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Third Quarter 2010
In this issue
p1
p2
p5
p7
Russia Welcomes Highly
Qualified Foreign
Professionals
Russia Finally Adopts
Law on Insider Trading
Proposed Competition
Law Amendments
Include Requirement for
Russian Antimonopoly
Approval of
Transactions Resulting
in Control Over Foreign
Companies Which
Import Goods with an
Annual Value of RUB 1
Billion into Russia
Ban on Use of NonStatutory Construction
Schemes and Other
Developments in
Russian Construction
Laws
p10 Dechert Wins Crucial
Case on the
Enforcement of
Bondholders’ Rights
against Guarantors
p12 Recent Developments in
Russian Tax Law
p14 New Laws Introduced in
Advance of New
Privatization Initiative
p15 Russia, Kazakhstan, and
Belarus Enter into a
Customs Union
p16 Recent Major Deals
p16 Recent Dispute
Resolution
p16 Opening of Dublin Office
p16 Recent/Upcoming
Events, Seminars and
Speaking Engagements
p17 Honors
d
Editor: Laura M. Brank
Russian Legal Update
Russia Welcomes Highly Qualified
Foreign Professionals
by Ruslan V.
Koretski and
Tatiana Kozlova
Russia has
significantly eased
immigration barriers
for highly qualified foreign professionals in a bid
to encourage the inflow of trade and investment
into the country, which stands in line with the
modernization rhetoric of Russia’s leaders. For
years, the foreign business community in Russia
has been hampered by tight work permit
regulations and a lengthy bureaucratic process,
which many see as a hangover from the Soviet
era. The immigration restrictions have negatively
affected the investment climate in Russia and
hindered investment from abroad. After so many
years, the Russian government has finally
recognized that changes are long overdue.
Effective as of July 1, 2010, the new Federal Law
No. 86-FZ, which amended the Federal Law on
the Legal Status of Foreign Citizens and other
legislative acts (the “Migration Law”), introduced,
inter alia, a new preferential work permit regime
for a certain group of highly qualified foreign
professionals. Under the new regime, eligible
organizations and foreign businesses in Russia
can now streamline the process of obtaining work
permits (which authorize foreign nationals to
work in Russia) for some of their foreign
employees who fall under the new category
introduced by the Migration Law of a “highly
qualified professional.”
The Migration Law provides an unequivocal
definition of a highly qualified professional. The
only substantive criterion is the amount of the
locally paid salary. To qualify as a highly
qualified professional, a foreign employee’s
annual gross income in Russia must exceed two
million rubles (approximately US$65,000) and
be paid in accordance with Russian labor and
contractual laws. The qualification level of a
foreign employee is determined by the employer
itself. The Migration Law does not require the
employer to demonstrate to the immigration
authorities that the foreign employee meets
particular qualifications (such as work
experience, skills, education, or achievements) to
be considered a highly qualified professional.
The Migration Law has significantly simplified the
process for obtaining work permits for highly
qualified foreign professionals. The major
improvements introduced by the Migration Law
include:
„
Employers are freed from the Russian work
permit quota restrictions, which require
them to obtain a work permit before they
can issue an invitation letter to a
prospective employee. This flexibility will
allow employers to hire qualified foreign
nationals on an as–needed basis, without
having to anticipate their global foreign
labor needs far in advance.
„
Employers do not need to obtain a permit
to employ highly qualified foreign
professionals and register their vacancies
with the employment authorities, as
required under the current rules. An
employer wishing to hire a highly qualified
foreign professional can file an application
directly with the immigration authorities.
„
The new work permits must be issued
within 14 business days from the date of
filing the application, which is significantly
shorter than the current three to six month
process.
„
A work permit for a highly qualified foreign
professional may be issued for a period of
up to three years, instead of the current
d
one-year period, and can be extended an
unlimited number of times.
„
A work permit can be issued for multiple
regions within Russia where the highly
qualified foreign professional is supposed to
work pursuant to his or her employment
contract, rather than a single region, as is the
case under the current rules. This frees
employers from transferring the work permit
to a new region every time an employee
moves.
Another major benefit introduced by the Migration
Law is that highly qualified foreign professionals will
now be subject to a flat personal income tax rate of
13%, which is the rate that applies to Russian
nationals, in respect of income generated in Russia
regardless of the number of days they spend in
Russia per tax year. This rate is less than half the
30% rate currently being paid by non-residents (i.e.,
foreign nationals that spend less than 183 days per
tax year in Russia).
While a major improvement to the current
immigration regime, the Migration Law fails to go as
far as the companies doing business in Russia might
have hoped. Since the Migration Law applies the
new preferential regime only to a small group of
highly qualified professionals, foreign nationals that
do not fall into this category will continue to be hired
to work in any given region after going through a
complicated and lengthy quota system and other
immigration hurdles.
Furthermore, the Migration Law provides that only
Russian legal entities and accredited branch offices
of foreign legal entities are able to sponsor foreign
nationals for the new highly qualified professional
work permits. The Migration Law specifically
excludes representative offices of foreign legal
entities, and noncommercial and religious
organizations, from availing themselves of the
benefits of the new preferential regime. The new rule
introduced by the Migration Law allowing
representative offices of foreign legal entities to
employ foreign nationals without a work permit is
extremely limited given that this exception is
applicable only on the basis of reciprocity in
accordance with international treaties to which
Russia is a party. Since there are no such treaties in
force at this time, it is extremely unlikely that this
exception will be widely utilized in practice.
Overall, the adoption of the Migration Law is a major
step towards modernizing Russia and improving its
investment climate by making the country more
welcoming and friendlier to foreign professionals
who are looking to contribute to Russian growth. It is
likely to be some time before the new procedures
established by the Migration Law are crystallized.
For now, the foreign business community can only
hope that the implementation and enforcement of
the Migration Law will be in line with its spirit.
Ruslan V. Koretski
Moscow
+7 499 922 1161
[email protected]
Tatiana Kozlova
Moscow
+7 499 922 1168
[email protected]
Russia Finally Adopts Law on Insider
Trading
by Kirill Skopchevskiy
After more than 10 years in the
making, on July 27, 2010, Russian
President Medvedev finally approved
the Federal Law No. 224-FZ “On
Insider Trading and Countering
Market Manipulation and Amending
Certain Russian Legal Acts” (the
“Insider Trading Law”). The majority of the
provisions of the Insider Trading Law will come into
legal effect on January 27, 2011, with some
exceptions, as set out below. Its provisions do not
apply to the financial operations of the Russian
Central Bank or to debt securities issued by the
Russian State. The federal body responsible for its
enforcement is the Federal Service for Financial
Markets (“FSFM”).
This article does not analyze the provisions of the
Insider Trading Law that describe actions
constituting “market manipulation” because these
provisions are conceptually analogous to those that
were already set forth in Articles 51(2) and 51(2)(1)
of Federal Law No. 39-FZ “On the Securities
Market”, dated April 22, 1996 (as amended) (the
“Law on the Securities Market”), with some
differences in the exact language used in the
drafting of the Insider Trading Law. The market
manipulation provisions of the Insider Trading Law
supplement and override the relevant articles of the
Law on the Securities Market mentioned above.
The Insider Trading Law defines inside information
as specific and concrete information that has not
been disseminated or transferred (including
information that constitutes commercial secrets,
official secrets, bank secrets, correspondence, and
other secrets as provided by applicable law); whose
Third Quarter 2010
2
d
dissemination or transfer may materially affect the
price of a financial instrument, a currency, or a good
(an “Instrument”); and which is deemed to be inside
information with respect to the certain category of
insider with access to such information (collectively,
“Inside Information”). Inside Information may
include information concerning issuers,
management companies of investment funds, unit
investment funds, private pension funds, persons
holding dominant positions in certain markets, or
Instruments.
the relevant registry by the Russian Federal
Anti-Monopoly Service.
