April 20, 2023
Russian authorities require exiting foreign companies to pay 'contributions' at 5% or 10% of market value - implications for US multinationals
Recent amendments to guidance (Guidance) adopted by the Russian Governmental Commission (GC) affect "contribution" fees imposed on foreign companies exiting the country, including US multinationals.
Under Russian Presidential Decree #618, dated 8 September 2022, the direct or indirect change in ownership of a Russian subsidiary requires approval of the GC. In accordance with the Guidance, adopted by the GC in December 2022, unless the payment of the purchase price is deferred by an agreement between the seller and the purchaser, a "contribution" should be made to the government at 10% of the transaction price. Originally, the "contribution" was designed to support the negotiations of Russian purchasers to delay the payments to foreign sellers, though this objective was not directly stated in the Guidance.
In March 2023 (published on 27 March 2023), the Guidance was amended to designate the contribution as a means to increase state revenue and discourage management buyout at a nominal price. If the transaction price represents a discount of less than 90% of the fair market value (FMV), then the contribution should be 5% of the FMV (otherwise it is 10% of FMV). (For example, if FMV is 100 and the transaction price is 10 — 100, then the contribution is 5% of FMV; if the transaction price is 0 — 10, then the contribution is 10% of FMV.) The FMV must be confirmed by an Appraisal Report issued by a Russian certified appraiser (chosen from a list adopted by the GC) and verified by a report issued by a self-regulatory appraisal organization. The appraisal (and respective "contribution") is now required, whether the purchase price is paid in a lump sum at closing or whether there is a deferral.
For the sake of completeness, note that some sources refer the "contribution" as an "exit tax." Please note that, technically, it is not a tax because it is not established in any Russian legislation, but rather is a condition precedent (a requirement established by the GC) for receiving the GC's approval. There is no explicit provision stating (i) whether the Buyer or the Seller should pay the contribution, though in practice it is payable by the Buyer, or (ii) whether it applies for intergroup reorganizations.
Based on the public statements made by the Minister of Finance in April 2023, the Government intends to codify the "contribution" by amending the Tax Code to introduce it explicitly.
US implications (if the seller is under US control)
In general, the United States has banned the payment of any Russian taxes. However, General License OFAC No. 13D dated (GL 13D), dated 24 February 2023, allows parties to pay Russian taxes until 6 June 2023, provided these transactions are ordinarily incident and necessary to the parties' day-to-day operations in the Russia. This exemption from the general ban has been extended several times.
However, the US Treasury's Office of Foreign Assets Control (OFAC) clarified (1118 | U.S. Department of the Treasury) that the payment of "exit taxes" is not considered ordinarily incident and necessary to day-to-day operations in the Russian Federation and, thus, is not authorized under GL 13D.
Therefore, US persons whose divestment of assets in the Russian Federation will involve the payment of such an "exit tax" should consider seeking a specific license from OFAC by submitting a request for a specific license with OFAC's Licensing Division online at http://www.home.treasury.gov/policy-issues/financial-sanctions/ofac-license-application-page. License applications related to these payments should include information regarding the amount of the exit tax, the amount of ongoing taxes that would otherwise be paid to the Government of the Russian Federation should divestment not occur, the impact that failure to pay the tax could have on the employees of the exiting company, the specific economic activity in Russia of the exiting company, and the impact on the Russian Federation of the divestment. OFAC indicates it will expedite its review of such requests, which are evaluated on a case-by-case basis.
For additional information with respect to this Alert, please contact:
EY Consulting LLC, Doha, Qatar
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor