Winding-up a Company in Russia During Sanctions. Summary Guide

15 March 2022
Eugen Heinrich
Julia Korablyova

Currently, a great number of western companies declare the winding-up or suspension of their business activity in Russia. For many counterparties, which render services, perform works, or supply materials and goods to these companies (clients or a buyers), their winding-up inevitably leads to permanent or temporary ceasing of operations in the territory of the Russian Federation and, as a consequence, minimizing the associated costs of the Russian legal entity – at least for the next several months.

In the abovementioned cases, two following models seem feasible: the liquidation of the Russian company or its "freezing". The implementation of a particular model depends on many circumstances, such as the possession of real estate, equipment, retaining of unique personnel, the expected period of activity suspension, and etc. Hence, if a legal entity owns real estate and/or equipment, the liquidation of such a company is unlikely to be reasonable. However, if the retention of unique personnel is required, the freezing of business is more appropriate option.

The liquidation of a legal entity includes following stages:

  1. Making a decision on liquidation and appointment of a liquidation commission;

  2. Notifying of the tax authority and insurance funds (FSS) on the liquidation;

  3. Publication of the liquidation notification in the «State Registration Bulletin»;

  4. Publication of the liquidation notification in the Federal Resource (UFRIFALE);

  5. Notifying the creditors of the company on the liquidation;

  6. Preparing of the interim liquidation balance sheet;

  7. Submission of documents for liquidation to the tax authority;

  8. Receipt of documents on state registration of liquidation of a legal entity.

By the time the interim liquidation balance sheet is drawn up, settlements with creditors must be completed, the lease agreements of the office (production, warehouse premises) – terminated, labour contracts with employees – terminated.

The liquidation process takes approximately from 4 to 6 months. If the property of the legal entity is insufficient to satisfy the claims of the creditors, the insolvency (bankruptcy) procedure is required.

The temporary suspension of business ("freezing") involves the closing of business operations, downsizing of personnel to a minimum (generally to the executive body, if required – temporary external manager), reduction of other expenses (rental payments for office, warehouse, or production premises).

For temporary suspension of activity of the company shall take the following steps:

  1. Downsizing of employees (4-5 monthly wages, unless otherwise provided in an employment contract or a collective labor agreement, other local acts);

  2. Termination of lease agreements (office, warehouse or production premises);

  3. Realization or liquidation of office furniture, office equipment, etc.;

  4. Lease of a minimal office for documentation and receiving correspondence storage;

  5. Optimizing of the banking service tariff;

  6. Submission of reports to tax authorities, funds and statistical bodies within the established deadline , specifically:

  • tax reporting – I quarter, half-year, 9 months and a year, depending on the tax;

  • reporting on insurance premiums to the IFTS and the FSS – I quarter, half-year, 9 months and for the year;

  • reporting to the Pension Fund of the Russian (PFR) - monthly, annually or quarterly, depending on the form;

  • accounting statements – within 3 months after the end of the reporting year;

  • statistical reporting – every month, quarter, half-year or year, depending on the form (excl. for microenterprises - by the end of the year).

If the company does not submit reports and make transactions on accounts for 1 year or more, the IFTS is entitled to exclude the company from the Unified State Register of Legal Entities (Article 21.1 of the Federal Law No. 129-FZ dd 08.08.2001).

After taking steps as specified above and until the resumption of a business activity, the expenses of a "frozen" company will be limited by the rental payments, the general manager’s salary (or temporary external manager’s salary, if applicable) and costs for filing "zero reporting".

It is worth noting that recently the Ministry of Economic Development prepared a bill on external management of Russian companies, more than 25% of the authorized capital of which is owned by shareholders / participants from “unfriendly” countries and whose balance-sheet value exceeds 1 billion rubles or the average number of employees exceeds 100 people. If this bill is adopted, the external administration of the Russian business will actually lead to its isolation from the owner: all decisions of the participants made after February 24, 2022, will be suspended/cancelled, and the disposal of the assets of the Russian company will be transferred to the State Development Corporation VEB.RF. 

In order to minimize the risks related to Russian business during an unstable economic and political situation, inter alia, the risks of introducing of an external management, the alternative option of control transferring to a shareholder / participant from a “friendly” state can be considered. The list of “unfriendly” countries was approved by the Decree of the Government of the Russian Federation No. 430-r dated March 05, 2022.

This summary guide does not replace an individual legal advice. Responsibility for the content and (or) accuracy of the data provided is excluded.