3.
Trading organizers (e.g., exchanges); and
clearing, custody, and credit organizations
that settle trades performed via trading
organizers.
4.
Professional securities market participants
and other persons engaged in operations with
Instruments in the interests of their clients,
who have obtained access to Inside
Information.
Article 6 of the Insider Trading Law prohibits:
„
using Inside Information for the purpose of
undertaking operations on Instruments to
which Inside Information relates (using one’s
own or third party accounts), apart from when
performing a previously vested obligation to
purchase or sell Instruments that arose before
the person obtained the Inside Information;
„
transferring Inside Information to third
parties, unless the transfer is to a person on
the relevant insider list in furtherance of the
obligations established by applicable federal
laws, or through employment or other
contracts; or
„
The Inside Information of persons mentioned in (1)
through (4) will be identified in a regulation which
will be adopted by FSFM. Based on this regulation,
the persons listed above will have to approve their
own internal registers of Inside Information. As of
the date of this article FSFM has not yet adopted the
said regulation on Inside Information. We can
assume that this will be done by July 30, 2011,
when these provisions of the Insider Trading Law
come into legal effect.
5.
Persons who have access to Inside
Information deriving from the persons listed
in categories (1) through (4) above on the
basis of agreements, including auditors,
appraisers, professional securities market
participants, credit, and insurance
organizations.
6.
Persons who possess at least 25% of the
votes in the highest management bodies of
the persons listed in (1) through (4) above, or
shareholders of persons listed in (1) through
(4) above who have access to Inside
Information on the basis of federal laws or
statutory documents.
7.
Members of the boards of directors,
management boards, or persons performing
the functions of the sole executive body
(including management companies) or
management companies of persons listed in
(1) through (6) above and (11) and (12)
below.
8.
Persons who have access to information
about mandatory, voluntary, and competing
offers to acquire shares of joint-stock
companies, including persons who extend
such offers, banks who act as guarantors
under these offers, and appraisal companies.
9.
Federal, state and municipal bodies, offices of
the attorney general, management bodies of
state extra-budgetary funds and the Russian
providing recommendations (or any other
incentives) to, or obliging, third persons on
the basis of Inside Information to purchase or
sell Instruments.
A specific carve-out from these restrictions is made
for journalists and the media in general who receive
Inside Information for the purposes of public
disclosure. Publishing or broadcasting Inside
Information to the general public will not be deemed
to be an unlawful use of Inside Information.
However, under certain circumstances, journalists
may be held liable for market manipulation; also,
persons providing Inside Information to journalists
may be liable for unlawful disclosure.
The Insider Trading Law sets out the types of
persons and the legal entities that are deemed to be
insiders for the purposes of the Insider Trading Law
(the “Insiders”) and further sets forth the types of
information that are deemed to be Inside
Information with respect to such Insiders. From July
30, 2011, all Insiders in the below list (1)-(13),
except those in categories (9), (10), and (13), must
maintain their own register of Insiders.
1.
Issuers and management companies.
2.
Persons holding dominant positions (more
than 35%) on given markets and included in
Third Quarter 2010
3
d
misleading information, if this person did not
know and should not have known that such
information constituted Inside Information
and was restricted;
Central Bank. The following information
constitutes the Inside Information of these
insiders:
‰
Information on the results of trades
(tenders) approved by them;
‰
Information obtained during inspections and
the results thereof;
‰
Information on decisions adopted with
respect to persons listed in (1) through (4),
(11) and (12) concerning the issuance,
suspension, and revocation of licenses
(permits, approvals etc.) to perform certain
types of activities;
‰
Information on the imposition of
administrative liability and other sanctions
on persons listed in (1) through (4) and (11)
through (13); and
‰
Inside Information approved by the
regulations adopted by them.
10. Persons holding executive positions in and
employees of the entities listed in (9) above
who have access to Inside Information of
entities listed in (9) above.
11. News agencies that disclose or provide
information on the persons listed in (1)
through (4) and (9) above.
12. Ratings agencies providing ratings on the
persons listed in (1) through (4) above, as
well as on securities.
13. Natural persons who have access to Inside
Information of the persons listed in (1)
through (8), (11) and (12) above, on the basis
of contracts (including employment
contracts).
Starting from July 30, 2011, the persons mentioned
in (1) through (4), (11) and (12) above are obliged to
publish lists of the information that constitutes
Inside Information of these insiders on their webpages.
In addition to the exception for media/journalists
mentioned above, the Insider Trading Law contains
a number of other instances where a person (entity)
will not be found liable for dissemination or transfer
of Inside Information, even though his/its actions
contain elements of violations as provided for in the
Insider Trading Law:
„
General exception – a person shall not be
liable for the unlawful use of Inside
Information or the dissemination of false or
„
Exception for professional securities market
participants (Broker-Dealers, etc.) – these
persons shall not be liable if acting pursuant
to the instructions of third parties (the person
giving such instructions will be liable); and
„
Exception with respect to the revocation of
licenses – a license of a professional
participant in the Russian securities market
may be withdrawn for the unlawful use of
Inside Information and market manipulation
only if the accused participants are unable to
prove that they took all possible measures to
prevent the violations.
The Insider Trading Law allows a party to seek
damages resulting from the actions of the party
responsible for the unlawful use of Inside
Information and/or market manipulation. However,
the Insider Trading Law provides in Article 7(8) that
operations or transactions may not be deemed void
solely because they involved the unlawful use of
Inside Information or market manipulation; that is,
the Insider Trading Law maintains that the remedy
of damages is sufficient for persons who suffered
from these unlawful actions and the underlying
transactions shall not be unwound.
The Insider Trading Law introduces two new articles
to the Russian Criminal Code and the Code of
Administrative Violations (the “CoAV”), imposing
liability for market manipulation and the unlawful
use of Inside Information. Criminal liability for the
unlawful use of Inside Information will come into
force as of July 30, 2013; criminal liability for
market manipulation is already in force. Another
article added to into the CoAV penalizes the violation
of the requirements of other applicable laws on
insider trading and countering market manipulation;
for example, the violation of disclosure
requirements. These provisions will come into legal
effect on July 30, 2011.
The adoption of the Insider Trading Law is long
overdue and a very positive development for the
Russian securities market. It is also a critical
element in the ambitious plans of the Russian
government and financial regulators to turn Moscow
into a meaningful regional financial center and the
Russian Ruble into a reserve currency for the world’s
largest central banks. However, it is far too early to
predict how the Insider Trading Law will be enforced
and applied to real market situations. It still remains
to be seen whether the adoption of the Insider
Third Quarter 2010
4
d
Trading Law will lead to increased transparency and
effectiveness in the Russian securities market.
certain other important amendments to
antimonopoly law.
Kirill Skopchevskiy
Moscow
+7 499 922 1164
[email protected]
Definition of When FAS Approval Is Required on the
Acquisition of Foreign Companies Which Do
Business with Russia
Proposed Competition Law Amendments
Include Requirement for Russian
Antimonopoly Approval of Transactions
Resulting in Control Over Foreign
Companies Which Import Goods with an
Annual Value of RUB 1 Billion into Russia
by James A. Fishkin
and Evgenia
Gaysinskaya
On July 13, 2010, the
Russian Federal
Antimonopoly Service
(“FAS”), the state agency that enforces Russian
antitrust laws, released its draft “Third
Antimonopoly Law Package” of amendments (the
“Draft Antimonopoly Amendments”). If enacted, the
Draft Antimonopoly Amendments would be the third
set of major changes since 2006 to the antitrust
laws in Russia. The law “On the Protection of
Competition,” commonly called the “Antimonopoly
Law,” was enacted in October 2006 to replace the
prior antitrust laws in Russia and was amended in
July 2009 (commonly called the “Second
Antimonopoly Law Package” of amendments). Since
this set of Draft Antimonopoly Amendments has not
passed through any of the required readings in the
Russian legislature, they may significantly change
before they are enacted into law.
