation. Namely, Decree of the Government of the Russian Federation No. 302 dated May 22, 2006, On the Creation and Activity of Organizations with Foreign Investments in the Territory of a Closed Administrative-Territorial Formation, establishes that when creating an organization with foreign investments in the territory of a closed administrative-territorial formation (the "ZATO"), its founder submits an application for state registration of the legal entity to the federal executive body, the State Atomic Energy Corporation Rosatom, or the State Space Corporation Roscosmos, under whose jurisdiction the enterprises and (or) facilities warranting the creation of the relevant ZATO are located.

Within 3 business days from the date of receipt of the application from the founder of the organization with foreign investments, the interested body sends a copy for approval to the Federal Security Service of the Russian Federation and the Ministry of Internal Affairs of the Russian Federation. These authorities decide on granting consent to the creation of the organization with foreign investments in the territory of the ZATO or refusing its creation within 30 days from the date of receipt of the copy of the application.

After receiving notification of the decision to create the organization with foreign investments in the territory of the ZATO, the founder submits an application to the relevant territorial body of the Federal Tax Service.

Based on the foregoing, although equal rights are created for foreign investors investing in Russian companies as for domestic investors, there are certain features and restrictions. In addition to the specifics of creating companies with foreign investments in Russia, there are certain restrictions regarding the activities of such organizations in some economic sectors. We will examine these restrictions in more detail below.

Restrictions on the Activities of Companies with Foreign Investments

According to Art. 4 of the Law on Foreign Investments, the legal regime for the activities of foreign investors and the use of profit obtained from investments cannot be less favorable than the legal regime for the activities and use of profit granted to Russian investors, subject to exceptions established by federal laws.

Restrictive exceptions for foreign investors may be established by federal laws only to the extent necessary to protect the foundations of the constitutional order, morality, health, rights, and lawful interests of other persons, and to ensure national defense and state security.

Stimulating exceptions in the form of benefits for foreign investors may be established in the interests of the socio-economic development of the Russian Federation.

Let us consider the main restrictive exceptions in the following economic sectors.

Land Ownership

Article 15 of the Land Code of the Russian Federation provides that foreign citizens, stateless persons, and foreign legal entities cannot possess land plots on ownership rights that are located in border territories, the list of which is established by the President of the Russian Federation in accordance with federal legislation on the State Border of the Russian Federation, and in other specially established territories of the Russian Federation in accordance with federal laws. Thus, Decree of the President of the Russian Federation No. 26 dated January 9, 2011, approved the list of border territories where foreign citizens, stateless persons, and foreign legal entities cannot possess land plots on ownership rights. For example, such border territories include the Kronstadt District of St. Petersburg, the municipal formation of the resort city of Anapa, the municipal formation of the resort city of Gelendzhik, the municipal formation of the city of Novorossiysk, and others.

It should be noted that there is no ban on the acquisition of ownership of such land plots by Russian legal entities with foreign participation.

Also, according to Clause 3 of Art. 39.4 of the Land Code of the Russian Federation, land plots owned by the state or municipality are provided to foreign citizens, stateless persons, and foreign legal entities solely for a fee.

In addition to the above, a ban is established on the acquisition of ownership of agricultural lands. Specifically, Art. 3 of Federal Law No. 101-FZ dated July 24, 2002, On the Turnover of Agricultural Lands, establishes that foreign citizens, foreign legal entities, stateless persons, as well as legal entities in the authorized (pooled) capital of which the share of foreign citizens, foreign legal entities, or stateless persons exceeds 50%, may possess agricultural land plots only on a lease right. An exception applies to land plots located in the Arctic zone within the framework of assistance to the voluntary resettlement of compatriots living abroad and their family members moving jointly to the Russian Federation for permanent residence, regarding land plots owned by the state or municipality. Thus, in the territories specified in Art. 1 of Federal Law No. 119-FZ dated May 1, 2016, On the Specifics of Providing Citizens with Land Plots Owned by the State or Municipality and Located in the Arctic Zone of the Russian Federation and Other Territories of the North, Siberia, and the Far East of the Russian Federation, and on Amendments to Certain Legislative Acts of the Russian Federation (Republic of Sakha (Yakutia), Amur Region, Murmansk Region, Yamalo-Nenets Autonomous District, etc.), a land plot may be provided for free use on a one-time basis.

