Following previously adopted restrictions on dividend payments in joint-stock companies, Decree No. 254 requires that any payment of dividends from a limited liability company to its foreign participant connected with a “hostile state” be made in Russian rubles and a special type blocked Account “C”, subject to certain exceptions.
On May 4, 2022, Russian President Vladimir Putin issued Decree No. 254, “On the Temporary Order for Fulfillment of Financial Obligations in the Field of Relations of Companies with Certain Foreign Creditors” (Decree 254), which builds on and amends a number of Executive Orders issued since February 28, 2022. Executive Order 254 went into effect immediately upon its issuance.
This LawFlash discusses Executive Order 254’s restriction on the payment of dividends by Russian LLCs to their foreign participants connected to “hostile states”. Executive Order 254 also contains rules applicable to other transactions, which we will discuss in future LawFlashes.
DISTRIBUTIONS TO PARTICIPANTS LINKED TO ‘UNFRIENDLY STATES’ – GENERAL PROCEDURE
Decree 254 establishes a special procedure for the payment of dividends, especially in Russian limited liability companies (although Decree 254 also applies to general and limited partnerships and production cooperatives), extending practically the same rules and restrictions than those already applied to dividends on shares of corporations and other distributions on other securities.
In particular, Decree 254 requires that if a Russian limited liability company passes a resolution on the distribution of dividends to its participants, then any distribution exceeding 10 million rubles (approximately $143,000) to a person linked to a “hostile state must be done in Russian. rubles to a special blocked account of the “S” type – commonly known as the “C” type account – opened in Russia (i.e. the procedure is the same as that established under Decree No. 95). If the dividend amount is denominated in foreign currency, the ruble amount will be calculated at the official exchange rate established by the Central Bank of Russia on the date of payment.
PEOPLE LINKED TO ‘UNFRIENDLY STATES’
The list of “hostile states”, i.e. those designated as committing “hostile actions” against Russia, includes the United States, Canada, member states of the European Union, the Kingdom Kingdom, Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland. , Liechtenstein, Monaco, Norway, San Marino, North Macedonia, Japan, South Korea, Australia, Micronesia, New Zealand, Singapore and Taiwan. The list could be further extended if more countries impose sanctions on Russia.
Generally, a person is linked to a “hostile state” if
- he has the citizenship of, or his place of registration, his principal place of business or his principal source of profit in such “hostile state”; or
- it is controlled by such a person, regardless of their place of registration or principal place of business.
However, there are a number of exceptions. No particular procedure applies to dividends paid to
- Russian affiliates of people linked to “hostile states”; and
- persons controlled by (a) foreign states not included in the list of “hostile states” (the “neutral states”) or (b) natural or legal persons whose personal law is the law of a “neutral state” , in each case provided that such control was established before March 1, 2022.
Currently, it is unclear how these exceptions would apply to companies ultimately owned by Russian beneficiaries and companies with complex ownership structures that include both “hostile states” and “neutral states.”
TYPE “C” ACCOUNTS
As mentioned earlier, Decree 254 requires the use of special bank accounts of type “C” opened in the name of a participant linked to a “hostile state” for any dividend payment exceeding 10 million rubles per calendar month.
The type “C” bank account must be opened in the name of this participant by a Russian limited liability company distributing dividends. No consent or assistance from the entrant is required.
Funds paid into type “C” bank accounts are subject to further use restrictions. Namely, under a decision of the Board of Directors of the Central Bank of Russia, dated March 18, 2022, funds credited to these bank accounts may only be used to pay taxes and legal fees in Russia, acquire Russian sovereign debt and carry out transfers to other types “C” accounts. In other words, these funds are effectively blocked in Russia unless the foreign participant receives permission from the Central Bank of Russia or the Ministry of Finance to withdraw these amounts.
DISTRIBUTIONS TO PARTICIPANTS FROM ‘NEUTRAL STATES’
A Russian LLC can distribute dividends to its foreign participant from a “neutral state” to that participant’s ordinary bank account; it is not necessary to use a type “C” account. In other words, there are no restrictions on the use of the funds payable to these participants.
However, if an amount of dividends is denominated in a foreign currency, the Russian company paying the dividends must calculate the amount in rubles at the official exchange rate established by the Central Bank of Russia on the date of payment. The foreign member can then convert the funds into foreign currencies and transfer the funds out of Russia, unless other restrictions apply.
Transfers of dividends to ordinary or foreign accounts are possible only if there is specific permission from the Central Bank of Russia (with respect to Russian entities that are financial institutions) and the Ministry of Finance ( with respect to other Russian entities). Similarly, special authorization is required for any use of funds in a Type “C” account other than the limited authorized uses described above.
Decree 254 also allows the Central Bank of Russia and the Ministry of Finance to determine alternative procedures for the payment of dividends to foreign participants in the future.
Executive Order 254 incorporates an anti-avoidance prohibition from Executive Order 95, which provides that if after March 1, 2022, a foreign person connected with a “hostile state” has assigned their claim to receive payment to a Russian resident or foreign person of a “neutral state”, this payment must always be made via a type “C” bank account, notwithstanding the assignment.
It is unclear whether this restriction would apply to share transfers made after March 1, 2022.
Trainee lawyer Maxim Sidorenko contributed to this LawFlash.