Special anti-sanctions regulation has been in effect in Russia for two years now. One of the innovations was the need to obtain authorization from the Government Commission for Control over Foreign Investment for a number of transactions involving "unfriendly" non-residents .[1].

At the same time, the legislator has not yet provided for liability for transactions made in violation of anti-sanctions legislation.

Next, we will look at what consequences a violation of anti-sanctions restrictions can lead to.

Administrative Liability: Draft Law of the Ministry of Finance of the Russian Federation

It should be noted that the search for an effective mechanism to prevent violation of anti-sanctions measures is still on the legislator's agenda.

Thus, in March 2023, the RF Ministry of Finance prepared a draft law [2] on the introduction of a new article 15.25.1 in the CAO RF, which provides for administrative responsibility for failure to comply with the measures of influence (counteraction) aimed at ensuring the financial stability of the Russian Federation. According to the bill, such violation will be punishable by a fine of 20-40% of the amount of the illegally performed transaction or a fine of 800 thousand to 1 million rubles, if the violation has no monetary value.

According to the Explanatory Note, such fixing of liability at the legislative level is aimed at suppressing violations of anti-sanctions legislation by introducing a fine.

At the same time, the above bill has not yet been submitted to the State Duma of the Russian Federation.

Administrative liability: Art. 15.25 of the Code of Administrative Offenses

The question of whether Article 15.25 of the CAO RF, which provides for liability for illegal currency transactions, applies to violations of anti-sanctions legislation, has long been debatable.

The law enforcement practice is currently unaware of any cases of prosecution under Article 15.25 of the Administrative Offenses Code of the Russian Federation for conducting transactions without taking anti-sanctions restrictions into account.

However, such attempts were made in the second half of 2023. In the cases of Primregiongaz[3] and Vladimir Khmel[4], the companies appealed against the tax authority's rulings on bringing them to liability under part 1 of article 15.25 of the Administrative Code for failure to comply with the requirement for the compulsory sale of foreign currency proceeds established by para. 2 of the Decree of the President of the Russian Federation from 28.02.2022 № 79 .[5]

In our opinion, these cases may become practice-oriented for the following reasons:

• The courts recognized the rulings imposing liability as unlawful under the factual circumstances - at the time they were drawn up, the obligation to sell foreign currency proceeds had already been abolished. At the same time, the courts were not confused by the very fact of being held liable under the "currency" article. Thus, in fact, the courts confirmed the possibility of holding companies liable under Article 15.25 of the Administrative Offenses Code of the Russian Federation for violating anti-sanctions measures;
• Courts explicitly link anti-sanctions regulation with the implementation of currency control. This is important for understanding the place of anti-sanctions regulation in the Russian legal system. In the future, this will be essential for the formation of legal certainty in law enforcement (including with regard to the legality of the very fact of being held liable under Article 15.25 of the CAO RF for violation of anti-sanctions measures).

Civil law consequences: nullity of the transaction

The anti-sanctions acts do not contain provisions providing for the invalidity of a transaction as a consequence of its conclusion in violation of the anti-sanctions regulation.

At the same time, the "first signs" of such an approach have already appeared. Thus, the procedural codes were amended to give the prosecutor the right to file a lawsuit with the courts to invalidate transactions made in violation of anti-sanctions legislation and to apply the consequences of invalidity of such transactions [6].

In addition, in October 2023, the Arbitration Court of the Moscow District considered the case of Bauer Technologiya LLC[7]. The subject of the challenge was a transaction involving the sale of immovable property by a Russian company controlled by a "hostile" non-resident (a German company) to a Russian individual.

When making the transaction, the company did not receive the permission of the Government Commission. A little later, the company changed its management, which decided to challenge the transaction in court.

The court concluded that it was necessary to obtain authorization from the Government Commission in order to carry out the transaction in question, and therefore qualified the transaction as null and void. According to the case card on the kad.arbitr.ru website, the company has already appealed to the Supreme Court of the Russian Federation.

Civil law consequences: recourse to the state revenue

Potentially, the development of law enforcement practice in the area of consequences of violation of anti-sanctions measures may lead, in addition to the invalidation of the transaction, to the conversion of the proceeds of the transaction to the state income in accordance with Article 169 of the Civil Code of the Russian Federation (by analogy with similar regulation in the area of strategic enterprises).

Other implications

The issue of qualifying a transaction subject to anti-sanctions regulation as having been made in violation of anti-sanctions measures in the case of an indirect sale of shares in a Russian company between non-residents deserves special attention.