Thus, foreign investors participating in Russian legal entities may be an obstacle to the acquisition of certain land plots, including those classified as agricultural land.

Subsoil Use

According to Art. 13.1 of Law of the Russian Federation No. 2395-1 dated February 21, 1992, On Subsoil, the Government of the Russian Federation has the right to establish specifics for the procedure of holding auctions for the right to use subsoil plots of federal significance. This includes establishing restrictions on the admission of Russian legal entities with foreign investor participation to such auctions in the interests of national defense and state security, upon the recommendation of the Ministry of Defense of Russia and (or) the FSB of Russia. The Government also has the right to establish special requirements for participants in auctions for the right to use subsoil plots.

Thus, in accordance with Art. 17.1 of the specified legal act, the transfer of the right to use a subsoil plot of federal significance is prohibited to a legal entity created under the legislation of the Russian Federation with the participation of a foreign investor or a group of persons including a foreign investor, if they:

have the right to directly or indirectly dispose of (including based on a property trust management agreement, a simple partnership agreement, an agency agreement, or as a result of other transactions or on other grounds) more than 10% of the total number of votes attributable to voting shares (stakes) constituting the authorized (pooled) capital of such legal entity;
have the right based on an agreement or other grounds to determine decisions made by such legal entity, including the conditions for its entrepreneurial activity;
have the right to appoint the sole executive body and (or) more than 10% of the composition of the collegial executive body and (or) have the unconditional ability to elect more than 10% of the composition of the board of directors (supervisory board) or other collegial management body of such legal entity.

However, the transfer of the right to use a subsoil plot of federal significance to the indicated persons may be permitted by a decision of the Government of the Russian Federation subject to preliminary approval of the possibility of transferring the subsoil use right by the Government Commission on Monitoring Foreign Investment in the Russian Federation, carried out in the manner provided by Federal Law No. 57-FZ dated April 29, 2008, On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for National Defense and State Security (the "Law No. 57-FZ").

Thus, according to Art. 8 of the said Law No. 57-FZ, the petition for preliminary approval of a transaction, including for the approval of the transfer of the right to use subsoil, submitted to the Government Commission must include an application for preliminary approval of the transaction containing a proposal on the duration of the preliminary approval decision, drawn up in free form, with the following documents attached:

a document confirming the state registration of the applicant legal entity;
a document confirming the fact of establishment of the applicant foreign organization that is not a legal entity, in accordance with the legislation of the state where it was established;
constituent documents;
a draft contract or other agreement disclosing the content of the transaction;
a document containing information on the main types of activities of the applicant carried out by the applicant during the two years preceding the date of filing the petition;
a document containing information on the composition of the group of persons to which the applicant belongs;
a document containing information on beneficiaries, beneficial owners, and the person exercising control over the applicant;
a draft business plan;
a document containing information on shares (stakes) constituting the authorized capital of the business entity of strategic importance and belonging to the applicant, as well as other circumstances existing on the date of filing the petition;
the balance sheet as of the last reporting date;
information on the book value of assets as of the last reporting date preceding the date of submission of the petition.

Issues Related to Foreign Investments in Strategic Entities

A business entity of strategic importance for national defense and state security is understood as a business entity created in the territory of Russia and carrying out at least one of the types of activities of strategic importance.

In accordance with Part 5 of Art. 7 of Law No. 57-FZ, a foreign investor or a group of persons is obliged to submit a petition for approval of the establishment of control over a business entity of strategic importance, in the manner provided by this Federal Law, within a period not exceeding 3 months from the date of establishing control over the business entity of strategic importance, if:

the establishment of control by the foreign investor or group of persons over such business entity occurred:

1) as a result of a change in the ratio of votes attributable to voting shares (stakes) constituting the authorized capital of such business entity at the general meeting of its shareholders (participants) due to the acquisition by such business entity, transfer to it, or redemption by it of its own shares (stakes constituting its authorized capital), distribution of stakes belonging to such business entity among its participants, or conversion of preferred shares into common shares;

2) as a result of a citizen (citizens) of the Russian Federation exercising control over such business entity acquiring other citizenship, obtaining a residence permit or other valid document confirming the right to permanent residence in a foreign state, or revocation of a decision on admission to citizenship of the Russian Federation or formalization of withdrawal from citizenship of the Russian Federation of the person (persons) exercising control over such business entity;

3) in other cases provided by the legislation of the Russian Federation.

