LawFlash

Update: Russia Extends Restrictions on Dividend Distributions on Limited Liability Companies

May 09, 2022

Following previously adopted restrictions on payments of dividends in joint stock companies, Decree No. 254 requires that any dividend payment from a limited liability company to its foreign participant connected with an “unfriendly state” must be made in Russian rubles and to a special blocked type “C” account, subject to certain exceptions.

On May 4, 2022, Russian President Vladimir Putin issued Decree No. 254, “On Temporary Order of Discharge of Financial Obligations in the Sphere of Corporation Relations Towards Certain Foreign Creditors” (Decree 254), which builds on and amends a number of decrees issued since February 28, 2022. Decree 254 took effect immediately upon its publication.

This LawFlash addresses Decree 254’s restriction on the payment of dividends by Russian limited liability companies to their foreign participants connected with “unfriendly states.” Decree 254 contains rules applicable to other transactions as well, which we will address in forthcoming LawFlashes.

Distributions to Participants Connected with ‘Unfriendly States’ – General Procedure

Decree 254 establishes a special procedure for paying dividends in, most notably, Russian limited liability companies (although Decree 254 also applies to general and limited partnerships and production cooperatives), effectively extending practically the same rules and restrictions as have already been applied to dividends on shares in joint stock companies and other distributions on other securities.

In particular, Decree 254 requires that if a Russian limited liability company adopts a resolution on dividend distribution to its participants, then any such distribution exceeding 10 million rubles (approximately $143,000) to a person connected with an “unfriendly state” must be made in Russian rubles to a special blocked type “S” account—commonly referred to as a type “C” 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 shall be calculated at the official exchange rate established by the Russian Central Bank as at the date of payment.

Persons Connected with ‘Unfriendly States’

The definition of persons connected with “unfriendly states” generally follows the approach taken in the earlier decrees adopting Russian countermeasures (see our LawFlashes on Decree No. 81 and Decree No. 95).

The list of “unfriendly states,” i.e., those that are designated as committing “unfriendly actions” toward Russia, includes the United States, Canada, European Union member states, the United 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 may be further extended if more countries impose sanctions on Russia.

Generally, a person is connected with an “unfriendly state” if

  • it has citizenship of, or its place of registration, primary place of business, or source of primary profit in, such “unfriendly state”; or
  • it is controlled by any such person irrespective of its place of registration or primary place of business.

However, there is a number of exceptions. No special procedure applies to dividends being paid to

  • Russian subsidiaries of persons connected with “unfriendly states”; and
  • persons controlled by (a) foreign states not included on the list of “unfriendly states” (the “neutral states”) or (b) individuals or legal entities whose personal law is the law of a “neutral state,” in each case provided that such control was established prior to March 1, 2022.

Currently, it is unclear how these exceptions would apply to companies ultimately owned by Russian beneficiaries and companies with complicated ownership structures including both “unfriendly states” and “neutral states.”

Type ‘C’ Accounts

As mentioned earlier, Decree 254 requires using special type “C” bank accounts opened in the name of a participant connected with an “unfriendly state” for any dividend payments exceeding 10 million rubles per calendar month.

The type “C” bank account should be opened in the name of such participant by a Russian limited liability company distributing dividends. No consent or assistance from the participant is required.

Funds paid to type “C” bank accounts are subject to restrictions on further use. Namely, pursuant to a decision of the Central Bank of Russia’s board of directors, dated March 18, 2022, the funds credited to such bank accounts can only be used for paying taxes and statutory fees in Russia, acquiring Russian sovereign debt, and making transfers to other type “C” accounts. In other words, these funds are effectively blocked in Russia unless the foreign participant receives an authorization from the Central Bank Russia or the Ministry of Finance to withdraw such amounts.

Distributions to Participants from ‘Neutral States’

A Russian limited liability company may distribute dividends to its foreign participant from a “neutral state” to such participant’s regular bank account; there is no need to use a type “C” account. In other words, there are no restrictions on the use of funds payable to such participants.

However, if an amount of dividends is denominated in a foreign currency, the Russian company paying the dividends should calculate the ruble amount at the official exchange rate established by the Central Bank of Russia as at the date of payment. The foreign member may then convert the funds into foreign currency and transfer the funds outside Russia, unless other restrictions apply.

Exemptions

Transfers of dividends to regular accounts or abroad are possible only if there is a specific permission of 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). Likewise, a special permission is required for any use of funds from a type “C” account other than the limited permitted uses described above.

Decree 254 also allows the Central Bank of Russia and the Ministry of Finance to determine alternative procedures for payment of dividends to foreign participants in the future.

Anti-Avoidance

Decree 254 incorporates an anti-avoidance prohibition from Decree 95, which provides that if after March 1, 2022, a foreign person connected with an “unfriendly state” has assigned its claim to receive payment to a Russian resident or a foreign person from a “neutral state,” such payment should still be made via a type “C” bank account notwithstanding the assignment.

It is unclear whether this restriction would apply to transfers of shares made after March 1, 2022.

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Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:

Ukraine Conflict Task Force
Giovanna M. Cinelli
Alexey Chertov
Joanna Christoforou
Bruce Johnston
Grigory Marinichev
Michael Masling
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Carl A. Valenstein
Dr. Axel Spies
Abaigael R. Clifford
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicola Kelly
Christian Kozlowski
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly

Trainee solicitor Maxim Sidorenko contributed to this LawFlash.