On July 15 2016 amendments to the Federal Law on Joint Stock Companies came into effect, allowing shareholders to finance Russian joint stock companies (JSCs) safely by means of so-called 'contributions to assets'. Contributions to assets are a form of equity financing under Russian law, comparable – to a certain extent – with capital reserve and share premium payments in western jurisdictions. Contributions to assets do not increase the share capital of a JSC or the nominal value of shares.
This method of equity financing was previously explicitly allowed only for Russian limited liability companies (LLCs). Since 2014 the Civil Code provided a list of items considered permissible as contributions to the assets of a business entity (JSCs qualify as 'business entities'), but no clear regulations regarding the implementation of contributions to the assets of a JSC were established. As such, the equity financing of a JSC by means of a contribution to assets was considered controversial and ran the risk of being reclassified as a 'donation'. Following the amendment of the Federal Law on Joint Stock Companies, this legal insecurity has been eliminated.
According to the amended law, contributions to the assets of a JSC may be either voluntary or obligatory. Conversely, the Federal Law on Limited Liability Companies provides only for obligatory contributions by LLC shareholders.
Each shareholder of a public or non-public JSC has the general right to make voluntary contributions to the assets of the JSC. In such cases, other shareholders are not obliged to make additional contributions.
Such a voluntary contribution must be made in accordance with an agreement between the relevant shareholder and the JSC. This agreement requires prior approval from the JSC's board of directors (ie, supervisory board), but is not classified as an 'interested party transaction'. Therefore, the members of the JSC's board of directors who are legally considered to be interested in the contribution may also vote for or against the contribution agreement. The amended Federal Law on Joint Stock Companies explicitly provides that donations regulations do not apply to agreements on contributions to the assets of a JSC.
Obligatory contributions to assets are permitted only for non-public JSCs.
As is the case with LLCs, the articles of association of a non-public JSC can stipulate that the company's shareholders' meeting can impose an obligation on shareholders to make contributions to the assets of the JSC. The relevant shareholders' meeting resolution must be adopted unanimously by all shareholders.
Generally, this resolution will be binding on all shareholders of the non-public JSC, who must make the contribution pro rata to their shareholding.
As an exception to this rule, the JSC's articles of association can also stipulate that the obligation to make contributions will be imposed only on shareholders of a certain type of share. The relevant shareholders' meeting resolution will then require a unanimous vote of all shareholders on whom this obligation will be imposed, as well as a vote of no less than 75% of the total number of votes of the shareholders who participated in the meeting.
Contributions to assets must be made in cash, unless otherwise provided for by the articles of association or the resolution of the shareholders' meeting.
The JSC and any of its shareholders can assert claims for a forced contribution to assets against any shareholder who fails to perform its contribution obligation.
The regulations applicable to the taxation of contributions to the assets of an LLC are also applicable to the taxation of contributions to the assets of a JSC. Where a contribution has been made "in order to increase the net assets of a JSC", the JSC receiving contributions from its shareholders will not gain any taxable income. Against this background, it is necessary to provide in the underlying documents (ie, the shareholders' meeting resolution or the agreement between the JSC and the shareholder performing the voluntary contribution) that the contributions were made for the purpose of increasing the JSC's net assets. For a shareholder, making a contribution to assets is also neutral for the purpose of income tax.
There is no difference between the taxation of voluntary and obligatory contributions.
For further information on this topic please contact Elena Frolovskaya or Björn Paulsen at Noerr by telephone (+7 495 799 56 96) or email ([email protected] or [email protected]). The Noerr website can be accessed at www.noerr.com.