In accordance with Part 1 of the specified article, transactions subject to preliminary approval include the following types of transactions:

transactions (excluding transactions regarding shares (stakes) constituting the authorized capital of a business entity of strategic importance engaged in the use of a subsoil plot of federal significance and (or) fishing), as a result of which a foreign investor or a group of persons acquires:
- the right to directly or indirectly dispose of more than 50% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of a business entity of strategic importance;
- the right to appoint the sole executive body and (or) more than 50% of the composition of the collegial executive body of a business entity of strategic importance, and (or) the unconditional ability to elect more than 50% of the composition of the board of directors (supervisory board) or other collegial management body of such business entity;
transactions regarding shares (stakes) constituting the authorized capital of a business entity of strategic importance engaged in the use of a subsoil plot of federal significance and (or) fishing, if as a result of these transactions a foreign investor or a group of persons acquires:
- the right to directly or indirectly dispose of 25% or more of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of such business entity;
- the right to appoint the sole executive body and (or) 25% or more of the composition of the collegial executive body of such business entity and (or) the unconditional ability to elect 25% or more of the composition of the board of directors (supervisory board) or other collegial management body of such business entity;
transactions committed by a foreign investor or a group of persons regarding a business entity of strategic importance engaged in the use of a subsoil plot of federal significance and (or) fishing, if this foreign investor or this group of persons has the right to directly or indirectly dispose of at least 25% and no more than 75% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of such business entity, including taking into account the right temporarily transferred to another person (other persons) to dispose of votes attributable to voting shares (stakes) constituting the authorized capital of the specified company based on a trust management agreement, pledge agreement, repo agreement, security payment, other agreement or transaction;
agreements on the performance by a foreign investor or a commercial organization or individual entrepreneur belonging to a group of persons of the functions of a manager (managing organization) regarding a business entity of strategic importance;
transactions aimed at the acquisition by a foreign state, international organization, foreign investor not providing information, or an organization under their control, of the right to directly or indirectly dispose of more than 25% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of a business entity of strategic importance;
other transactions or agreements aimed at transferring to a foreign investor or a group of persons the right to determine the decisions of the management bodies of a business entity of strategic importance, including the conditions for its entrepreneurial activity.

It should be noted that the issues of approving these transactions have many nuances and will be covered in a separate article due to their significant volume.

Mass Media Sector (SMI)

In accordance with Art. 19.1 of Law of the Russian Federation No. 2124-1 dated December 27, 1991, On Mass Media, a foreign state, international organization, as well as an organization under their control, a foreign legal entity, or a Russian legal entity with foreign participation (including with the participation of a foreign citizen, stateless person, or citizen of the Russian Federation holding citizenship of another state), collectively or individually, are not entitled to act as the founder of an SMI, act as an editorial office of an SMI, or as an organization (legal entity) carrying out broadcasting. Furthermore, a stateless person or a citizen of the Russian Federation holding citizenship of another state, collectively or individually, is not entitled to act as the founder of an SMI and (or) act as an editorial office of an SMI.

Moreover, a Russian legal entity in which the foreign participation share in the authorized capital exceeds 20%, a foreign citizen, a stateless person, or a citizen of the Russian Federation holding citizenship of another state, collectively or individually, are not entitled to exercise ownership, management, or control directly or indirectly (including through controlled persons or through possession in aggregate of more than 20% of stakes (shares) of any person) regarding more than 20% of stakes (shares) in the authorized (pooled) capital of a legal entity that is a participant (member, shareholder) of the founder of a mass media outlet, editorial office of a mass media outlet, or organization (legal entity) carrying out broadcasting.

