On 1 July 2017, the Federal Law No. 155-FZ amending, inter alia, the Federal Law No. 57-FZ "On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance to National Defense and State Security" (the "Strategic Investments Law" or the "Law No. 57-FZ") came into force.
Amendments extend special regulation (and thresholds) for approval of transactions which is established by the Strategic Investments Law for foreign state-controlled investors (i.e. foreign states and international organisations, except for such organisations listed in the Order of the Russian Government No. 119-r dated 3 February 2012 and organisations under their control) on offshore companies and organisations controlled by these.
Pursuant to the Federal Law No. 155-FZ, "offshore companies" are these registered in jurisdictions included in the list of states and territories that provide for beneficial tax regime and/or do not require the disclosure of information for financial transactions (offshore zones), as approved by the Ministry of Finance of the Russian Federation. The respective list was approved by the Order of the Ministry of Finance No. 108n dated 13 November 2007.
Consequently, from the date of entry of the Federal Law No. 155-FZ into force, offshore companies (and organisations under their control) are prohibited from establishing control over Russian entities considered "strategic" under the Strategic Investments Law, i.e. from acquiring, inter alia, more than 50 per cent of votes pertaining to voting shares in the charter capital of the strategic entity (or 25 per cent and more of votes in the strategic subsoil user, respectively). Such companies are also prohibited from acquiring into ownership, possession or use of the main production assets of Russian strategic entities if the book value of such assets represents 25 per cent or more of the total book value of assets of strategic entities.
Under the new regulation, offshore companies (and organisations under their control) will be required to obtain a prior approval of the Government Commission for each acquisition of more than 25 per cent of votes pertaining to voting shares in the charter capital of the Russian strategic entity, or for acquisition of the right to block decisions of governing bodies of such entity, as well as for acquisition of more than 5 per cent of votes pertaining to voting shares in the charter capital of the Russian strategic entity – subsoil user.
Apart from the above, with enactment of the new regulation provisions of the Strategic Investments Law on "collective" control of several independent foreign state-controlled investors also extend on offshore companies. Such provisions regulate situations where several independent foreign state-controlled investors collectively own more than 50 per cent of votes pertaining to voting shares of another entity, or own less than 50 per cent of votes pertaining to voting shares, but due to the factual circumstances of distribution of shares between shareholders such investors have the ability to determine decisions adopted by such entity. In these situations the said independent foreign state-controlled investors (and now – also offshore companies) will be considered collectively controlling the Russian strategic entity.
The new regulation will obviously require development of the practice of its implementation as well as clarifications by the authorized state body – the Federal Antimonopoly Service (FAS).
Thus, for example, the Federal Law No. 155-FZ does not amend part 9 of Article 2 of the Strategic Investments Law, which provides that the said Law does not apply to transactions performed by companies which are controlled by, in particular, one individual who is the Russian citizen not having another citizenship and is a Russian tax resident. Consequently, this exemption should continue applying to transactions involving offshore companies. However this is still to be confirmed by the practice.
Similarly, such practice or FAS clarifications will be required for situations where an offshore company acts as an intermediate company in a vertical of control over the acquirer and the final controlling entity is a foreign private investor from a jurisdiction which is not in the list of offshore jurisdiction.
The Federal Law No. 155-FZ expressly provides that the new regulation will not apply to the existing structures of ownership of Russian strategic entities involving offshore companies and will regulate only transactions performed after the entry of the said Law into force.
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