The key provisions in the Draft Antimonopoly
Amendments: (1) set out when FAS approval is
required for the acquisition of foreign companies
which do business with Russia; (2) establish
restrictions on FAS’s power to declare that prices on
exchanges are monopolistically high; (3) remove
agreements or actions within a corporate group from
the scope of antimonopoly law; (4) abolish existing
FAS notification requirements on financial
institutions entering into agreements with other
financial institutions or with state authorities; (5)
include mergers between financial institutions and
commercial (non-financial institution) organizations
in the list of transactions subject to the prior
approval by or post notification to FAS; (6) expand
the audit and inspection powers of FAS; (7) separate
and amend the concepts of “agreements restricting
competition” and “concerted actions;” and (8) make
The Draft Antimonopoly Amendments define the
range of foreign company acquisitions that require a
pre-transaction filing and prior approval by FAS
within the framework of the Russian Antimonopoly
Law. Under the Draft Antimonopoly Amendments,
the acquisition of more than 50% percent of voting
shares/participation interests in a foreign legal
entity or the acquisition of other rights giving control
over the business activities of a foreign legal entity
will be subject to FAS’s prior approval if a foreign
legal entity, which is the acquired party, imports
goods into Russia in an amount exceeding RUB 1
billion annually. This threshold will be calculated for
the year preceding the date of the relevant
transaction.
Establishment of Restrictions on FAS’s Power to
Declare that Prices on Exchanges Are
Monopolistically High
Certain provisions of the Draft Antimonopoly
Amendments are designed to restrict FAS from
declaring that the prices of commodities, shares, or
any other assets traded on exchanges are
monopolistically high. FAS will be limited in its
ability to declare such prices as monopolistically
high, and would be required to look at comparable
markets to determine whether the price traded on
an exchange is fair. It is hoped that this would
further encourage listings on exchanges of such
commodities, shares or any other assets.
Removal of Agreements or Actions Inside a
Corporate Group from the Scope of Antimonopoly
Law
The Draft Antimonopoly Amendments preclude FAS
from prohibiting intra-group transactions or
concerted actions restricting competition among
companies belonging to the same “group,” as
defined by the Draft Antimonopoly Amendments. It
is provided that such intra-group agreements or
actions will not be viewed as violating the
requirements of the Antimonopoly Law if one of the
parties to such agreements or actions has direct or
indirect control over the other, or when such parties
are under the direct or indirect control of one
person. The Draft Antimonopoly Amendments
introduce a long-awaited definition of “direct” and
“indirect” control:
Third Quarter 2010
5
d
„
„
Direct Control – where a legal or natural
person can determine the decisions adopted
by a legal person, through one or more of the
following: (1) the ability to control more than
50% of the total number of votes attributable
to shares/participation interests in the charter
capital of a legal entity; (2) the ability to
determine the conditions of the business
activities of a legal entity; or (3) the exercise
of the functions of the executive body of a
legal entity.
Indirect Control – where a legal or natural
person can determine the decisions taken by
another legal person through its direct control
of a third legal person which has established
direct control of that other legal person.
Abolition of Existing FAS Notification Requirements
on Financial Institutions Entering into Agreements
with Other Financial Institutions or with State
Authorities
The Draft Antimonopoly Amendments provide for the
termination of the current obligations of financial
institutions to notify FAS of all written agreements
which are concluded between: (1) two financial
institutions; or (2) a financial institution and either a
state executive authority or an executive authority of
a constituent of the Russian Federation. Parties to
any such agreements would still be able to send a
draft to FAS for review if they would like an advisory
opinion stating that their agreement does not violate
the Antimonopoly Law, as currently permitted under
the law.
Inclusion of Mergers Between Financial Institutions
and Commercial (Non-Financial Institution)
Organizations into the List of Transactions Subject
to the Prior Approval by or Post Notification to FAS
The list of transactions which must receive prior
approval from FAS would be expanded under the
Draft Antimonopoly Amendments to include:
„
„
a merger (Rus. присоединение) of a
commercial organization (which is not a
financial institution) into a financial
institution, if the balance sheet value of such
financial institution exceeds the value
established by the Russian Government (note
that the Russian Government has not yet set
such values);
a merger (Rus. присоединение) of a financial
institution into a commercial organization
(which is not a financial institution), if the
balance sheet value of such financial
institution exceeds the value established by
the Russian Government (in this case, the
value will be established by the Russian
Government in agreement with the Central
Bank of Russia).
The list of transactions that require post-transaction
notification to FAS would also be expanded to
include other (in all likelihood, lower value) mergers
(Rus. присоединение) of a financial institution into a
commercial organization (which is not a financial
institution), if the latest balance sheet value of such
financial institution exceeds the value which will be
established by the Russian Government. In such
cases, the obligation to notify FAS of the transaction
would be imposed on the commercial (non-financial
institution) organization.
Expansion of the Audit and Inspection Powers of
FAS
The Draft Antimonopoly Amendments will expand
FAS’s authority to conduct antimonopoly audits to
include documentary audits as well as on-site
audits. These FAS antimonopoly audits will take the
form of both scheduled and unscheduled
inspections. The Draft Antimonopoly Amendments
provide for the expansion of the required grounds for
conducting unscheduled inspections, including:
„
on the special instruction of the Russian
president or the Russian government; and
„
on a detection of signs of a violation of
antimonopoly requirements by FAS.
A number of significant provisions would be added
to the procedure for the examination of cases of
violations of antimonopoly legislation conducted by
FAS. In particular: (1) the list of rights and
responsibilities of individuals involved in such cases
would be expanded to include the right to record the
procedure of the examination of such cases (in
writing or using audio recordings, except for cases
where information that constitutes secrets protected
by law is disclosed); (2) certain mandatory
requirements would be established in respect of the
form and contents of an application regarding a
violation of antimonopoly requirements to be filed
with FAS; and (3) the powers of FAS and the
procedure for review of such applications would also
be expanded.
Separation of and Amendments to the Concept of
“Agreements Restricting Competition” and
“Concerted Actions”
The Draft Antimonopoly Amendments distinguish
between the concepts of “agreements restricting
competition” and “concerted actions” into two
Third Quarter 2010
6
d
different articles with different qualifying criteria
(such criteria would not change significantly and this
would be a more structural amendment). It also
proposes to abolish criminal liability for “concerted
actions.”
Ban on Use of Non-Statutory Construction
Schemes and Other Developments in
Russian Construction Laws
Other Important Amendments
Since Federal Law No. 214-FZ “On
Participation in Participatory Share
Construction of Multi-Apartment
Residential Buildings and Other Real
Estate and on the Amendment of
Certain Legislative Acts of the Russian Federation,”
dated December 30, 2004 (as amended) (the
“Participatory Share Construction Law”), was
adopted more than six years ago, it has been subject
to frequent and severe scrutiny and discussion
between the business community, legal
practitioners, and scholars. This is due to the
ambiguous language of the Participatory Share
Construction Law, which was aimed at protecting
individuals and legal entities that invest in the
construction of property, but did not clearly set out
the rules and mechanisms for imposing liability on
unscrupulous developers. The need to revise the
Participatory Share Construction Law increased
following the negative fall out from the credit
crunch, when most developers were facing a lack of
funds, and many were thus unable to complete all of
the projects that they had contractually agreed to for
investors (both legal entities and individuals).