The establishment by the aforementioned persons of any other forms of control over the founder of an SMI, the editorial office of an SMI, or an organization (legal entity) carrying out broadcasting, as well as over persons who are participants (members, shareholders) of the founder of an SMI, editorial office of an SMI, or organization (legal entity) carrying out broadcasting, resulting in said persons acquiring the ability to directly or indirectly own, manage, control such founder, editorial office, or organization, as well as actually determine the decisions they make, is not permitted.

Exceptions to this rule may be provided by an international treaty of the Russian Federation. For example, SMIs to which this rule does not apply include the magazine "Union State," whose founders are the Standing Committee of the Union State and the Secretariat of the Parliamentary Assembly of the Union of Belarus and Russia, as well as official journals of the EAEU and other international organizations in relevant cases [8].

In case of violation of these requirements, such persons are obliged to alienate the stakes (shares) exceeding the maximum size established by this article in the manner prescribed by Article 238 of the Civil Code of the Russian Federation (Termination of property rights of a person to property that cannot belong to them). The votes belonging to such persons are taken into account when determining the quorum of the general meeting of participants and when counting votes within the limits not exceeding 20% of such participation. Any transactions that lead to a violation of the requirements of this article are void.

The Government of the Russian Federation has established a list of documents evidencing compliance by SMI founders and their editorial offices, and organizations (legal entities) carrying out broadcasting, with the requirements of Article 19.1 of the Law on Mass Media specified above.

Such documents include:

copies of constituent documents of legal entities;
an extract from the register of shareholders, a list of participants of a limited liability company;
an extract from the trade register of the country of registration or other equivalent document in accordance with the legislation of the country of registration of the founder (participant) legal entity;
duly certified copies of identity documents (for individuals), including persons who are members of the supreme management body and executive body of a non-profit organization, as well as persons exercising the powers of the sole executive body of a non-profit organization;
a copy of a document evidencing the filing of a notification regarding a citizen of the Russian Federation having other citizenship or a residence permit or other valid document confirming the right to permanent residence in a foreign state (provided at the applicant's own initiative);
documents evidencing direct or indirect control of the SMI;
certified copies of documents confirming the formation of the supreme management body and executive body of a non-profit organization in the manner prescribed by the legislation of the Russian Federation.

It should be noted that the aforementioned restrictions have a controversial assessment in the academic community. For example, there is an opinion that the above provisions offer a solution to the problem of ensuring the information security of the Russian Federation through corporate law means and instruments, which is fundamentally incorrect, since nothing prevents establishing a special rule on the termination of broadcasting rights and revocation of the relevant license from a mass media outlet in the presence of relevant circumstances of foreign influence [9]. However, there are grounds to believe that, on the other hand, such restrictions provide supervisory authorities with the opportunity to timely restrict the access of foreign investments to SMIs, as the dissemination of information through SMIs is important for shaping state policy and protecting public interests.

Insurance

According to Part 3 of Art. 6 of Law of the Russian Federation No. 4015-1 dated November 27, 1992, On the Organization of Insurance Business in the Russian Federation, insurance organizations that are subsidiaries of foreign investors (parent organizations) or have a foreign investor share in their authorized capital of more than 49% cannot carry out life, health, and property insurance of citizens at the expense of funds allocated for these purposes from the budgets of the budgetary system of the Russian Federation to executive authorities (policyholders), insurance related to the procurement of goods, works, and services to ensure state and municipal needs, as well as insurance of property interests of state organizations and municipal organizations.

If the size (quota) of foreign capital participation in the authorized capitals of insurance organizations exceeds 50%, the Bank of Russia stops issuing licenses for insurance activities to insurance organizations that are subsidiaries of foreign investors (parent organizations) or have a foreign investor share in their authorized capital of more than 49%, and also stops making decisions on the issuance (replacement) of licenses for insurance activities to foreign insurance organizations and on the accreditation of branches of foreign insurance organizations.

The size (quota) of foreign capital participation in the authorized capitals of insurance organizations is calculated by the insurance supervision authority annually as of January 1 of the current year.

