With a growing number of media headlines full of unprecedented sanctions imposed, we would like to help our readers to understand the European sanctions by using the example of a holding structure headquartered in the European Union.
Special list of 22 “unfriendly countries”
First of all, it Is worth noting that the Russian Federation has a special list of 22 “unfriendly countries”, which included the entire European Union and this list was approved by No. 430-r Order of the Government of the Russian Federation on March 5, 2022. However, other countries, including the European Union, depending on various factors, have introduced and continue to introduce a large number of restrictions.
On April 12, 2022, the European Union has already implemented the fifth package of sanctions against the Russian Federation, which was entered into force on April 8, 2022.
Today we will consider restrictions at the holding structures level because such changes apply not only to Russian Federation legal entities but also to other countries.
The European Union’s new package of sanctions included new statements and significantly expanded the list of individuals and companies. Earlier it was about individual lists and organizations, now the list of sanctions is much broader.
Categories of persons with prohibitions
There is a prohibition to register, indicate a registered office, business or administrative address, as well as provide management services to a trust (or any legal arrangements) as a trustee or beneficiary for the following categories of persons:
(a) Russian citizens or individuals residing in Russia;
(b) legal entities, organizations or bodies established in Russia;
(c) legal persons, organizations, or bodies whose ownership rights are directly or indirectly owned by more than 50% of the individual or legal person, organization or body referred to in paragraphs (a) or (b);
(d) legal persons, organizations or bodies controlled by individual or legal person, organization or body referred to in paragraphs (a), (b) or (c);
(e) individual or legal person, organization or body acting on behalf of or at the direction of an individual or legal person, organization or body referred to in paragraphs (a), (b), (c) or (d).
It is important to mention that most of the European Union countries with a favorable tax regime, including the Netherlands, Cyprus, Luxembourg, require the mandatory registration of a new company, the presence of a legal address, and a second manager from citizens or legal institutions of residents of these countries. Using intermediate companies, for example, legal entities – residents of Kazakhstan, with a beneficial owner of a citizen of the Russian Federation, can not alleviate this situation. The very first mandatory KYC (Know Your Customer) procedure reveals the corporate structure and indicates the final beneficiary.
This prohibition implies that from May 10, 2022 local service providers will refuse to provide the services of directors, corporate secretaries, consultants, auditors, and so on. The exception to these prohibitions is for all operations related to the company’s termination or the suspension of the service, or if the trustor or beneficiary is a citizen with permanent or temporary residence in the European Union.
Such broad statements have also implications for companies that are registered in the European Union but operate in the Russian Federation, including service providers such as Yandex, Ozon, and all other companies that were headquartered in Europe. Undoubtedly, it will also be difficult for those who, on the contrary, are registered in the Russian Federation, but carried out activities in the European Union.
Kazakhstani companies with Russian founders
who are planning to establish a subsidiary/branch, or representative office in the territory of the European Union should pay attention first of all to the wording: controlled by an individual or legal entity, organization or body originating in the Russian Federation.
Thus, according to the ratified Enhanced Partnership and Cooperation Agreement between the Republic of Kazakhstan, on the one hand, and the European Union and its Member States, on the other hand, it is stated that a legal entity is under the control of another legal entity if the latter has the authority to appoint a majority of its directors or lawfully direct its business. The influence of a Party is considered decisive when the Party, directly or indirectly, can appoint more than half of the members of the administrative, management or undertaking governing body. In practice, even the presence of a Russian Federation citizen member in the Board of Directors or the Management Board may indirectly indicate the presence of influence in a legal entity.
It is also worth mentioning that when participating in the creation or execution of any state or concession contract of the European Union by companies where the ultimate beneficiary is a citizen of the Russian Federation or a legal entity established in the Russian Federation, they are also expected to terminate or frosts.
The Russian Federation also signed a resolution that stated that all transactions and operations of Russian companies with citizens and firms from countries unfriendly to Russia will be approved by the government commission which is monitoring foreign investment. According to the document, a Russian resident company or a foreign firm from an unfriendly country must apply for permission to deal. At the same time, until the end of 2022 residents of the Russian Federation cannot pay for shares, and investments to the capital of non-residents without special permission from the Central Bank.
There are several possible ways out of this situation indicated:
1) Repurchase of shares directly by a person or organization- a resident of the Russian Federation; 2) Moving and carrying out activities in any other jurisdiction not included in the list of unfriendly countries; 3) Termination and liquidation of business.
Each of the proposed options has its own legal consequences: from tax payments “for early exit” to the redistribution of tax burdens in a new jurisdiction.
Only professionals can entrust the procedure of structuring a legal entity, including the opening of new subsidiaries in the European Union: West East Legal can take care of all organizational and legal issues, guaranteeing a 100% favorable and quick result for each client. To eliminate sanctions risks – contact us today!
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