Other important innovations of the Draft
Antimonopoly Amendments include:
„
amendments to the definition of “coordination
of economic activities” so that such
coordination would be possible only by a third
person not acting in the commodity market in
which the coordination is implemented;
„
a direct clarification that an agency contract is
not a “vertical” agreement;
„
amendments to the list of financial services
that require competitive bidding to select
financial organizations;
„
the introduction of a procedure for the review
of complaints by FAS of a violation of trade
procedures and the procedure for concluding
contracts;
„
changes in the list of documents which must
be submitted to FAS in connection with an
application for prior approval or a posttransaction notification; and
„
the introduction of a procedure for the
notification of a person being investigated by
FAS.
A review of the Draft Antimonopoly Amendments by
the Russian Government (at the ministerial level) is
planned in the near future.
James A. Fishkin
Washington
+1 202 261 3421
[email protected]
Evgenia Gaysinskaya
Moscow
+7 499 922 1116
[email protected]
by Elena Ivankina
As a result, in the summer of 2010, a new set of
amendments to certain Russian laws regulating
participatory share construction (Rus. долевое
строительство) was finally adopted by the State
Duma of the Russian Federation (the “RF”). These
amendments were introduced by Federal Law No.
119-FZ “On the Amendments to the Federal Law,
‘On the State Registration of Immovable Property
Rights and Transactions Therewith,’ and Several
Legislative Acts of the Russian Federation,” dated
June 17, 2010 (the “Amendment Law”), which, in
addition to affecting the Participatory Share
Construction Law, also affects several codes and
other legal acts. 1 With certain exceptions, the new
amendments came into legal force on June 21,
2010.
For the sake of convenience, and since the
amendments are very distinct in their nature, this
1
RF Tax Code, RF Administrative Offenses Code,
Federal Law No. 102-FZ “On Mortgage (Pledge of Real
Estate),” dated July 16, 1998 and Federal Law No. 39FZ “On Investment Activity in the RF, Performed in the
Form of Capital Investments,” dated February 25,
1999.
Third Quarter 2010
7
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article focuses only on the principal amendments to
the Participatory Share Construction Law (the “SCL
Amendments”), in particular those affecting the
entire construction and development industry
(including construction companies, developers and
investors).
As mentioned above, the Participatory Share
Construction Law was adopted with the aim of
protecting the interests of investors and
incentivizing developers and construction companies
to operate in the Russian market in strict
compliance with Russian construction and other
laws. However, a variety of practical problems have
been associated with the implementation of the
Participatory Share Construction Law in the past,
including those outlined below.
Abuse of Individuals’ Rights by Unscrupulous
Developers Using Non-Statutory Construction
Schemes
The operational requirements set forth by the Share
Construction Law have always been inconvenient
and burdensome for developers, imposing numerous
additional requirements of both a financial and a
technical nature. Of numerous requirements, the
most unpopular and rarely observed in practice was
the requirement to use so-called participatory share
construction agreements when raising funds from
individuals. In particular, developers were reluctant
to use these participatory share construction
agreements because: (a) the Participatory Share
Construction Law established mandatory provisions
to be incorporated into the agreements; (b) the
agreements required registration with the state
authorities; (c) having been registered with the state
authorities, these agreements created an
encumbrance over the developers’ real estate and
entitled an individual to trigger a foreclosure
procedure over the real estate upon the occurrence
of certain events; and (d) the use of participatory
share construction agreements increased the level of
liability on developers (compared with all other
agreements previously used for the same purpose).
The wording of the Participatory Share Construction
Law was also imprecise, and certain provisions were
quite ambiguous when taken together (i.e., it was
possible to dispute its mandatory application to
construction).
Therefore, up until the recent amendments,
developers had been very creative in avoiding the
use of participatory share construction agreements
in their operations and, thus the application of the
mandatory provisions of the Participatory Share
Construction Law. In practice, these avoidance
schemes frequently included: (a) the execution of
promissory note sale and purchase agreements; (b)
the execution of preliminary sale and purchase
agreements over premises; or (c) a combination of
the above. These schemes were not strictly
prohibited under the then-applicable legislation.
Despite the fact that the use of these alternative
schemes was common practice in Russia, and that
this gave rise to frequent controversy, including
disputes and public protests (by investors who had
been deceived), the case law finding these schemes
illegal (void) was very limited. Therefore, until
recently, those individual investors who invested in
property caught up in these schemes were not
protected, and this often resulted in abuses of their
rights by developers.
This situation, however, is likely to change
substantially with the adoption of the SCL
Amendments. Starting from June 21, 2010,
developers are only authorized to raise funds from
individuals on the basis of participatory share
construction agreements. Thus, all other schemes
(such as the execution of preliminary agreements,
the sale of promissory notes, or a combination of
the above) are forbidden by statute (except for the
issue of residential construction bonds (certificates)
and the raising of funds by cooperative societies
(special legal entities), directly permitted by the
Participatory Share Construction Law). The
mandatory requirements imposed by the
Participatory Share Construction Law can no longer
be avoided by developers, and the position of
individual investors has consequently been
significantly improved in comparison to past
practice.
This express statutory ban on the use of alternative
schemes to raise finance from individuals for
construction is considered to be the principal benefit
from the SCL Amendments. It appears that the SCL
Amendments have had the desired effect and many
of the well-known and reputable developers have
initiated the process of converting their operations
from alternative schemes to those specifically
permitted by the Participatory Share Construction
Law.
The Need to Protect the Interests of Bona Fide
Developers Facing the Consequences of the Credit
Crunch
The downside of the mandatory imposition of
participatory share construction schemes described
in paragraph (1) above, however, is that the
restriction on using any alternative schemes has
significantly limited the ability of developers to raise
external financing at the earlier stages of
construction. Based on the Participatory Share
Construction Law, participatory share construction
agreements can only be executed (and financing
Third Quarter 2010
8
d
obtained) after a construction permit has been
received. Unfortunately, the state authorities
responsible for the issuance of construction permits
and for monitoring the compliance of construction
operations with Russian law remain extremely
bureaucratic and are known to create artificial
obstacles; in practice it often takes a significant
amount of time to receive all of the necessary
documents and permits. Given that the time
available for the construction of real estate is usually
limited by a relevant obligation to a governmental or
municipal authority (e.g., by a term of validity in an
investment contract, or by the inclusion of a
condition to complete construction within a certain
period of time in a resolution of a local authority
granting rights over a land plot), the requirement
that financing can only be acquired after the relevant
construction permit is received significantly limits
the time available for the construction of a real
estate object, especially when external financing
from individuals is used. In other words, should an
investment contract state that the construction of a
residential house must be accomplished within four
years, and a bona fide developer is going to finance
construction from external sources only (i.e., from
individuals), this four year period will in practice be
significantly shortened by: (a) the time required for
the issuance of a construction permit; and (b) the
time required to raise enough funds from individuals
to begin construction.
To balance the interests of developers and investors
and to motivate developers to convert their
operations into schemes which are fully compliant
with the Participatory Share Construction Law, a
new tax benefit initiative has been introduced into
law. In particular, the Tax Code has been amended
to provide that VAT is no longer applied to services
rendered by developers under participatory share
construction agreements (except industrial
constructions). Developers will be able to apply this
tax relief in the fourth quarter of 2010. It is expected
that this statutory development will positively affect
the financial standing of developers.
