Russian Federation: Recent Developments of Russian Law

Last Updated: 10 October 2010
Article by Oleg Shvander

Following the tradition, the September issue covers some of the hottest topics of Russian law and its practical application.

Violetta Molchanova talks about an important initiative of the Russian Ministry of Justice which is currently working on new amendments to the Russian legislation on notaries, aimed at granting Russian notaries an even broader scope of authorities. Query whether this will turn out to be a positive development for the market.

Dmitry Milyutin writes about draft legislation adopted by the Russian Duma in first draft dealing with some ambiguities that exist with respect to the distribution of profits in Russian joint stock companies and limited liability companies.

Igor Orlov goes into some detail discussing the protocol recently agreed by the ministries of finance of Russia and the Republic of Cyprus. The protocol stipulates some very important amendments to the double taxation treaty between Russia and Cyprus. If the protocol is signed and ratified, authorised bodies of each country will receive the right to collect taxes from residents of the other country. Given that Russian businessmen often use Cypriot structures in their operations, this coming change may reduce the popularity of Cyprus amongst Russian businesses.

Russian Ministry of Justice is preparing a bill to amend legislation on notaries

The Russian Law on Limited Liability Companies was amended with effect from 1 July 2009 to include a requirement that any transaction involving a transfer of a participation interest in a limited liability company must be endorsed by a notary public. While a number of questions and uncertainties connected with the role of a notary in property transactions still remain unresolved, the Ministry of Justice is preparing a new set of amendments to laws and regulations governing notarial services. The amendments are expected to further extend the scope of notaries' responsibilities, in particular, into the domain of corporate law.

For example, one point in discussion is whether notaries should be involved in company incorporation process. Where limited companies are concerned, it is expected that the notaries would be engaged to review corporate documents of a company in the process of its incorporation and to monitor the terms on which the company is created and the amount of its charter capital. A notary would attend a meeting of participants and attest the signatures of the participants on the memorandum of association. In accordance with the proposed procedure, a notary would act as an applicant before registration authorities and thereby guarantee that the information entered into the state register is true.

In addition to the above, many changes in company information (e.g. change in participants) would require a notary. This measure is proposed as a way to ensure accuracy and credibility of the information entered into the state registers in respect of company registration.

It is expected that a notaries' certification will become a mandatory requirement for all transactions with real property. At present such transactions can be executed either in "simple written form" or in the form of a notarized contract. If the proposed amendments are adopted, notaries will be in a position to fully control the entire process of a real property transaction, from checking legal capacity of the parties and fully reviewing title documents (which would require a notary to have direct access to electronic databases of the state registers etc), to overseeing performance of the contract, in particular, the transfer of funds from the buyer to the seller with the help of the notary's depositary accounts which are now mostly used to settle accounts between debtors and creditors.

The legislator also proposes to extend the list of notarized documents having a role in the enforcement process. This change is nothing new; previously the notary's executory endorsement on a contract had the power of an enforcement document which in the event of a default under the contract allowed the non-defaulting party to seek enforcement of the contract through the notary. It is the plan now to get back to this scheme.

Naturally, such a change in the scope of notaries' powers would require an increased level of responsibility for notaries. Indeed, it is envisaged that the Notaries Professional Code, which currently does not have the status of a regulatory document, will be given such status. The legislator intends to enable the State to dismiss or suspend notaries and to bring claims for disqualification of a notary.

Finally it should be noted that the amendments described above will be brought in line with the Civil Legislation Development Concept that is currently being prepared, in order to ensure that notarial law and civil law are harmonized and operate consistently with each other.

The State Duma adopted the dividends bill in the first Reading

On 21 September 2010 the State Duma adopted the Bill "On amending certain legislative acts of the Russian Federation to improve company management procedures".

The Bill is intended to amend the Federal Law "On Joint Stock Companies" and the Federal Law "On Limited Liability Companies" where these laws deal with issues of dividend payments in joint stock companies and profit distributions in limited liability companies.

The main purpose of the Bill is to remove any uncertainty in respect of dividends which were declared for distribution but not claimed by shareholders of joint stock companies, and profits that were allocated to but not claimed by participants in a limited liability company.

The Bill establishes uniform requirements for establishing the due date for the payment of declared dividends in a joint stock company, and allocated profit in a limited liability company. The Bill sets the deadline for payment of declared dividends/allocated profit, which is 60 days after the company resolved to pay dividends and/or distribute profit. According to the Bill, the company charter may establish a shorter timeframe for the payment of the declared dividends / allocated profit.

