Liquidating a Russian subsidiary with an unfriendly shareholder: permits, payouts and timing
Many Western groups chose to wind their Russian subsidiary up rather than sell it at a 60% discount. Liquidation is lawful and needs no permit for the decision itself — but the proceeds above RUB 10 million a month land in a type C account, and the paperwork takes the best part of a year.
Does the liquidation decision need a permit?
Not as such. The Ministry of Finance's Clarifications No. 1 of 13 October 2022, which list the operations covered by Decree No. 618, do not include a resolution to liquidate: liquidation terminates the company and with it the participation interest, rather than transferring the interest to anyone. The prevailing view among practitioners, and the position the sub-commission has taken when asked, is that a voluntary liquidation of an LLC with an unfriendly participant may be resolved and carried out without a permit. Two caveats follow. Notaries are not uniform: a significant number refuse to certify the general meeting's resolution or the liquidator's signature without either a permit or a written refusal from the Ministry of Finance confirming that none is needed, so a precautionary enquiry to the sub-commission secretariat, which costs nothing but time, is often the faster route. And liquidation of an economically significant organisation, or of a company in a strategic sector under Decree No. 520, is a different matter.
Where the money goes
Paragraph 3 of Decree No. 737 of 15 October 2022 brings payments made on liquidation, reduction of charter capital and bankruptcy to persons of unfriendly states under paragraphs 2–9 of Decree No. 95. The consequence is the familiar one: the liquidator may pay the unfriendly participant up to RUB 10 million per calendar month in roubles or foreign currency, to an account in Russia or abroad; anything above that is paid in roubles into a type C account opened in the participant's name, or requires an individual permit of the sub-commission for the payment itself. A Russian-controlled or pre-March-2022 friendly-controlled participant with disclosed control is outside the regime and is paid in full (see the control-disclosure guide).
Distribution in kind — transferring the company's real estate, shares in other companies or receivables to the unfriendly participant instead of cash — does not escape the regime and adds a second layer: the transfer of real estate or securities to an unfriendly person is itself a transaction under Decree No. 81 requiring a permit, and a transfer of an LLC interest held by the liquidating company is a Decree No. 618 transaction. In practice assets are sold to Russian buyers during the liquidation, and the cash follows the rule above.
Groups planning a liquidation therefore model two numbers: what can be extracted at RUB 10 million a month over the liquidation period (and, before it, through dividends and loan repayments under the same cap), and what will sit in a type C account at the end, usable for Russian taxes and federal bonds and otherwise frozen until the decrees change. The type C guide covers what can be done with such a balance.
Tax on the way out
A liquidation distribution to a foreign participant is taxed in Russia as a dividend to the extent it exceeds the participant's paid-in contribution (Article 250(1) and Article 309 of the Tax Code): 15% withholding for a corporate participant from one of the 38 states whose treaty articles are suspended under Decree No. 585, with no treaty relief, and 30% for a non-resident individual on the whole excess. The part equal to the contribution is returned tax-free. The company's own final profit tax and VAT on asset sales during the liquidation are settled before the liquidation balance sheet is approved; the tax office may open a field audit when it receives notice of liquidation, which is the single largest source of delay.
Procedure and realistic timing
The statutory steps are those of Articles 61–64 of the Civil Code and Article 57 of the LLC Law: the general meeting resolves to liquidate and appoints a liquidator or liquidation commission; the company notifies the tax registrar within three working days (form R15016) and publishes in the Vestnik of State Registration and on Fedresurs; creditors have at least two months to lodge claims; the liquidator prepares an interim liquidation balance sheet, settles creditors in the statutory order, prepares the final balance sheet, distributes the remainder and files for removal from the register. On paper the minimum is about four months. With a foreign participant the realistic range is eight to twelve: the resolution and powers of attorney are signed abroad and need apostille and certified translation; courier times from unfriendly states have lengthened; the tax audit, if opened, adds months; and the type C account must be opened by a Russian bank before the final distribution. Appointing a Russian-resident liquidator — usually the general director or an outside professional under a power of attorney from the participant — avoids most of the signature logistics.
Alternatives compared
A sale to management or a Russian buyer is faster in cash terms but surrenders 95% of value on the sub-commission's minimum terms (see exit cost). A reduction of charter capital returns part of the investment but falls under the same Decree No. 737 regime, so it buys nothing over liquidation except the survival of the company. Dormancy — keeping the company alive with no operations — costs accounting and a director's salary and preserves the option of returning, which some groups value; it also preserves the exposure. Where the business is one the Russian state regards as significant, the “economically significant organisation” procedure of Law No. 470-FZ may be used by Russian beneficiaries to take the company out of the foreign holding's hands regardless of the parent's plans.