Branches (representative offices) of foreign companies in Russia can be transformed into LLC

On July 06, the State Duma adopted in the third reading a draft federal law establishing the conditions for the transformation of branches and representative offices of foreign companies in Russia into Russian limited liability companies (the “Draft law”)1.

The Draft law suggests establishing the possibility of transformation into an LLC to branches (representative offices) of those foreign companies2 that simultaneously meet the following criteria:

  1. The company has no more than 50 shareholders.
  2. At least 25% of the shares in the authorized capital (shares) of the company are owned by the shareholders, provided that each such shareholder meets at least one of the following conditions:
    • is a Russian citizen;
    • is a Russian legal entity whose controlling persons or persons who (in aggregate) directly or indirectly dispose of at least 25% of the votes in the supreme governing body are not foreign persons associated with unfriendly foreign states;
    • is a legal entity under the control of a Russian legal entity, the right to directly or indirectly dispose of at least 25% of the votes in the supreme governing body of which belongs to the Russian Federation, a constituent entity of the Russian Federation or a Russian citizen;
  3. The company is not a public company which shares are in free circulation or traded at organized auctions.
  4. The company has the right (license) to use mineral resources on the territory of Russia or owns objects of cross-border gas transportation infrastructure on the territory of Russia.

A branch (representative office) of a foreign company meeting the specified criteria may be transformed into an LLC by a decision of the Commercial (Arbitrazh) Court of the Moscow Region3 if there is one of the following grounds:

A. Refusal (evasion) of a foreign company from using its property for the intended purpose and/or from managing the property if such actions (inaction) have led or may lead to the complete or partial termination of the activities of a branch (representative office);

B. The actual termination of the management of the activities of a branch (representative office)4;

C. Making a decision to liquidate a branch (representative office);

D. Performing other actions (inaction) by a foreign company that may lead to the termination or significant hindrance of the activities of the branch (representative office) for the continuous and rational use of subsurface resources or objects of cross-border gas transportation infrastructure on the territory of Russia.

If the court decides on the transformation of a branch (representative office) of a foreign legal entity into an LLC, the rights and obligations arising from the activities of the branch (representative office) are transferred to the newly formed LLC in the order of universal succession.

1 Draft law No. 1197674-7 “On Amendments to the Federal Law “On privatization of state and municipal property”, certain legislative acts of the Russian Federation and on establishing the specifics of property relations regulation” 2 Apart from companies implementing projects to produce liquefied natural gas, implemented under production sharing agreements
3 Based on an application from a shareholder or the sole executive body of a foreign company, or the last appointed head of a branch (representative office)
4 Including if the head of the branch (representative office) left the territory of Russia after February 24, 2022 or actually stopped performing his/her duties and exercising his/her powers.