The effects of the protracted war between Russia and Ukraine continue to be a stumbling block for many businesses operating in the region. Upon the US imposing sanctions on Russia, a majority of Western companies sought to leave the nation. However, the exit process soon proved to be more challenging than anticipated, with many hurdles along the way, the latest of which is the “exit tax.”
What does the exit tax mean? How does it affect US companies looking to exit the Russian market? Getting a legal perspective can really help explain what’s going on. Speaking to Franchise attorney Jason W. Power of Franchise.Law can shed light on the matter. Either way, read our blog to find the answers to these and many more questions.
Executive Order 14024
In 2021, the United States established an emergency action through Executive Order 14024 to sanction companies that engaged in business dealings with the Russian Federation. Since its enactment three years ago, the US has amended this order several times.
One of the most critical amendments for businesses is Directive 4 under Executive Order 14024. Keep reading to understand why.
Directive 4 of Executive Order 14024
Under this directive, US businesses in Russia are banned from engaging in actions with three critical financial entities in Russia. They include:
- Central Bank of the Russian Federation
- Ministry of Finance of the Russian Federation
- National Wealth Fund of the Russian Federation
The directive also bans the transfer of assets to any of these entities. However, the Russian government has introduced stricter measures, including exit tax requirements, making it impossible for businesses to adhere to this directive.
Understanding Exit Tax
Before departure, Moscow requires companies to offer a 50% discount on any sale of assets after a valuation from selected Russian consultants. Russia also demands that 10% of the sale be contributed to its federal budget, which may be higher in some cases. These stringent requirements have been dubbed an ‘exit tax’ by Washington.
As you may have noticed, contributing to the budget would mean transferring assets to one of the entities explicitly prohibited in Directive 4. At the same time, there are increasing reports of many companies finding it difficult to exit Russia as Moscow demanded bigger discounts and enacted more stringent exit requirements.
How to Navigate Directive 4
According to the Office of Foreign Assets Control (OFAC), any entity whose divestments from Russia may necessitate paying the exit tax above must have a license from the OFAC. Take note that a special permit is required under this directive. You can apply for this permit online. Your attorney can guide you on how to fill out the application.
In addition to describing your activities in Russia, you must provide information on the amount of exit tax and tax payable to the Government of Russia if divestment does not happen. The impact of failing to pay this tax on your employees should also be included.
Rising Legal Risks and Asset Seizures
In recent months, Russia has escalated legal threats against departing companies, including arbitrary asset seizures and criminal investigations. Some Western businesses have reported frozen accounts or sudden audits targeting their local operations. These tactics, combined with the exit tax, are increasing the risks and costs of leaving. Legal counsel is essential to manage exposure and protect remaining assets. Getting the right help can make all the difference.
Conclusion
Due to Russia’s invasion of its neighbor, Ukraine, and the protracted war between the two countries, US authorities have sanctioned foreign entities from dealing with governmental financial entities in Russia. This directive caused many companies to exit the Russian market. However, increasing demands from Russia and complicated requirements from the US have made this process complicated. Consult an attorney to guide you on how to navigate this complex process and avoid legal complications with the OFAC.
