The articles in this Newsletter address the recent changes or proposed changes in Russian legislation that may have a significant impact on the way Russian companies are audited, distribute their profits and deal with situations where the amount of a company charter capital needs to be reduced.
Dmitry Milyutin writes about the recent changes in Russian legislation adopted in December of last year that apply to situations where dividends / net profits were announced but were not distributed to shareholders / participants in Russian legal entities. In his articles Dmitry covers instances where dividends / net profits are not claimed by company shareholders / participants, as well as situations where a company itself is not acting on its announcement to distribute dividends / net profits.
Igor Orlov in his article talks about changes recently introduced into Russian legislation governing auditing activities. The changes will affect a significant number of Russian companies that previously were not required to be audited. On the other hand, the new amendments have excluded a number of Russian companies from the mandatory audit requirement based on turnover figures.
Violetta Molchanova discusses a draft law that was debated at the Duma in December of last year that would change the procedure for reducing the amount of the charter capital for limited liability companies. The minimum amount of charter capital for Russian companies is linked to the net value of their assets. The proposed amendments, therefore, would apply to situations where the net value of a company's assets has become or is about to become lower than the amount of such company's charter capital.
New legislation regulates unclaimed dividends and profit Distributions
On 28 December 2010 the President of the Russian Federation signed Federal Law No. 409-FZ "On amending selected legislative acts of the Russian Federation in relation to dividend payment (profit distribution) regulations" (the Law).
The Law amends joint stock companies and limited liability companies law where it concerns the statutory term and procedure for dividend payments (profit distributions). We have already given a general overview of the bill "On amending certain legislative acts of the Russian Federation to improve corporate governance" in September 2010 after it passed the first reading on 21 September 2010. You will recall that the bill sought to impose uniform requirements as to the deadlines for dividend payments in joint stock companies and profit distribution in limited companies. The bill introduced the maximum period of time within which the declared dividends/profit distributions must be paid. In the opinion of the legislator the major objective of the proposed legislation was to eliminate the uncertainty in the regulation of those dividends which have been declared for payment but never claimed by shareholders in a joint stock company and/or the profit which has been distributed by the company but remains unclaimed by members of a limited company.
The respective provisions about dividend/distributed profit payment procedures made their way into law as the State Duma passed the bill in the final reading on 21 December 2010, the Federation Council approved it on 24 December 2010, the President signed it into law on 28 December 2010 with effect from 31 December 2010.
The Law introduces amendments to the Federal Laws "On Joint Stock Companies" and "On Limited Liability Companies" as well as the Tax Code of the Russian Federation. The law makes nearly identical changes in the procedure and time frames for dividend (distributed profit) payments in joint-stock companies and limited liability companies.
The Law established that dividends (or a part of the distributed profits, respectively, depending on the type of company) shall be paid within 60 days of the date on which a resolution to pay was made. Previously, the position was that a longer period could be established in the company's charter. Now the implication is that the charter can not establish a longer payment period than the one required in the Law, while the charter may still provide for a shorter period. Where the company's charter and the resolution to pay dividends (or distributed profit) are silent as to the time frame of such payments, it will be implied that the payment is due on or before 60 days after the date of the resolution. .
With regard to joint stock companies the Law has put a ban on establishing preferential deadlines for dividend payments to any category (type) of shareholders. Where a company has failed to pay the appropriate amount of dividend / distributed profit to a shareholder / member within the prescribed period of time, that shareholder / member may claim the respective amount from the company within three years. The company charter may provide for a longer period of limitations for dividend / profit distribution claims, but in any case it shall not exceed five years.
As a general rule, where a shareholder/member is claiming outside of this period of limitations, the period of limitations can not be extended unless the claimant has been prevented from claiming the payment by means of violence or threats.
Once the period of limitations has expired the declared dividends (distributed profit) which have not been claimed shall be restored as the company's retained profit.
The declared dividends (or a part of distributed profits) which have been restored as the company's retained profit, will not be seen as taxable profit for corporate profit tax purposes. Changes to that effect are made in the Tax Code of the Russian Federation. The company is free to use such funds at its discretion.
Notably, the Law has the effect of prohibiting joint stock companies from reducing their charter capital prior to the deadline for dividend payments, and, where the dividends have not been paid in full, for the entire duration of the limitations period for dividend claims.
In respect of a limited liability company, where a part of the company's distributed profit remains unpaid there is no ban on reducing the charter capital.
Auditing in Russia: what's new?
By Igor Orlov
December 2010 (namely, the 13th and 28th) saw the Russian Federal Law "On Auditing" 2008 amended with effect from the 1st of January 2011. It would appear that the most noticeable changes were made in Article 5 of the law (by Federal Law No.400-FZ dated 28 December 2010) which relates to mandatory audits of company accounts.
