Global Tax Alert | 3 October 2014

Russia amends On 'Mass Media law' regarding foreign participation

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On 26 September 2014, the Russian State Duma adopted in the third reading Draft Law 604509-6 (the Draft Law) “On introduction of amendments to the Law of the Russian Federation On mass media” (i.e., Federal Law 2124-1 of 27 December 1991, hereinafter – the Law).

The Draft Law tightens restrictions and sets new requirements with respect to the establishment of mass media and broadcasting organizations involving foreign participation.

The term “mass medium” covers periodical print publications, network publications (i.e., a website registered as a mass medium in accordance with the Law), TV channels, radio channels, TV programs, radio programs, video programs, newsfilm programs and other forms of periodical distribution of mass information bearing permanent names.

I. Requirements

Article 19.1 of the Law (as amended by the Draft Law) provides for the following requirements (the Requirements).

Mass media founders, mass media editorial offices and broadcasting organizations

  • A foreign state, an international organization, as well as an organization being under their control
  • A foreign legal entity
  • A Russian legal entity with foreign participation
  • A foreign citizen
  • A stateless person
  • A Russian citizen having citizenship of another state

(hereinafter jointly – the Persons)

together or each taken separately,
may not be:

  • A founder (participant) of a mass medium
  • An editorial office of a mass medium
  • An organization (legal entity) performing broadcasting (broadcasting organization).1

Possession, management or control in relation to shares of an entity being a participant (member, shareholder) of a mass medium founder, mass medium editorial office, broadcasting organization

  • A foreign state, an international organization, as well as an organization being under their control
  • A foreign legal entity
  • A Russian legal entity with a share of foreign participation in its charter capital of more than 20%
  • A foreign citizen
  • A stateless person
  • A Russian citizen having citizenship of another state

together or each taken separately,
may not exercise:

possession, management or control directly or indirectly (including through persons being under its control or by means of possession in total of more than 20% of participatory shares (shares) of any entity) in relation to more than 20% of participatory shares (shares) in the charter capital of an entity being a participant (member, shareholder) of a founder of a mass medium, an editorial office of a mass medium, a broadcasting organization.2

The Persons may not establish any other form of control over a mass medium founder, a mass medium editorial office, a broadcasting organization, as well as over persons being participants (members, shareholders) of a mass medium founder, as a result of which the Persons obtain the possibility to directly or indirectly possess or manage such founder, such editorial office, such organization, or control them as well as actually to determine decisions being made by them.

II. Failure to comply

  • In the case of failure to comply with the above Requirements, persons being participants (founders) of founders of mass media or editorial offices of mass media, as well as of broadcasting organizations, may not exercise corporate rights (provided by para 2-6 of item 1 of Article 65.2 of the Russian Civil Code).
  • Votes owned by such persons shall not be accounted for the purposes of defining a quorum of a general meeting of participants (members, shareholders) and of calculation of votes.
  • Any transactions leading to violation of the above Requirements shall be null and void.

III. Effective dates and required actions

General
  • The Draft Law provides for the amendments' to come into force on 1 January 2016.
  • The constituent documents of mass media founders or mass media editorial offices as well as of broadcasting organizations have to be brought into compliance with the Requirements before 1 February 2016.
  • Information on compliance with the Requirements has to be provided to the competent Russian state authority (Roscomnadzor) no later than 15 February 2016.
Specific
  • In relation to (i) foreign legal entities and (ii) Russian legal entities with a share of foreign participation in their charter capital of more than 20%, the requirements of the Law (as amended by the Draft Law) shall apply from 1 January 2017, provided the following conditions are simultaneously met:
  • Such persons (together or each taken separately) directly or indirectly (including through persons being under their control or by means of possession of more than 20% of participatory shares (shares) of any entity) exercise possession, management or control in relation to more than 20% of participatory shares (shares) in the charter capital of an entity being a founder of a mass medium, an editorial office of a mass medium, or a broadcasting organization.
  • One or several Russian persons directly or indirectly (through third parties) possess in each of such persons dominant participation of 80% or more.

Documents confirming these facts have to be provided to Roscomnadzor no later than 1 February 2016.

Constituent documents of such persons have to be brought into compliance with the Requirements before 1 February 2017.

Information on compliance with the Requirements has to be provided to Roscomnadzor not later than 15 February 2017.

Roscomnadzor will be obliged to file in court an application on suspension of a mass medium's activity (i) in the case of non-receipt from a mass medium founder or a mass medium editorial office or from a broadcasting organization of information on compliance with the Requirements or (ii) in the case of receipt of information on failure to comply of such persons with the Requirements.

IV. Implications

As a result of the amendments, it is important to consider how (i) ownership of media and broadcasting businesses and (ii) respective profit repatriation schemes could be restructured to meet the Requirements and preserve the current level of dividends for foreign owners. Accordingly, the following ideas could be considered:

  • Spin-off of media and broadcasting activities
  • Sale of media and broadcasting companies to current Russian management or a Russian partner
  • Intellectual property licensing or franchising
  • Special corporate governance structures of dividend distribution

Each idea should be carefully analyzed taking into account the particular aspects of a company's business, related limitations, legislative regulations, as well as legal, tax and operational implications.

Endnotes

1. Unless otherwise is provided for by an international treaty of the Russian Federation.

2. Unless otherwise is provided for by an international treaty of the Russian Federation.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Moscow
  • Alexey Markov
    +7 495 641 2965
    alexey.markov@ru.ey.com
  • Ekaterina Shangina
    +7 495 755 9954
    ekaterina.shangina@ru.ey.com
  • Vadim Ilyin
    +7 495 648 9670
    vadim.ilyin@ru.ey.com
  • Vladimir Abramov
    +7 495 755 9680
    vladimir.abramov@ru.ey.com
Ernst & Young LLP, Russian Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088
    julia.samoletova@ey.com

EYG no. CM4773