According to paragraph 1 of Presidential Decree No. 618 of 08.09.2022 [9] , its provisions apply, inter alia, to transactions between:

• by "unfriendly" non-residents;
• "unfriendly" non-resident and "friendly" non-resident.

The scope of regulation of the Decree includes transactions entailing directly and (or) indirectly the establishment, change or termination of rights to own, use and (or) dispose of shares in the authorized capitals of limited liability companies or other rights allowing to determine the terms of management of such limited liability companies and (or) the terms of their entrepreneurial activity.

Consider a situation where the ownership structure is as follows:

In the considered case, the transaction will be made at the level of two "unfriendly" non-residents (USA) in respect of a stake in a Cypriot company. Formally, the transaction does not affect the stakes in RosCo, i.e. there is no change in the ownership of RosCo's stakes in the administrative field of the Russian Federation (they are still owned by IncCo 1). At the same time, there is a transfer of control from InCo 2 to InCo 3, as a result of which another foreign company obtains indirect control over RosCo's shares.

Are such transactions covered by Presidential Decree No. 618 dated 08.09.2022? At present, there is no clarification in this regard. If, over time, the practice gives an affirmative answer to this question, it may have the following consequences:

• Obligation for "unfriendly" non-residents to obtain authorization from the Government Commission to carry out such a transaction;
• Due to the peculiarities of tax administration of foreign entities in the Russian Federation, the tax authority may impose negative consequences of such a transaction (in particular, prosecution for a currency offense) on a Russian company.

The Tax Cooperation Platform argued similarly (only in relation to the tax consequences of offshore indirect transfers) in its Toolkit released back in 2020.[10]

What should a business consider?

Given the fact that the practice of applying anti-sanctions measures is only just emerging, we believe that businesses should take a conservative approach when planning their business activities and take into account the following:

• Despite the current absence of both a special norm on liability and negative law enforcement practice for companies, companies should regard Article 15.25 of the CAO RF as a norm providing for liability for violation of anti-sanctions legislation;
• The development of law enforcement practice may lead to the emergence of other negative consequences of transactions without taking into account anti-sanctions restrictions (e.g., conversion of the transaction proceeds into state income);
• A transaction without the authorization of the Government Commission may lead to problems in verifying the "legal purity" of the asset in case of further transactions involving such an asset;
• Companies with foreign "unfriendly" participation, including indirect participation, should take into account the potential possibility of imposing negative consequences on them from indirect sale of their shares (stakes) at the level of foreign jurisdictions. We believe that at least the foreign beneficiaries of such companies should be aware of the existence of such risk.

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The Tax Compliance team has extensive expertise on controversial issues in the area of anti-sanctions regulation, including experience in applying to specialized government agencies for clarification of certain provisions of anti-sanctions restrictions. In case you need assistance, you can contact us at any convenient time.

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[1] Presidential Decrees No. 79 of 28.02.2022, No. 81 of 01.03.2022, No. 95 of 05.03.2022, No. 252 of 03.05.2022, No. 254 of 04.05.2022, No. 322 of 27.05.2022, No. 618 of 08.09.2022, and others.

[2] Draft Federal Law "On Amendments to the Code of the Russian Federation on Administrative Offenses" (prepared by the Ministry of Finance of Russia, Project ID 02/04/03-23/00136901) (not submitted to the State Duma of the Federal Assembly of the Russian Federation, text as of 22.03.2023).

[3] Ruling of the Arbitration Court of the Far Eastern District of 14.06.2023 in case No. A51-17349/2022.

[4] Ruling of the Arbitration Court of the Far Eastern District of 21.08.2023 in case No. A51-16385/2022.

[5] Decree of the President of the Russian Federation of 28.02.2022 № 79 "On the application of special economic measures in connection with unfriendly actions of the United States of America and foreign states and international organizations that have joined them".

[6] Federal Law of 07.10.2022 No. 387-FZ "On Amendments to Article 52 of the Arbitration Procedural Code of the Russian Federation and Article 45 of the Civil Procedural Code of the Russian Federation".

[7] Resolution of the Arbitration Court of the Moscow District of 23.10.2023 in case No. A41-101031/2022.

[8] Federal Law of 29.04.2008 № 57-FZ "On the procedure for foreign investment in business entities of strategic importance for the defense of the country and security of the state".

[9] Decree of the President of the Russian Federation from 08.09.2022 № 618 "On the special procedure for the implementation (execution) of certain types of transactions (operations) between certain persons".

[10] The Taxation of Offshore Indirect Transfers - A Toolkit. URL: https://www.tax-platform.org/sites/pct/files/publications/PCT_Toolkit_The_Taxation_of_Offshore_Indirect_Transfers.pdf