As amended, Article 5 of the Federal Law "On Auditing" provides that henceforth, a company will be required to have a mandatory audit if any one or more of the following conditions are met:
- the organisation is incorporated as an open joint stock company (this rule remains unchanged);
- the organisation is listed on a stock exchange and/or traded on other trading platforms (this is a new provision);
- the organisation is a credit organisation, a credit bureau, a professional participant of the securities market, an insurance company, a clearing company, a mutual insurance company, a commodities, foreign currency or stock exchange, a private pension or other fund, a share investment trust, a management company of a share investment trust, unit investment trust or private pension fund (the latter does not include the state non-budgetary funds) (the list of companies has been extended and supplemented);
- in the year preceding the accounting year the organisation (not including public authorities, local self-governance bodies, governmental and municipal agencies, state and municipal unitary organisations, agricultural cooperatives and unions of such cooperatives) received over RUR 400 million of revenue from "the sale of its product" (i.e. sale of goods, performance of work or supply of services), or, alternatively, the total value of its assets on the balance sheet as at the end of the year preceding the accounting year exceeded RUR 60 million (previously, the thresholds were RUR 50 and 20 million, respectively);
- the organisation (not including public authorities, local self-governance bodies, governmental and municipal agencies, state and municipal unitary organisations, agricultural cooperatives and unions of such cooperatives) files and/or publishes consolidated accounts/financial statements (another new rule); or where mandatory audits are expressly required by Russian legislation;
The above will apply to mandatory audit of company accounts starting from the accounts for the year 2010.
It appears that, on the one hand, the amendments substantially raise the mandatory audit exemption thresholds with the help of the revenue and balance sheet asset value criteria (at the time when the bill was in discussion, it was this particular proposal that caused a lot of criticism from the community of auditors who felt that these steps would reduce the statutory audit market and even entire industries and certain medium and large businesses will be taken out of the auditors' purview). On the other hand the legislator has significantly extended the list of organisations that are subject to mandatory audit regardless of their revenue and balance value.
Notably, the above relates to companies which are subject to mandatory audits, however shareholders or members of any Russian company may choose to have their accounts audited in other circumstances.
Earlier the Ministry of Finance of the Russian Federation adopted new federal standards of auditing which were enacted by an order of the Ministry of Finance, registered with the Ministry of Justice and published in November 2010. The first of the standards (FSAD 5/2010) addresses an auditor's duties in respect of bad faith actions. The Standards set out requirements to the audit procedure with regard to an auditor's duty to examine deliberate fraudulent acts by one or more persons from the following list: representatives of the owner, management, employees of the audited company or third parties. The second Standards (FSAD 6/2010) focus on application of regulatory requirements in the course of an audit. This act contains requirements to the audit procedure with regard to uncovering significant misstatements in the accounts caused by the audited company's breach of statutory provisions. It is expected that audits will become more effective and independent as the new standards should facilitate identification of bad faith behaviour of the audited companies' managers and accountants. Case studies are provided to help auditors with examples of typical situations in which there is a risk of misrepresentation in the accounts of an audited company. For each of the cases there is a suggested route the auditor is advised to take and the required procedures.
It has been suggested that the new federal audit standards have a closer correspondence to the present-day business realities and are designed to align Russian legislation and practices with international practice.
Amended rules on charter capital reduction
By Violetta Molchanova,
In the beginning of December the State Duma completed the first reading of a bill that seeks to amend the procedure in which charter capital can be reduced by a limited liability company. The authors of the bill have split the procedure into two stages.
The beginning of the first stage is triggered at the end of the second or each consequent financial year, if the company's net asset value at the year end falls below the amount of its charter capital. At the first stage the obligation of the Company is to have a section in its annual report that includes the Company's net asset value, its dynamics and the steps towards raising the net asset value to the level of the charter capital. The Company has no duty at this stage to notify its creditors of any decrease in the net asset value. If at the end of the following year the net asset value fails to reach the level of the charter capital, the Company moves to the second stage. At this point the Company must either reduce its charter capital or wind up.
If the amendments described above receive final approval of the Russian Parliament, the charter capital reduction procedure for limited liability companies will be similar to the one applicable to open joint stock companies.
In accordance with the Bill, a limited liability company must perform an assessment of its net asset value every three months (previously such assessments were to be carried out on a yearly basis prior to the annual meeting). Net asset value information must be disclosed to any participant of the limited liability company at his request. The requirement of quarterly net asset value assessments is introduced for the benefit of company creditors. If the assessment taken on the second stage shows that a company's net asset value over the 3 months remains below the charter capital amount, the company will have to publish a report on the decrease of its net asset value and consequently its creditors will be entitled to accelerate the liabilities the company owes to them.
In order to simplify the process of notifying creditors, the lawmakers propose to publish the information in specialised media instead of sending written notices to each creditor.
The bill is now in its second reading and in a while we will hear about its final version as passed into law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.