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Getting In and Getting Out:
Outline of remarks by Jonathan Russin, Russin
& Vecchi L.L.C. (See contacts at end of report)
March 10, 2002
This report is published
as a courtesy to U.S. business, and is not to be construed as BISNIS
sponsorship or endorsement of any companies or content herein.
This outline attempts to illustrate the general legal structure of a typical arrangement to provide contract services to the operators of the Sakhalin I and II projects. In order to provide a general overview, the outline necessarily simplifies and in some cases omits dealing with many of the requirements and considerations which will affect any specific transaction. Most Russian tax issues are not mentioned in the outline. . .(due to coverage elsewhere - BISNIS).
In
most cases both Sakhalin Energy Investment Company (SEIC) and Exxon Neftegas
Limited (ENL) are requiring contractors to meet the Russian content
requirements.
The
usual corporate form to comply with the 50% Russian ownership requirement is
the limited liability company or LLC (sometimes known by its Russian initials
as an “OOO”).
Russian
law spells out the detailed requirements and features of an LLC, including
·
The minimum paid in
capital requirement is approximately US$350
·
The contribution of
in-kind capital is permitted
·
The procedure for
formation and registration of the LLC is heavily documented and time consuming
(usually requiring from two to three months)
·
The law specifies
that a participant in an LLC may withdraw at any time and may require prompt
repayment of its capital contribution
·
Russian custom and
tradition gives substantial (and often unexpected) authority to the Managing
Director
A
formal agreement among shareholders embodying their commitment to form the LLC
is a required document.
This
contract should not be confused with the general concept of a Shareholders
Agreement as used in the United States where it often contains
·
Obligations among
the shareholders to vote shares identically on certain issues
·
Agreements on the
management of the company, e.g. the President will be American, Vice President
will be Russian
·
Undertakings to
provide additional capital in the event of a cost overrun
Russian
courts have found such obligations to be unenforceable since they contradict
the rights established in company charters which provide that these issues will
be decided, not in advance, but by shareholders decision during the life of the
company.
Most
of these issues can be adequately dealt with through the use of other types of
agreements which are expressly recognized under the Russian Civil Code. For example, through the use of a management
agreement.
One
of the classic solutions used in situations where the foreign shareholder is in
fact providing a disproportionate part of the financing and expertise of the
LLC is to have the shareholders unanimously agree in the charter of the LLC
that the management functions of the company will be contracted to a third
party. A Management Contract between
the LLC (usually approved by unanimous vote of the shareholders) and the foreign
shareholder conveys full operating responsibility on this party.
With
a 50:50 LLC now established and managed by the financing partner, the LLC
enters into a contract with SEIC or ENL under which the LLC will perform
certain services in Russia and the U.S. shareholder company will provide
services and equipment from the States.
In effect there are two agreements:
·
A prime contract
between SEIC (or ENL) and the LLC, and
·
A subcontract
between the LLC and the U.S. shareholder company
For services performed by the LLC in Russia, the LLC will have income and will pay a yearly profit tax of 24%. Profits can then be distributed to the shareholders.
·
If the turnover of
the LLC is greater than approximately $1.7 million, dividends can only be paid
out following verification by a certified auditor.
·
Dividends paid to
the foreign shareholder are subject to a 15% withholding tax. Under the U.S.
Russia Avoidance of Double Tax Treaty, payments to a U.S. shareholder can be
reduced to 5%. But the reduction is not
automatic and requires time consuming documentation.
In order to pay its subcontractor, the LLC will send a copy of the sub-contract to its local Russian bank. Under Russian law commercial banks act as the agent of the Central Bank to assure compliance with currency transfer regulations. The local bank will open ruble and foreign currency accounts for the LLC (again the procedure requires time consuming documentation), and the bank will issue a “transaction passport” which traces the payment provisions of the subcontract.
Upon
receipt of an invoice from the subcontractor, the LLC will invoice SEIC or ENL.
When payment is received, the LLC will request the bank to transfer payment to
the subcontractor, and the bank will wire payment to the subcontractor and
enter the transfer into the transaction passport.
In
order to wind up the LLC at the end of its usefulness, the shareholders meet to
elect a liquidation commission. The
procedure for liquidation of a solvent company is detailed in the law and
requires:
·
Publication
announcing the wind up of the company and advising all creditors to present
their claims within a two month period.
·
Preparation of an
interim liquidation balance for approval by the shareholders.
·
Sale of all
physical assets and payments in cash to creditors.
·
Approval by the tax
service and the company registration authority (again, heavily documented and
time consuming)
·
Final distribution
to the shareholders.
·
Deletion of the
company from the company register.
For
Further Information:
Russin
& Vecchi, L.L.C. International legal
counsellors
32 Kommunistichesky Prospect, Sakhincenter, Suite 610 · Yuzhno-Sakhalinsk, Russia 693000 · tel.: (7-4242) 72 67 86/87 · fax: (7-4242) 72 67 58 · e-mail: russinvecchi@snc.ru· www.russinvecchi.com
This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)