Business does not play whole nesting dolls
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The amendments to corporate legislation promised to businesses to lift the ban on the creation of “matryoshka” companies did not live up to market expectations. The ban has long been explained by the risks of tax optimization due to the non-transparent structure of the owners of the nesting dolls, but in practice it is easily overcome – the nesting dolls are used by businesses to circumvent sanctions, although a formal ban increases costs. The government had to balance the risks of the state in order to preserve tax revenues and the interests of business in order to adapt to the sanctions – but the bill presented did not solve the problem: permission for “matryoshka” dolls is accompanied by an excessive array of restrictions and requirements and is unlikely to be claimed by companies, the RSPP warns. Lawyers also consider the bill controversial – the introduction of unconditional subsidiary liability of the holding for the debts of “daughters” even reduces the attractiveness of “matryoshkas”.
The Ministry of Justice published on regulation.gov.ru amendments to the laws “On Joint Stock Companies” and “On Limited Liability Companies”, designed to lift the ban on the creation of so-called “matryoshka” companies – the ability of one legal entity to own 100% of the shares of another, which owns 100% third and so on. According to the Civil Code, as a general rule, a business company cannot have another one consisting of one person as the sole participant. This prohibition was explained by the risks of avoiding subsidiary liability and paying taxes by delegating responsibility within the nesting doll: in the case when company A owns company B, company B owns company C, and that company A again, it is impossible to establish a profit center.
The RSPP has long insisted on the abolition of the “archaic” ban (introduced in 1995), but sanctions became the reason for returning to the discussion about the legalization of “nested dolls” – the ability to structure a business and create intricate schemes makes it easier to work under restrictions. The authors of the project explain that “structuring is a convenient way to separate activities, clearly allocate management responsibilities, and more clearly and expediently organize a business.” The need to balance the risks of the state and the interests of business was discussed at a meeting on the transformation of the business climate with First Deputy Prime Minister Andrey Belousov at the end of 2022 (see Kommersant dated December 21, 2022).
To remove risks, the Ministry of Justice proposes to introduce joint and several subsidiary liability of the holding for the obligations of 100% subsidiaries in the chain of nesting dolls. Valerian Mamageishvili, senior lawyer at Better Chance law firm, notes that now liability for subsidiaries arises only in specially established cases, as well as in the framework of their bankruptcy. At the same time, the draft law of the Ministry of Justice retains a ban on the creation of nesting dolls in groups in which control continues to be limited to foreign companies, and also establishes a ban on filling the position of a director in several companies from the corporate structure of a nesting doll, which contradicts the goals of the project. “Large Russian business is quite often structured in such a way that a number of legal entities in a corporate group have one management company, which is also the ultimate holding company,” adds Valerian Mamageishvili.
The State Secretary, Vice President for Legal Regulation and Law Enforcement of the RSPP Alexander Varvarin recalls that the Union has long raised the question of the need to lift the existing ban on nesting dolls, but the proposed version of the bill will not facilitate corporate work. “Instead of the current direct ban on the creation of nesting dolls, permission is formally given, but it is associated with so many restrictions and conditions that it is unlikely to be widely demanded by business. The proposed subsidiary liability for obligations, which will also have a joint and several character inside the nesting dolls, makes it impossible to create them for the purpose of diversifying the risks of investing in new business areas,” he explains.
Lawyers also took the initiative skeptically. The very idea of lifting the ban on nesting dolls is supported by experts. Andrey Filippenko, Forward Legal partner, says that in practice, the legislative ban on “matryoshka structures” has always been ineffective and was managed by introducing micro-minority shareholders (including a “parent” company of a higher level) into the ownership structure. “On the scale of large holdings, quite often such ownership is caused by objective reasons. Therefore, these changes can be welcomed as reducing the burden of corporate administration in large industrial groups,” he notes. According to Sergei Glandin, a partner in the BGP Litigation Compliance and Sanctions Practice, lifting the ban could help businesses adapt to the sanctions, but time will tell how effective the mechanism is.
Partner of Guskov Associates (GALP Middle East) Igor Guskov considers the draft law controversial – its main novel is not about lifting the ban. “We see new problems for Russian holdings. The norms of the bill provide for unconditional subsidiary liability for the company’s debts. It looks like a new vector of struggle against “matryoshkas”. If earlier there were attempts to prevent such a construction, now these constructions are burdened in advance (ex ante) with increased responsibility. This proposal raises questions in terms of correlation with the fundamental corporate principle of the organization’s property isolation, as well as the exclusive nature of subsidiary liability,” the expert states.
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