According to the Procedure for Calculating the Size (Quota) of Foreign Capital Participation in the Authorized Capitals of Insurance Organizations, approved by Regulation of the Bank of Russia No. 5878-U dated August 5, 2021, the Bank of Russia uses the following data to calculate the size (quota) of foreign capital participation in the authorized capitals of insurance organizations:

information contained in the unified state register of legal entities on the size of the authorized capitals of insurance organizations holding a license for insurance activities (hereinafter – insurance organizations) as of the date of calculating the size (quota) of foreign capital participation in the authorized capitals of insurance organizations;
information available to the Bank of Russia on the increase in the size of authorized capitals of insurance organizations through the placement of additional shares, the report on the results of the issue of which has been state-registered or notification of the results of the issue of which has been received by the Bank of Russia;
information available to the Bank of Russia on the minimum amounts of guarantee deposits of branches of foreign insurance organizations as of the date of calculating the size (quota) of foreign capital participation in the authorized capitals of insurance organizations.

The main restrictions related to investing in foreign legal entities were discussed above. However, given current changes in international relations, additional restrictions are currently being introduced.

Restrictions and Benefits for Foreign Investment in Russian Companies

Since the beginning of 2022, certain restrictions related to corporate governance and foreign investments in Russian organizations from unfriendly states have been introduced.

Thus, Government Order of the Russian Federation No. 430-r dated March 5, 2022, approved the List of Foreign States and Territories Committing Unfriendly Actions against the Russian Federation, Russian Legal Entities, and Individuals (USA, Japan, Canada, EU member states, etc.). Several restrictions have been established for foreign investors from these states when working with Russian companies as their founders and/or managers.

For example, Decree of the President of Russia No. 79 dated February 28, 2022, On the Application of Special Economic Measures in Connection with the Unfriendly Actions of the United States of America and Foreign States and International Organizations Joining Them, permitted public joint-stock companies to acquire shares placed by them (excluding the acquisition of placed shares to reduce their total number) until December 31, 2022, inclusive, subject to the aggregate presence of the following conditions:

the acquired shares are admitted to organized trading;
the weighted average price of the acquired shares, determined for any three months starting from February 1, 2022, has decreased by 20% or more compared to the weighted average price of such shares determined for three months starting from January 1, 2021;
the value of the main stock market index, calculated by the trade organizer for any three months starting from February 1, 2022, has decreased by 20% or more compared to the value of such index calculated by the trade organizer for three months starting from January 1, 2021;
shares are acquired at organized trading based on bids addressed to an unlimited circle of trading participants;
the acquisition of shares is carried out by a broker on the instructions of the public joint-stock company;
the board of directors (supervisory board) of the public joint-stock company has adopted a decision to acquire shares placed by it in accordance with the requirements of this Decree, determining the categories (types) of acquired shares, the number of acquired shares of each category (type), and the period during which the acquisition of shares is carried out, which must expire no later than December 31, 2022. Information regarding the acquisition by a public joint-stock company of its own shares may not be disclosed in the form of a statement of a material fact if this is provided for by the adopted decision to acquire shares, or may be disclosed within the period established by such decision.

In this case, a public joint-stock company acquiring shares issued by it in accordance with the above Decree is obliged to send a notification to the Central Bank of the Russian Federation regarding the acquisition of shares with documents confirming compliance with the specified conditions attached.

Also, Decree of the President of the Russian Federation No. 618 dated September 8, 2022, established a special procedure for residents of unfriendly states to carry out transactions (operations) entailing directly and (or) indirectly the establishment, change, or termination of rights of possession, use, and (or) disposal of stakes in the authorized capitals of limited liability companies (except for credit institutions and non-credit financial organizations) or other rights allowing to determine the conditions of management of such limited liability companies and (or) the conditions for them to carry out entrepreneurial activity.

Such transactions/operations may be carried out based on permits issued by the Government Commission on Monitoring Foreign Investment in the Russian Federation and, if necessary, containing conditions for the execution (performance) of such transactions (operations).