The Need to Set Forth Clear Rules and Mechanisms
for Imposing Liability on Developers
Construction Law (and in particular for the improper
raising of funds from individuals (including through
using other types of schemes)):
„
Damages. An individual may claim: (a) the
immediate refund of all amounts paid to the
developer; (b) the payment of interest at
double the statutory rate calculated in
accordance with Article 395 of the RF Civil
Code; and (c) the payment of damages (in
addition to the payment of interest at double
the statutory rate calculated in accordance
with Article 395 of the RF Civil Code on such
amounts).
„
Administrative Fines. A developer (a legal
entity) may be held administratively liable in
an amount varying from RUB 500,000 to RUB
1,000,000 (approximately EUR 12,755 to EUR
25,510). The officers of the developer may be
held administratively liable in an amount
varying from RUB 20,000 to RUB 50,000
(approximately EUR 510 - EUR 1,275). Please
note that administrative liability may be
imposed on the developer (and its officers) for
each violation of the Participatory Share
Construction Law separately so that raising
funds from each individual in violation of the
Participatory Share Construction Law will
trigger administrative liability in each case on
the developer.
„
Challenge in Courts. The SCL Amendments
expressly provide that a transaction entered
into in violation of the Participatory Share
Construction Law may be challenged in court
(but note that such a transaction is not
deemed to be void from the moment when it
was made, but only from the moment when
the court overturns it). The statute of
limitations for bringing such a challenge is
one year from the date when an interested
person learned or should have learned of the
violation. This claim can only be brought by
the individual who entered into the relevant
transaction.
Application of the SCL Amendments in Practice
As discussed above, the past application of the
Participatory Share Construction Law failed to
prevent numerous violations of individuals’ rights by
unfair developers which was the main impetus for
the further imposition of liability on developers. In
addition, the procedure for imposing liability was
not sufficiently clear and straightforward.
It appears that the SCL Amendments seek to resolve
these problems by imposing the following sanctions
for the violation of the Participatory Share
At the time of drafting the SCL Amendments, there
was discussion about making the law retroactive to
apply to those agreements which were already in
effect. However, it appears the SCL Amendments do
not include such a provision. Nevertheless, since the
SCL Amendments are relatively new and there
appear to be no reported cases interpreting the new
law, it is possible that courts could attempt to apply
them retroactively. Thus, it is advisable (where
possible and applicable) for developers to proceed
Third Quarter 2010
9
d
with converting agreements entered into under other
schemes into participatory share construction
agreements to ensure compliance with these recent
Russian law changes and to avoid any negative
implications in this respect in the future.
„
acknowledged the possibility of executing a
guarantee of an issuer’s bond obligations after
the state registration of the bond resolution
and bond prospectus.
The Facts of the Case
Elena Ivankina
Moscow
+7 499 922 1118
[email protected]
Dechert Wins Crucial Case on the
Enforcement of Bondholders’ Rights
against Guarantors
by Yuri Makhonin and
Alexander K. Lazarev
The Russian state
arbitrazh courts have
recently considered a
number of disputes
between the owners of bonds issued on Russian
stock exchanges and the issuers and guarantors of
such bonds, with many issuers having defaulted on
payments during the financial crisis. Before the
financial crisis, very few bond disputes reached
Russian courts, which, as a result, have not yet
adopted a consistent approach to the resolution of
such disputes. In addition, Russian securities
legislation is still relatively underdeveloped and has
not kept pace with market practice, putting investors
in an awkward position.
In particular, court practice in disputes involving
third party guarantors of bonds (mainly in the form
of suretyships) has been very inconsistent. Recently,
Dechert’s Moscow office successfully represented a
foreign investor in the Russian state arbitrazh courts
in a bond dispute with a major Russian agroindustrial holding. The decision, which has
influenced other decisions in subsequent cases, was
the first time in Russian court practice that an
arbitrazh court:
„
„
ruled that a guarantee of the bond obligations
of an issuer may be executed without the
guarantor signing either the bond resolution
(i.e., the decision to issue the bonds) or the
bond prospectus, and without including the
terms of the guarantee into the issue
documentation;
declared valid a guarantee of an issuer’s bond
obligations which was sent as a public offer,
with a notice to such effect posted on the
internet;
In 2006, Derzhava-Finans LLC (the “Issuer”) (a
company which is part of a major Russian agroindustrial holding ‘Derzhava’) agreed to issue bonds
in certificated form and on September 26, 2006, the
Russian Federal Financial Markets Service registered
the bond issue and bond prospectus, the bond issue
having a total nominal value of RUB 1 billion.
To guarantee the performance of the obligations of
the Issuer with respect to the bond issue, a number
of legal entities from the Derzhava group of
companies executed a guarantee in the form of a
suretyship. Three guarantors signed the bond
resolution, bond prospectus and bond certificate
and their offers were included into the text of the
issue documentation. However three other
guarantors (Pavlovsky Zavod Metallicheskikh
Konstruktsij JSC, Group of Companies Derzhava
JSC, and SelProm-NN LLC) (the “Late Guarantors”)
issued public offers which were sent to the issuer
after the state registration of the bond issue and
prospectus. Their offers were not included into the
text of the issue documentation, but were rather
posted on the website of the Information Agency
“CBONDS” on the internet (www.cbonds.info). The
Late Guarantors did not sign the bond resolution,
bond prospectus, or bond certificate.
In 2007, the bonds were floated on the Moscow
Interbank Currency Exchange (MICEX). Beginning
from September 2008, the Issuer defaulted on
scheduled principal and interest payments.
Dechert’s client, a foreign investor (the “Investor”)
which purchased the bonds in April 2009, applied to
the Moscow State Arbitrazh Court with a claim
against the Issuer and the guarantors (including the
Late Guarantors) for the cost of the bonds,
accumulated interest and penalty payments (case
No. А40-99098/09-83-674).
Legal Analysis of the Case
In the course of the court proceedings, the Late
Guarantors disputed the claim, arguing that the
guarantees they provided were invalid due to a
violation of the Law “On the Securities Market” (the
“Securities Law”).
In accordance with Clause 2, Article 27.2. of the
Securities Law, if a guarantee is issued in favor of a
bond, the terms of the guarantee must be referred
to in the bond resolution, must be included in the
Third Quarter 2010
10
d
bond prospectus, and in the case of a certificated
form of issue, also included in the bond certificates.
Clause 3, Article 27.2 of the Securities Law provides
that if a bond is guaranteed by a third party then the
bond resolution, bond prospectus and bond
certificate (if relevant) must be signed by the
guarantor. Similar requirements are included in
paragraphs 6.2.12. and 6.2.15. of the Russian
Standards of Securities Issue and Securities
Prospectus Registration which were in force at the
time the decision was made by Derzhava-Finans LLC
to issue the bond.
It should be noted that the position of the
guarantors was also supported by then-existing
court practice, in particular, by a decision of the
Federal District Court of Moscow region No. КGА40/818-06 of 03.03.2006 and a decision of the
State Arbitrazh Court of the city of Nizhniy Novgorod
of 14.07.2009 on case No. А43-9731/2009-11-241.
Notwithstanding the above past precedents, we
argued on behalf of the Investor 2 that such decisions
were contrary to certain principles of Russian law. In
particular, we argued, inter alia, that:
„
„
Article 27.2 of the Securities Law should only
apply to guarantees which are provided before
the issue of the securities, because after the
bond resolution and the state registration of
the issue and the prospectus, a guarantor has
no possible way of signing the issue
documents; and
pursuant to Article 361 of the RF Civil Code
and the position of the Presidium of the RF
Supreme Arbitration Court in Resolution
No.7261/09 of 28.07.2009, a guarantee is
regarded as a method of ensuring the
performance of obligations and may be
created at any time during the performance of
a principal obligation and not only at the start
of the issuance procedure as argued by the
guarantors.
