Foreign ownership restrictions / limitation of foreign investments and equity in corporations in Russia

1) Are there any restrictions on foreign ownership in companies?

Russia has a comprehensive system of restrictions on foreign ownership in companies. 

The Russian Federation has a set of restrictions on foreign participation in business entities. The main regulatory legal acts include:

• Federal Law No. 57-FZ "On the Procedure for Foreign Investments in Business Entities of Strategic Importance" restricts the share of foreign investors in the authorized capital of companies in strategic sectors: the banking sector (up to 50%+1 share with the permission of the Central Bank of the Russian Federation), mass media (20%), airlines (49%), mineral resources (25-50%, depending on the deposit). Since 2022, additional restrictions have been introduced for investors from "unfriendly" countries on transactions in shares and shares in the authorized capital of Russian companies and withdrawal from strategic investment projects.
• Federal Law No. 395-1 "On Banks of Banking Activity" – for credit institutions with foreign participation in the authorized capital over 50% require a special permit from the Central Bank of the Russian Federation.
• Federal Law No. 7-FZ "On Non-Profit Organizations" prohibits foreign financing of NGOs recognized as "foreign agents".
• The Land Code establishes a ban on the acquisition of agricultural land by foreign persons.

There are also restrictions for foreign countries and individuals to be founders of mass media, owners of audiovisual services and in a number of other industries. 

In accordance with Decree of the President of the Russian Federation No. 618 dated 09/08/2022, it is necessary to obtain permission from the Government Commission to carry out (execute) transactions (operations) with shares in the authorized capitals of LLC and shares of JSC (except for credit organizations and non-credit financial organizations) or other rights that allow determining the management conditions of such LLC/Joint-stock companies and (or) the conditions for their business activities, if they are carried out with the participation of a person from unfriendly foreign countries. Such a permit, if necessary, may contain conditions for the implementation (execution) of transactions (operations), according to Decree of the Government of the Russian Federation No. 295 dated March 6, 2022.  

Failure to obtain prior authorization for the transaction entails its nullity and the possibility of foreclosure on the income of the Russian Federation of all received by the parties to the transaction.

2) Is government approval required for foreign investment in local companies?

The approval of government agencies/institutions for foreign investments in the Russian Federation is required, in particular, in the following cases:

1. Transactions with shares and stakes in business entities of strategic importance (according to Federal Law No. 57- FZ) – must be coordinated with the Government Commission for the Control of Foreign Investments, if:

• a foreign investor obtains control (more than 50% of the authorized capital) in a company in the defense, energy or other strategic industry;
• investments come from a foreign state or its structures.

2. Banking sector – transactions leading to an increase in the share of foreign participation over 50% in the authorized capital require the permission of the Central Bank of the Russian Federation.

3. Transactions involving shares and shares in the authorized capital of business entities with the participation of persons from "unfriendly countries", including reorganization, require the approval of a Government Commission.

In certain industries (communications, mass media, military–industrial complex), additional permits may be required depending on the structure of the transaction.

3) Which sectors are subject to special rules or restrictions for foreign investors?

Geological exploration of the subsurface and (or) exploration and mining of minerals in areas of the subsurface of federal significance, space activities, fishing, development, production, repair, disposal, trade in weapons and military equipment, production and trade in weapons and basic parts of firearms and other activities of strategic importance for ensuring national defense and security States, specified in Federal Law No. 57-FZ; banking and insurance industries, communications, mass media, private detective and security activities.

4) Can foreign persons own 100% of a limited liability company or joint-stock company?

Foreign persons may own 100% of the shares in the authorized capital of a limited liability company (LLC) or shares in a joint-stock company (JSC), with the exception of companies in certain industries.

In general, Russian law does not prohibit foreigners from being the sole participants or shareholders of such companies.

However, there are certain cases when foreigners' participation in the authorized capital may be limited.

In particular, foreign persons should not be founders of mass media; the amount (quota) of foreign capital participation in the authorized capitals of insurance organizations may not exceed 50%, otherwise the insurance supervisory authority stops issuing licenses for insurance activities to insurance organizations that are subsidiaries of foreign companies or have a share of foreign investors in their authorized capital more than 49% percent.

In addition, where more than 49% of the authorized capital belongs to foreign legal entities or citizens, they cannot take advantage of the benefits and support measures intended for small and medium-sized businesses.

5) Are beneficial ownership rules applicable to foreign participants?

The rules of beneficial ownership control fully apply to foreign participants, including the obligation to disclose ultimate beneficial owners (in accordance with Federal Law No. 115-FZ "On Combating the Legalization (Laundering) of Proceeds from Crime and the Financing of Terrorism" and Article 23 of the Tax Code of the Russian Federation).

Foreign organizations are required to annually submit information about their beneficial owners to the Federal Tax Service (for ownership shares exceeding 5%) and update this information in the event of changes under penalty of blocking transactions or recognizing contracts as invalid.