The main change to the existing rules proposed by the Bill is to establish a prescriptive period within which shareholders in a Russian joint stock company or a participant of a limited liability company can claim the declared dividends or the relevant share of the allocated profit, respectively. The proposed term is 5 years from the due date for dividend payments or profit distribution (as the case may be).

Once this prescriptive period expires, the shareholder / participant forfeits the right to receive those declared dividends / relevant sums of allocated profit which they failed to claim. At the same time the Bill expressly provides that the company charter may establish a longer prescriptive period than the statutory one (i.e. the proposed 5 years).

At the end of this prescriptive term, as set out in the Bill or the company's charter, the unclaimed sums of dividend or allocated profit will revert to the company and be treated as net profit of the company. The company is free to use the net profit received in this way as it may think fit.

In the opinion of the legislator, the Bill, if passed into law, can help resolve the problems with unclaimed dividends /allocated profits, release these monies back into business and stimulate more active behaviour on the side of shareholders and company participants.

Cyprus and Russia may soon start collecting taxes for each other

Cyprus has long secured a position as a leading investor into Russian economy, including direct investment. By way of example, the Russian Statistics Authority reports that in 2008 the island invested approximately 56.9 billion US dollars, which accounted for 21.5% of the total inward investment in Russia; and the country continued to keep its leading position as an investor throughout the credit crunch years. The reason is that the Republic of Cyprus is a rather popular offshore jurisdiction with businessmen doing business in Russia. Large numbers of non-resident companies are registered in Cyprus predominantly for tax optimisation purposes; they hold Russian companies and are ultimately owned by Russian businessmen (and, of course, their foreign colleagues who have interests in business projects in Russia).

This attractiveness of Cyprus as an offshore jurisdiction is based on the current Double Taxation Treaty 1998 between Russia and Cyprus. In spite of the Russian government's repeated declarations that it intends to tighten the treaty regime (and amend the treaty accordingly) in order to prevent abuse in the sphere of tax optimisation, and in spite of the relatively recent changes in the Cyprus tax and corporate legislation, Cyrus still preserves its attractiveness to date.

Meanwhile, approximately 1½ years ago both countries' Ministries of Finance developed and approved a protocol of amendments to this treaty, designed to substantially change the situation. Along with other changes, the protocol describes in detail and imposes on the parties an obligation to disclose information relating to the subject of the treaty; it enables the parties to restrict tax benefits (or tax exemptions) for a resident of either party, where "as a result of consultations, it was established by relevant authorities of both [parties], that the main purpose (or one of the main purposes) of the creation or existence of such resident was to obtain benefits under the [agreement]"; and, finally, the protocol enables the parties to assist each other in collecting taxes owed to the other country. The protocol was approved by the resolution of the Russian Government dated 2 September 2010 which also instructed the Russian Ministry of Finance to hold negotiations with the Government of the Republic of Cyprus and have the protocol signed if an agreement is reached. There are valid reasons to believe that the protocol amending the treaty can be signed very soon (with corrections "that are not essential in nature"): the Cyprus party generally agrees with its provisions (the Cyprus Minister of Finance is expected to visit Moscow on 27 September 2010 to confirm such agreement) and the document can be signed in the course of the Russian President's visit to Cyprus planned for the end of October. Subsequently, to become effective, the document would have to be ratified by the parliaments of the contracting parties.

Mutual assistance in tax collection is the innovation that attracts most interest from the press and the general public. Arguably, this is the most notable change in the treaty, as the current version of the agreement does not impose any obligations to cooperate in the area of taxation.

In accordance with Article 27, as amended (Assistance in tax collection), either party's competent authority (i.e. the Ministry of Finance) can request competent authorities of the other party to collect tax claims on behalf of the requesting state from the resident of the other party. The other party will collect the tax claim in accordance with its domestic tax collection laws as if the tax were owed to this other party, whereby relevant provisional measures can be taken, if necessary.

A request for tax collection assistance can be refused if the requirements of the requesting party are in conflict with domestic laws, administrative practices or public order of the other party, or the requesting party did not take all reasonable steps to collect or procure collection of the tax on its own territory; or the cost of collection is clearly disproportionate to the benefits the requesting party may get (that is, in simple terms, if collection costs clearly exceed the amount of tax claim).

As a matter of fact, if the protocol is signed and ratified accordingly, Cyprus will become the first state to have agreed to collect taxes for Russia. It is reported that the Russian Finance Ministry is working to introduce similar amendments to its agreements with Switzerland, Luxemburg and Austria. The prospects of such amendments are likely to be seen in the light of the fact that provisions of the above article are generally in line with the European practices and in particular, recommendations of the Organisation for Economic Co-operation and Development (OECD).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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