The Moscow State Arbitrazh Court in its ruling of
20.10.2009 agreed with our arguments and
awarded the disputed amounts in full to our client,
including the cost of the bonds, the accumulated
interest and penalty payments. The Ninth Arbitrazh
Court of Appeal in its Resolution of 20.01.2010
upheld the judgment of the court of the first
2
instance and agreed with the reasoning as set out
above.
Consequences of the Decision for Russian Court
Practice with regard to Bond Disputes
A court decision is not recognized as a source of law
in the Russian Federation, however, as in many
other civil law jurisdictions, court judgments are
acquiring greater significance in Russia (especially
the decisions of the appeal and cassation courts and
the resolutions of the Presidium of the RF Supreme
Arbitration Court).
The resolution of the Ninth Arbitrazh Court of Appeal
in case No. А40-99098/09-83-674 will hopefully be
an important judicial decision in terms of the
defense of investors' interests in the Russian
securities market and the enforcement of guarantees
of corporate bond issues.
In several subsequent cases, the Russian state
arbitrazh courts have, in similar circumstances,
begun satisfying claims of investors (e.g. in the
judgments of the State Arbitrazh Court of the city of
Nizhniy Novgorod of 05.02.2010 in case No. А439736/2009-27-85/32 and of 12.02.2010 in case
No. А43-19794/2009-27-183/8, as well as in the
ruling of the Ninth Arbitrazh Court of Appeal in case
No. А40-101091/09-57-468).
However, there is still some way to go before the
courts adopt a universal approach to this issue and
in several other cases the courts have continued to
dismiss similar arguments made by bondholders in
terms of the obligations of guarantors (e.g. in the
judgment of the Tenth Arbitrazh Court of Appeal of
11.03.2010 in case No. А41-28545/09).
Yuri Makhonin
Moscow
+7 499 922 1106
[email protected]
Alexander Lazarev
Moscow
+7 499 922 1103
[email protected]
Dechert attorneys Yuri Makhonin, Timur Djabbarov,
and Alexander Lazarev, under the supervision of
counsel Oxana Peters, argued the case on behalf of
the Investor.
Third Quarter 2010
11
d
Recent Developments in Russian Tax Law
New Tax Rules Remove RUB 500 Million Equity
Investment Requirement for Parent Companies to
Claim 0% Substantial Shareholding Exemption Tax
Rate on Dividends; Proposed Amendments
Contemplate Introduction of Consolidated Tax
Filings and Abolition of Capital Gains Tax on Long
Term Investments
by Kirill Skopchevskiy
Several amendments to Russian tax
law were introduced at the end of
2009 and the first half of 2010, with
some interesting reforms also
planned for 2011. This article
summarizes the new developments.
Removal of the RUB 500 million Equity Investment
Qualification Requirement for the Substantial
Shareholding Exemption on the Taxation of
Dividend Payments
The Tax Code of the Russian Federation (the “Tax
Code”) was recently amended (at Article 284.3(1))
to remove one of the qualification requirements for
the so-called “substantial shareholding exemption,”
which, when triggered, sets a 0% tax rate on
dividends distributed by subsidiaries to parent
companies. It is no longer required that to qualify
for the exemption the company receiving the
dividend must have made an equity investment of at
least RUB 500 million in the company paying the
dividend. This amendment brings shareholders
which had previously fallen beneath this threshold
into the scope of the substantial shareholding
exemption and will likely encourage the further use
of Russian holding companies in corporate groups.
The substantial shareholding exemption qualification
requirement of an equity investment of RUB500
million had previously been criticized for a number
of ambiguities: for example, it was unclear whether
the threshold value of an equity investment of RUB
500 million could be reached through the purchase
of shares at different times or only through a single
purchase of shares. The following two criteria for the
exemption are still retained: (1) the company
receiving the dividend must hold at least a 50%
shareholding in the company distributing the
dividend; and (2) the company receiving the
dividend must have owned the relevant shares in the
company distributing the dividend for a minimum of
365 days.
This provision will come into force from January 1,
2011, but will apply to the payment of corporate
income tax on dividends for 2010 and subsequent
periods.
New Rate of Income Tax for “Highly Qualified
Foreign Professionals”
As set out in detail in this DechertOnPoint Russian
Legal Update in the article titled “Russia Welcomes
Highly Qualified Professionals,” a new streamlined
work permit program for “highly qualified foreign
professionals” became effective on July 1, 2010. A
13% personal income tax rate will apply to
remuneration received from the professional
activities of such highly qualified foreign
professionals, even if they are not tax resident in
Russia (a tax resident must spend 183 calendar
days or more in Russia over a period of 12
consecutive months). Previously, foreign employees
who were not tax resident were taxed at 30% on
their Russian-source income.
Reinstatement of the Pre-Crisis Rate for Deducting
Interest on Ruble Debt Obligations
The previous procedure for calculating the deduction
of interest on Ruble debt obligations was reinstated
from July 1, 2010, for all Ruble debt obligations that
arose before November 1, 2009. From July 1, 2010,
interest on Ruble debts may be deducted at the
refinancing rate of the Central Bank of Russia
multiplied by 1.1. Until June 30, 2010, interest on
debt obligations that arose before November 1,
2009 could have been deducted at double the
refinancing rate (for Ruble debts). This was a
temporary measure that was introduced in 2009 as
part of the Russian Government’s anti-crisis
program. The deduction of interest on Ruble debt
obligations arising after November 1, 2009, was not
affected by the temporary measures and remained
at the refinancing rate of the Central Bank of Russia
multiplied by 1.1. For debt obligations in a foreign
currency the current limit for interest deduction is
15% per annum.
VAT Amendments
Since January 1, 2010, the following amendments to
the Tax Code in relation to VAT have taken effect:
„
Assignments under loan agreements or credit
agreements and the fulfillment of obligations
by borrowers to creditors which have been
assigned the benefit of such loan or credit
agreements are now VAT exempt. Previously,
the Ministry of Finance of the Russian
Federation had interpreted the provisions of
Article 149 of the Tax Code in such a way so
that only assignments from initial creditors
(who signed the original agreement) and the
fulfillment of obligations to such initial
creditors were VAT exempt. These VAT
exemptions are now available to all creditors.
Third Quarter 2010
12
d
„
„
„
In order for a buyer to deduct VAT paid to a
seller, the invoice for the purchase should
meet certain criteria provided in Article 160 of
the Tax Code. In practice there have been
many disputes related to violations of these
criteria which have led the tax authorities to
reject the deduction of VAT. The new
amendments provide that non-material errors
in an invoice shall not constitute grounds for
the rejection by the tax authorities of a VAT
deduction. A non-material error is one which
does not impair the identification of the buyer,
purchaser, price, goods, works or services,
applicable tax rate or the amount of tax
payable. Most Arbitrazh Courts have
supported this approach in various tax
disputes relating to VAT.
REPO transactions (including funds which
should be paid by providing securities under
such transactions), as well as loans in the
form of securities (including interest on such
loans) are now VAT exempt. The Ministry of
Finance has stated with respect to this
provision that in the event that securities have
been transferred under the relevant loan
agreements before 2010 and the termination
date of such agreements is after January 1,
2010, then interest under such loan
agreements should be subject to VAT.