In particular, the Ministry of Finance of Russia website contains information that a sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation has currently been created, which is empowered to make decisions on the issuance by the Government Commission on Monitoring Foreign Investment in the Russian Federation of permits for residents to carry out transactions with foreign persons of unfriendly states [10].

The procedure for approving such transactions is defined by Decree of the Government of the Russian Federation No. 295 dated March 6, 2022, according to which the application for granting a permit to carry out a transaction must include the following information and documents:

a request for the issuance of a permit to carry out (execute) a transaction (operation), containing information on the purpose, subject, content, and essential terms of the transaction (operation), and the planned validity period of such permit, drawn up in free form;
a document confirming the state registration of the applicant legal entity or individual as a sole proprietor;
an identity document of the applicant individual;
a document confirming the fact of establishment of the applicant foreign organization that is not a legal entity;
constituent documents of the applicant legal entity;
a document containing information on beneficiaries, beneficial owners, and the person exercising control over the person of the unfriendly state that is a party to the transaction (participating in the operation);
the resident's balance sheet as of the last reporting date preceding the date of submission of the application;
information on the book value of the resident's assets as of the last reporting date preceding the date of submission of the application (in case of submitting an application for a permit for a transaction (operation) entailing the emergence of ownership rights to real estate of the resident).

The Ministry of Finance also clarifies that for the purposes of applying the cited Decree No. 618, transactions (operations) requiring a permit from the Government Commission include, among others:

transfer of a stake in the authorized capital to one or more participants of the said company or to a third party;
acquisition by the company of a stake in its authorized capital;
withdrawal of a participant from a limited liability company by alienating their stake to the company or demanding the acquisition of the stake by the company;
voluntary reorganization of the company in accordance with Russian legislation;
simple partnership agreement (joint activity agreement);
trust management agreement for stakes of limited liability companies;
other transactions (operations) entailing directly and (or) indirectly the establishment, change, or termination of rights of possession, use, and (or) disposal of stakes in the authorized capitals of limited liability companies, or other rights allowing to determine the conditions of management of limited liability companies and (or) the conditions for them to carry out entrepreneurial activity [11].

Additionally, Decree of the President of Russia No. 254 dated May 4, 2022, established a temporary procedure for fulfilling obligations to pay profits of limited liability companies, business partnerships, and production cooperatives that are residents to participants of such companies, partnerships, and cooperatives who are foreign persons associated with unfriendly states. In the event of a decision to distribute resident profits, their payment to foreign creditors is carried out in accordance with paragraphs 2–9 of Decree of the President of the Russian Federation No. 95 dated March 5, 2022, On the Temporary Procedure for Meeting Obligations to Certain Foreign Creditors, according to which the transfer of profit is made to a special Type "C" account. Obligations are fulfilled in rubles. This procedure applies to the fulfillment of obligations in an amount exceeding 10,000,000 rubles per calendar month, or in an amount exceeding the equivalent of this sum in foreign currency at the official exchange rate of the Central Bank of the Russian Federation established on the 1st day of each month.

Thus, currently, several foreign investors may face difficulties exiting Russian commercial organizations and receiving profit payments.

Also, Decree of the President of the Russian Federation No. 81 dated March 1, 2022, decided to establish from March 2, 2022, a special procedure for residents to carry out (execute) the following transactions (operations) with foreign persons associated with unfriendly states:

transactions (operations) for providing credits and loans (in rubles) to persons of foreign states committing unfriendly actions, except for cases where the provision of credits and loans is prohibited in accordance with regulatory legal acts of the Russian Federation;
transactions (operations) entailing the emergence of ownership rights to securities and real estate, carried out (executed) with persons of foreign states committing unfriendly actions.

The transactions indicated above, as well as currency operations related to the provision by residents of foreign currency to non-residents under loan agreements, may be carried out (executed) based on permits issued by the Government Commission on Monitoring Foreign Investment;

Transactions (operations) entailing the emergence of ownership rights to securities may be carried out at organized trading based on permits issued by the Central Bank of the Russian Federation in agreement with the Ministry of Finance of the Russian Federation and containing conditions for the execution (performance) of such transactions (operations).