Special restrictions apply to companies from "unfriendly states" (Decree of the President of the Russian Federation No. 16 dated January 17, 2023) who are participants (shareholders) of a Russian business company in the field of energy, mechanical engineering or trade – their votes may not be taken into account for the purpose of making decisions by the governing body of such a company when determining the quorum and voting results on the issues on the agenda of the meeting of the body.

Failure to comply with the requirements entails the risk of subsidiary liability, sanctions from Rosfinmonitoring and banking restrictions, which makes strict compliance with disclosure and documentation requirements critically important for foreign participants.

6) Are there any quotas or thresholds on foreign ownership in strategic companies?

The Russian Federation maintains a quota system for foreign participation in strategic companies. 

Transactions that are carried out by foreign states, international organizations or organizations under their control and as a result of which these foreign states, international organizations or organizations under their control acquire the right to directly or indirectly dispose of more than 25% of the total number of votes attributable to voting shares (stakes) constituting the authorized capital of a Russian business company, or is there another possibility to block the decisions of the governing bodies of such a company, are subject to prior approval in accordance with the procedure provided for by Federal Law No. 57-FZ "On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance."

Special 2022 Restrictions for "unfriendly countries":

• Ban on stake increases without the Government Commission permission;
• Transaction limitations in key economic sectors;
• Enhanced beneficial ownership scrutiny.

7) Is disclosure of foreign shareholders/participants required when registering a company?

Yes, it is necessary. As a general rule, the full corporate name of the foreign founder, the registration number and the address in the country of incorporation are disclosed, if the founder is a foreign citizen or a stateless person, his/her full name and data of the identity document are indicated. The information is reflected in the application for registration of a legal entity in the form No. P11001.

8) Are there any restrictions on the acquisition of real estate by foreign legal entities?

As established by Clause 3 of Article 15 of the CC RF, foreign legal entities cannot own land plots located in border territories, the list of which is established by the President of the Russian Federation in accordance with federal legislation on the State border of the Russian Federation, and in other specially designated territories of the Russian Federation in accordance with federal laws.

Land plots within the boundaries of a seaport may not be owned by foreign citizens and organizations in accordance with clause 2 of Article 28 of Federal Law No. 261-FZ of 08.11.2007 "On Seaports in the Russian Federation and on Amendments to Certain Legislative Acts of the Russian Federation".

In addition, by virtue of Decree of the President of the Russian Federation dated 01.03.2022 No. 81, transactions (operations) entailing the emergence of ownership rights to immovable property carried out (executed) with persons of foreign countries who commit unfriendly acts, as a general rule, require the permission of the Government Commission for the Control of Foreign Investments in the Russian Federation.

9) Are there any business or office localization requirements for foreign investors?

Localization of a business may be required to participate in procurement for state and municipal needs in the Russian Federation. 

In accordance with Part 2 of Article 14 of Federal Law No. 44-FZ and paragraph 1 of Decree of the Government of the Russian Federation No. 1875, the following are established:

• a ban on the purchase of goods of foreign origin, works (services) performed (provided) by foreign persons from List No. 1 to this Decree;
• restriction on the purchase of goods of foreign origin from List No. 2 to this Decree;
• an advantage for goods of Russian origin that are not included in the mentioned lists to this Decree.

10) Are sanctions or other restrictions applied to investors from specific countries?

A temporary procedure is established for Russian LLCs, business partnerships, and production cooperatives to fulfill their obligations to pay profits to their participants who are foreign persons associated with unfriendly states or persons controlled by them (except in cases where the place of registration of controlled persons is the Russian Federation). The payments should be made to a type "C" account in accordance with clauses 2-9 of Decree of the President of the Russian Federation No. 95 dated 03/05/2022.

Branches (representative offices) of foreign legal entities associated with unfriendly states may, if there are grounds, be transformed into an LLC by a decision of the Arbitration Court of the Moscow Region, if:

• they have license to use the subsoil of the Russian Federation or facilities of the cross-border gas transportation infrastructure in the Russian Federation;
• there are no more than 50 participants (shareholders);
• at least 25% of their shares belong to participants (shareholders) who are citizens of the Russian Federation; Russian legal entities in which at least 25% of the votes in the supreme governing body are not controlled by foreign persons associated with unfriendly states;
• there are no shares that are freely traded or traded on the stock exchange.

In addition, according to Federal Law No. 320-FZ of 14.07.2022, the decision of the Arbitration Court of the Moscow Region may suspend the rights of foreign investors associated with unfriendly states that collectively, directly or indirectly, dispose of at least 25% of shares or at least 25% of votes in the management body of the company or have another opportunity to exercise the right to vote or the opportunity to actually terminate (significantly impede) the company's activities, if the company is not public, has a license to use the Russian Federation's subsoil or facilities of the cross-border gas transportation infrastructure in the Russian Federation and there are no more than 50 participants (shareholders).

Authors: Juliya Zhadan, Alena Ivanova, Aleksandra Levenkova, Yana Dianova