Those taxpayers who have paid more than
RUB 10 billion in tax over the past three years
(including profits tax, excise tax, mineral
extraction tax and VAT, but excluding
import/export VAT and VAT withheld by tax
agents) will be able to offset VAT input tax
recorded in their tax returns before the
mandatory audit of such tax returns. In order
to qualify, the taxpayer must provide a bank
guarantee in the amount of the refund in the
event that it is later challenged. This new
procedure can be applied to tax declarations
submitted for the first quarter of 2010.
Abolition of the Unified Social Tax
New rules related to the calculation and payment of
social security contributions were effective as of
January 1, 2010. Thus, the unified social tax no
longer exists and instead separate contributions to
the Russian social funds (i.e., state pension, medical
insurance and social insurance funds) have been
introduced. These contributions are payable by
employers in conjunction with employee salaries.
From 2011, higher tariffs for these contributions will
be introduced. Employers’ reports must now be
submitted to the relevant social fund instead of to
the tax authorities.
Projected Future Amendments
Consolidated Returns
Russian law does not currently provide for
consolidated tax filings for companies under
common control in a group structure. However, a
draft law is currently under consideration which
would allow for consolidated group profits and
losses, if the participants of the group agree. The
group would be recognized only for the purposes of
the profits tax. Under the draft law, the profits and
losses of different group companies could be offset
against each other and transactions between group
companies would be ignored for tax purposes. These
measures would allow corporate groups to reduce
their overall tax burden. However, companies which
already enjoy certain tax advantages would be
excluded from such groups for tax purposes and
there is a requirement in the draft law that all group
companies would need to be in the same industry
sector.
Transfer Pricing Rules
A proposed draft law on transfer pricing is also
under consideration, which, if adopted, would be
effective from January 1, 2011. The key changes
would include the introduction of: “advance pricing
agreements” with tax authorities (to resolve key
issues early); new pricing methods (derived from
widely-used international practice); the “arm’s
length” concept (as opposed to looking at 20%
deviations from market prices); further
documentation and reporting rules; and making
further sources of data available for the calculation
of market prices.
Transfer pricing controls would cover transactions
between related parties, transactions with third
parties in low tax jurisdictions or with other third
parties which enjoy tax advantages, and a number of
other cross-border transactions.
Capital Gains Tax Exemption For Long Term
Investments
In his speech to the St Petersburg Economic Forum
on June 18, 2010, President Dmitry Medvedev
announced that in 2011 “Russia will completely
abolish capital gains tax on long-term direct
investment.” However, further details concerning
this measure have yet to be published. Since many
companies transact business through offshore
structures, it is difficult to determine the true impact
of the abolition of this tax.
Third Quarter 2010
13
d
Ratification of the Protocol to the Russia/Cyprus Double
Tax Treaty
On April 16, 2009, a Protocol (the “Protocol”) to the
Russia/Cyprus Double Tax Treaty (the “Double Tax
Treaty”) was signed in Nicosia. 10 articles of the
Double Tax Treaty were amended by the Protocol
and one new article was added. The main changes
will affect revenues from the sale of real estate, the
taxation of dividends, the definition of a permanent
establishment (which has been broadened) and
provisions relating to the exchange of information.
The Protocol provides that it will come into effect on
January of the year following the date of its
ratification by the last of the two parties to do so. An
article relating to revenues from the sale of real
estate will come into effect four years from the date
the Protocol comes into force.
Kirill Skopchevskiy
Moscow
+7 499 922 1164
[email protected]
New Laws Introduced in Advance of New
Privatization Initiative
by Ruslan V. Koretski
and Irina Kulyba
The Russian
government has
recently unveiled a
plan to sell stakes in
several major state-owned companies over the next
five years to private investors with a goal of raising
funds to cover budget deficits and to reduce the
state’s presence in the economy. The plan had first
surfaced in 2009 and was dubbed the “New
Privatization Initiative.” The privatization plan is still
in its early stages and the Russian government is
expected to work out the main aspects of the plan
later this year.
The Ministry of Finance and the Ministry for
Economic Development have compiled an interim
list of state-owned companies in which stakes of
various sizes will be sold to both domestic and
foreign investors. The Russian government intends
to maintain controlling stakes of at least 50% plus
one share in all of these companies. The companies
subject to privatization include Rosneft, Transneft,
Rosagroleasing, Sovkomflot, Federal Grid Company,
RusHydro, Rosselkhozbank, VTB, Sberbank, United
Grain Company, and Rosspirtprom. The Russian
government expects to raise an estimated $50
billion between 2011 and 2015 from these sales,
which is an increase from a previously announced
plan to raise US$29 billion over three years.
However, it has been rumored that the asset sale
could begin as early as 2010 with the sales of stakes
in two major companies, most likely in the
transport/infrastructure and financial services
sectors (the latter could be the sale of a 10% stake
in VTB).
The architects of the New Privatization Initiative
intend to benefit from lessons learned during the
controversial loan-for-shares privatizations in the
mid-1990s, and this is one of the drivers behind
recently introduced amendments to the privatization
legislation aimed at making the process of
privatization more efficient and transparent.
The relevant amendments were made to the Federal
Law No. 178-FZ, dated December 21, 2001, “On
Privatization of State and Municipal Property” (the
“Privatization Law”) by the adoption of the Federal
Law No. 106-FZ, dated May 31, 2010, “On the
Amendments to the Federal Law, ‘On Privatization of
State and Municipal Property’” (the “Privatization
Amendments”), which came into force on June 15,
2010.
One of the key new changes introduced by the
Privatization Amendments, which has been widely
discussed in the legal and business community, is
the ability of the Russian government to engage
foreign and domestic investment banks to arrange
and manage the privatization process on behalf of
the Russian government on an asset-by-asset basis.
Previously, the Federal Property Agency and, with
respect to certain military property, the Ministry of
Defense had exclusive authority to handle the
privatization of federal property.
The Privatization Amendments contemplate that the
Russian government would approve a list of
companies eligible to organize the sale of state
assets (the “Eligibility List”). The selection by the
Russian government of companies from the
Eligibility List who would handle each particular sale
must be accompanied by the following information:
„
a description of the federal property subject to
privatization;
„
a description of the actions to be undertaken
by the company in the context of privatization;
and
„
the amount and the manner of payment of
fees to the company.
The Privatization Amendments make no reference to
any criteria for companies on the Eligibility List, nor
do they set out procedures for compiling and
Third Quarter 2010
14
d
maintaining the Eligibility List. The Ministry for
Economic Development has prepared an internal
draft of the Eligibility List for approval by the
Russian government, which includes major foreign
and domestic investment banks. Based on early
indicators, the draft Eligibility List consists of 20
banks, of which nine are Russian banks (including
VTB Capital, Troika Dialog, and Renaissance Capital)
and 11 are foreign banks (including Credit Suisse,
Deutsche Bank, JP Morgan, Morgan Stanley,
Goldman Sachs, and Citigroup).
Another significant change introduced by the
Privatization Amendments is the ability to conduct
privatizations through digital auctions. The details of
the digital auction process will be set out in a
separate regulation to be adopted by the Russian
government. The designated auctioneer of federal
property subject to privatization will be able to
subcontract its obligations to reputable and
experienced companies capable of conducting
digital auctions.
The Privatization Amendments have removed the
section of the Privatization Law that authorized the
Russian government to set prices for federal
property subject to privatization. Such prices often
fell either well below or well above the market price
of the property. Under the new rules, the price of
federal property subject to privatization will be
determined in accordance with a property valuation
method prescribed under existing Russian law,
which should provide a more reliable estimate of the
fair market value of the property.