The procedure for carrying out (executing) the transactions (operations) indicated above does not apply to transactions (operations) to which the Central Bank of the Russian Federation and state bodies are parties;

A ban was also established from March 2, 2022, on the export from Russia of cash foreign currency and (or) monetary instruments in foreign currency in an amount exceeding the equivalent of 10,000 US dollars calculated at the official exchange rate of the Central Bank of the Russian Federation on the date of export.

The above outlines the main restrictions introduced as retaliatory sanction measures applied to Russia, as well as to ensure economic security.

In addition to these restrictions, attention must be drawn to certain benefits that may be granted to foreign investors. Thus, as a general rule under Articles 16–17 of the Law on Foreign Investments, benefits on payment of customs duties are granted to foreign investors and commercial organizations with foreign investments when they implement a priority investment project in accordance with customs legislation. Furthermore, constituent entities of the Russian Federation and local self-government bodies, within their competence, may grant a foreign investor benefits and guarantees, provide financing, and offer other forms of support for an investment project implemented by a foreign investor, at the expense of the budgets of the constituent entities of the Russian Federation and local budgets, as well as extra-budgetary funds.

Such benefits are granted within the framework of simplifying customs procedures for representatives of EAEU member states, as well as providing other benefits at the local level [12]. However, direct preferences for foreign investments in Russian companies through the simplification of corporate procedures are not provided.

Nevertheless, the Government and the Bank of Russia plan to create incentives for investors from friendly countries to invest in Russian financial assets, as follows from the Strategy for the Development of the Financial Market of Russia until 2030 [13].

This article has examined the main features of the legislative regulation of foreign investments in Russian commercial organizations. It should be noted that legislative measures taken in this area are currently highly fluid and adaptive to the existing economic and political situation.

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References

[1] Badulina E. Participation of foreign investors in Russian business entities: features, legal aspects, guarantees, problems // Financial Newspaper. 2011. No. 15. P. 5.

[2] Burdenko E.V., Bykasova E.V., Kovaleva O.N. Foreign economic activity: taxation, accounting, analysis, and audit: textbook / ed. by Ph.D. in Economics, Assoc. Burdenko E.V. 2nd ed., Moscow: INFRA-M, 2022. P. 232.

[3] Letter of the Ministry of Finance of Russia dated February 3, 2012 No. 03-03-06/1/58.

[4] Annual Report - 2022 / ed. by V.I. Meshcheryakov. M.: Agency of Accounting Information, 2022. P. 532.

[5] Review of court practice in resolving disputes related to the protection of foreign investors, approved by the Presidium of the Supreme Court of the Russian Federation on July 12, 2017.

[6] Letter of the Federal Tax Service of Russia dated June 30, 2020 No. VD-4-17/10595@.

[7] Ostrovskaya A. Is it necessary to register a permanent establishment in the RF when conducting negotiations with customers? // EZh-Accountant. 2023. No. 6. P. 6.

[8] Commentary to the Law of the Russian Federation dated December 27, 1991 No. 2124-1 "On Mass Media". Zherebtsov A.N., Rotko S.V., Rydchenko K.D., Strauning E.L., Chernus N.Yu., Elaev A.A., Kotukhov S.A., Timoshenko D.A., Tomtosov A.A. 2021.

[9] Modern corporate law: current problems of theory and practice: monograph / O.A. Belyaeva, S.A. Burlakov, M.M. Vildanova et al.; executive ed. O.V. Gutnikov. Moscow: IZiSP, Statut, 2021. 528 p.

[10] Activities of the sub-commission on issuing permits (Decrees Nos. 79, 81). Ministry of Finance of Russia.

[11] Letter of the Ministry of Finance of Russia dated October 13, 2022 No. 05-06-14RM/99138.

[12] Main directions of budget, tax, and customs tariff policy for 2023 and for the planning period of 2024 and 2025, approved by the Ministry of Finance of the RF. Published October 27, 2022.

[13] Authorities are preparing incentives to attract investors from friendly countries to the Russian financial market // Vedomosti. January 10, 2023.