Other changes introduced by the Privatization
Amendments include the provision of information via
the Internet in connection with privatized assets and
changes to regulations relating to privatizations
carried out via initial public offerings.
Ruslan V. Koretski
Moscow
+7 499 922 1161
[email protected]
Irina Kulyba
Moscow
+7 499 922 1137
[email protected]
Russia, Kazakhstan, and Belarus Enter
into a Customs Union
by Ruslan V. Koretski
and Svetlana
Kuzovkova
On July 1, 2010, the
Customs Code (the
“Customs Code”) of the
Customs Union of Russia, Kazakhstan, and Belarus
(the “Customs Union”) came into force. Prior to the
ratification of the Customs Union, the trade relations
of the member states were governed by several
treaties. The main objective of the Customs Union is
the elimination of trade barriers between member
states and the unification of customs rules on trade
between the member states and the rest of the
world.
The territories of the member states now constitute
a single customs territory, with internal customs
borders having been abolished. Goods released for
free circulation within one of the member states are
automatically granted the status of being in free
circulation throughout the entire Customs Union,
although there are some remaining restrictions
regarding certain imported goods.
The Customs Code established a Customs Union
Commission, which has been entrusted with several
distinctive duties, including the maintenance of
common registries (in particular, registries for duly
authorized agents, customs brokers, customs
carriers, duty-free shops, warehouse owners, and
preliminary classification decisions). The Customs
Union Commission is also responsible for the
approval of Customs Union implementation
documents, such as instructions for the completion
of customs declarations.
The Customs Code introduced uniform import duties
on goods imported into the member states of the
Customs Union, which are set out in the Common
Customs Tariff of the Customs Union. It is
contemplated that export duties on goods exported
from the member states will also be standardized
and will be set out in a unified registry. Any
amendments to the unified registry may be made
only with the agreement of each of the other
member states. Basic principles governing the rates
of export duties of the member states had already
been set out, and are currently in force, in a
trilateral treaty “On Export Customs Duties in
Respect of Third-Party Countries” of January 25,
2008.
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d
“Industrially assembled” goods (such as motor
vehicles) may only be custom cleared through
customs in the state in which the industrial
assembly of such goods was performed. Customs
tariffs are not charged when such goods are
transferred from one member state to another, if
certain criteria are met.
The importation of technological equipment for
certain investment projects will be exempt from the
payment of customs duties. A list of investment
projects that qualify for such exemption is expected
to be compiled by the Customs Union Commission.
Tariff concessions may be also granted for goods
imported into a member sate as a contribution to
the charter capital of companies formed within the
member state. However, such concessions may be
granted only in the manner prescribed by the local
legislation of the applicable member state.
The Customs Union introduced substantial changes
to the tax regime for commercial transactions
carried out among taxpayers of the member states.
According to a trilateral treaty adopted in
connection with the Customs Code, a taxpayer
exporting goods from one member state to another
will be able to take advantage of a 0% value added
tax rate, together with other tax exemptions and
reimbursements, in the exporting member state,
provided that all applicable taxes and fees are paid
in full in the importing member state. In order to
take advantage of this tax benefit, the exporting
taxpayer will be required to file various supporting
documents evidencing the transaction and the
payment of applicable taxes and fees in the
importing member state.
Ruslan V. Koretski
Moscow
+ 7 499 922 1161
[email protected]
Irina Kulyba
Moscow
+7 499 922 1137
[email protected]
Recent Major Deals
A team of Dechert lawyers led by Laura Brank,
Moscow office managing partner and head of
Dechert's Russia practice, represented Canada's
Kinross Gold Corporation in the completion of its
previously announced US$368 million acquisition of
companies owning the rights to the high-grade
Dvoinoye deposit and the Vodorazdelnaya
exploration and mining licenses. The acquisition
required an approval under the Strategic Sector
Law, making it one of the first times a Russian
company acquired a strategic subsoil company
since the law "On the Procedures for Foreign
Investment in Companies of Strategic Importance
for National Security and Defense" came into effect
in May 2008. Both assets are located approximately
100 km north of Kinross' Kupol operation in the
Chukotka region of the Russian Far East.
Recent Dispute Resolution
Dechert’s Russia and CIS dispute resolution practice
has been very busy. This year alone has seen 25
successful representations on a range of cases in
the Russian courts, including on matters relating to
bankruptcy, tax, real estate, commercial contracts,
and the issue of securities.
Opening of Dublin Office
In June 2010, Dechert opened an office in Dublin,
making it one of only a handful of international law
firms to establish a presence in Ireland and the first
major onshore transatlantic funds practice to do so
in Dublin. The new office will focus on advising
investment funds, investment managers, and other
fund service providers. Ireland has become a major
center for investment funds because of favorable tax
treatment, regulatory structures, expertise of local
service providers and appeal to investors concerned
about sound regulatory oversight.
Recent/Upcoming Events, Seminars and
Speaking Engagements
June 23, 2010: Dechert hosted a seminar titled “Top
10 Things to Consider When Investing in Russian
Securities” in its New York office. Members of
Dechert’s Corporate and Securities, Financial
Services, and Tax Practices, including Laura Brank,
Olga Watson, Adrienne M. Baker, Carl A. de Brito,
and George J. Mazin, provided practical advice on
structuring and carrying out investments in Russia,
taking into account changing regulatory
requirements, tax considerations, and shareholder
rights.
September 14, 2010: Ivan Marisin, Head of Dispute
Resolution for Russia, the CIS, and Eastern Europe,
made a presentation on the subject “The
Terrorization of Business and Corporate Raiding” at
the ABA Section of International Law Conference on
“Cross-Border Dispute Resolution: The Perspective
for Russia and the CIS” in Moscow.
Third Quarter 2010
16
d
September 16, 2010: Dechert hosted a networking
reception organized by the Russo-British Chamber
of Commerce in its London office.
September 22, 2010: Dechert Chairman Barton J.
Winokur, Laura M. Brank, Head of the Russia and
CIS Practice, and Ivan Marisin, Head of Dispute
Resolution for Russia, the CIS, and Eastern Europe,
hosted an evening reception to welcome Mr. Marisin
and a team of lawyers, including counsel Vasily
Kuznetsov, to our expanding Moscow office.
Honors
Laura Brank was nominated to the Board of the
U.S.-Russia Business Council on July 29, 2010. The
U.S.-Russia Business Council (USRBC) is a
Washington-based trade association that provides
significant business development, dispute
resolution, government relations, and market
intelligence services to its American and Russian
member companies.
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We welcome your feedback. Please let us know if
there are any topics you would like to see covered in
future issues.
If you or your colleagues would like to receive
Russian Legal Update or our other DechertOnPoints,
please contact Andrew Robinson (+7 499 922 1139;
[email protected]) or Kieran Morgan
(+44 20 7184 7853; [email protected]).
You can also subscribe at www.dechert.com.
Practice group contacts
For more information, please
contact the authors, one of the
lawyers listed, or the Dechert lawyer
with whom you regularly work.
Visit us at www.dechert.com.
Laura Brank
Moscow, London
Ivan Marisin
Moscow
Moscow: +7 499 922 1110
+7 499 922 1100
London: +44 20 7184 7870
[email protected]
[email protected]
If you would like to receive any of
our other DechertOnPoints, please
click here.
D
www.dechert.com
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different jurisdictions. Dechert has nearly 900 qualified lawyers and 700 staff members in its offices in
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This document is a basic summary of legal issues. It should not be relied upon as an authoritative
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provided by Dechert LLP as a general informational service, may be considered attorney advertising in
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17