14.07.2017 — Supreme Court Approved Draft Reform of Courts of General Jurisdiction

On 14 June the Plenum of the Supreme Court approved the draft judiciary reform. According to the draft, the courts of general jurisdiction will be organized by analogy with state commercial (arbitrazh) courts: there will be nine courts of cassation and five appellate courts of general jurisdiction within the newly created judicial districts. Therefore, the appellate courts and the courts of cassation will be more autonomous, what will improve the judges’ independency and impartiality.

Currently the judicial system is organized in such a way that regional courts are competent to adjudicate the same matters both in appellate and cassation procedure, and sometimes even as the courts of the first instance. The Chairman of the Supreme Court Vyacheslav Lebedev has been initiating these changes for a long time and insisted that combining the functions of courts of different instances by one and the same court is inappropriate, he also referred to the positive experience of the organization of the state commercial (arbitrazh) courts. In December 2016 the concept of the reform was approved on the All-Russian Congress of Judges.

The bill developed on the basis of this concept provides that all the Russian regions will be distributed between the judicial districts analogously to the federal districts. At that the zones of jurisdictions of the appellate courts and of the courts of cassation often will not coincide with one another. The choice of the cities and towns to host new courts is predetermined mainly by the vacant buildings where the courts may be located, and therefore the new courts will not always be situated at the regional centers. At the same time, to make the courts easier to access to the litigants and other persons involved in the court dispute, the bill provides for establishment of permanent judicial seats. 

According to the explanatory note to the bill, 904 judges will be working in the newly established courts, and the overall costs will amount to more than 4 billion rubles. The change of the structure of the courts of general jurisdiction will require introducing amendments to the procedural laws – the Code of Civil Procedure, the Code of Criminal Procedure and the Code of Administrative Procedure. Yet, the bill has not been discussed with the governmental agencies in charge; therefore, it may still be substantially amended.

13.07.2017 — State Duma Adopted New Amendments on Financial Transactions to Civil Code

It is expected that the new rules on the financial transactions, adopted by the State Duma in the final reading, will enter into force starting from 1 June 2018. The amendments concern loan agreements, facility agreements, bank deposit contracts, bank account agreements and provisions on settlements.

The bill introduced the concept of consensual loan agreement, upon the conclusion of which the lender may be compelled to provide a loan, except for the cases when the lender has grounds to believe that the loan will not be repaid. Now only the banking institutions can be compelled to provide a loan under the credit agreement. Furthermore, the bill formalized into law the established court practice on the possible reducing of interest under the loan agreement between individuals, if the interest exceeds the ordinary interest rate, normally applied in analogous circumstances (usurious interest).

Many amendments concern the bank accounts. New agreements were introduced: bank account agreement in precious metals, joint account agreement, public deposit account agreement, etc. In case the amendments are approved, the account may be opened by several account holders (e.g. a married couple) and in this case the rights to the monetary funds will be distributed proportionally. Moreover, several accounts may be combined in one account group, and the withdrawal will take place simultaneously.

The provisions on escrow agreements are expanded. Previously the provisions on escrow accounts were introduced to the Russian Civil Code, where the bank deposited monetary funds until the moment, stipulated by the agreement. Now the parties will be free to use escrow as a security regarding any other property, and any person, and not only the bank, will be able to act as an escrow agent. Still, as a general rule, escrow agreement shall be notarized. 

Among other things, the new bill introduces amendments to the factoring agreement, rules on bills of credit, nominal accounts and other financial institutes. 

12.07.2017 — Supreme Court Published Case Law Digest on Protection of Foreign Investors’ Rights

On 12 July the Supreme Court published Case Law Digest, where the issues concerning the protection of foreign investors’ rights, which frequently arise in court practice, are summarized. The Supreme Court reminded that the foreign investors shall be granted protection from unlawful interference of the state authorities in their activities: thus, the state authorities are not entitled to cancel their previously adopted decisions on the selection of the investors, if the project is already at the implementation stage. Moreover, the Supreme Court noted that it is illegal to refuse to register the branch (representative office) of a foreign commercial entity, if the grounds of such a refusal are purely formal. The Supreme Court also recalled the limitations for the foreign investors established by law, the rights of the foreign investors in the field of taxation and customs duties and the guarantees of the just adjudication of the disputes where the foreign investors are involved.

In this Case Law Digest related to the foreign investors’ status in Russia the Supreme Court reminded that in accordance with the effective Russian laws the foreign investors are guaranteed stability and protection from the unlawful interference of the state authorities in their activities. The Supreme Court adduced the following case as an illustrative example: the state authority approved that the company with foreign investments shall be an investor in the project, however it reviewed its decision later on, after the investor had started to implement the project, with the reference to the fact that the respective decree was adopted with procedural violations. The courts noted and the Supreme Court confirmed that such activities of the state authorities are inadmissible, since they violate the prohibition to the public authorities to interfere in the activities of the foreign investors.  

In another case the Supreme Court noted that the refusal to accredit the branch (the representative office) of a foreign commercial organization due to formal requirements (for example, if there is no translation of the name of the company into Russian in one of the documents, while it is translated in other documents provided), is illegal. 

The Supreme Court also reminded that there are some restrictions for foreign investors in respect of the land plots designated for agricultural use (foreign investors may only lease such lands, but may never obtain the ownership title), and that it is necessary to obtain the approval of the authorities for transactions as a result of which foreign investors may obtain control over the strategic enterprises.

Moreover, the Supreme Court recalled that it is illegal to introduce legal amendments concerning tax benefits retroactively, if such amendments are to the disadvantage of the foreign investors, and reminded on other rights of the investors in the area of tax and customs law.

As for the jurisdiction matters, the Supreme Court noted that the disputes of the companies with foreign investments, registered in Russia, may be also adjudicated by arbitral tribunals, except for the cases when the subject-matter of the dispute falls within the exclusive competence of the Russian state courts. Russian state courts may also adjudicate the disputes, where a foreign investor is involved, if the prorogation agreement entered into by the parties is unenforceable (in particular, the foreign state court, indicated in the agreement, is not competent to adjudicate such matters).

11.07.2017 — Federal Tax Service Will Be Granted Simplified Access to Data on Foreign Financial Transactions

Starting from 2018 in accordance with the International Agreement on the Automatic Exchange of Financial Account Information Russia will join the electronic data exchange system functioning on the basis of the Organization for Economic Co-operation and Development. This Agreement is aimed at countering the taxable base erosion and profit shifting. Starting from 2018 transnational companies will have to report to the tax authorities on internal transactions of their subsidiaries, while banks and financial organizations will have to submit data on their clients to tax authorities.

In accordance with this Agreement starting from 2018 transnational companies with income exceeding 50 billion rubles will have to file three reports with the Federal Tax Service: national, by country and global. The first report should contain information on the transfer prices (in the transactions with affiliates), the second – information on the income, retained earnings, losses, assets and income tax. Global report will concern the activities of all companies’ subsidiaries and shall contain information on the markets, where companies operate, transactions, which bring income exceeding 5% from earnings, internal contractual terms, finance system, companies’ strategy, and information on restructuring. The global report has to be filed not annually, but upon the request of the tax authorities.

Companies shall report to the Federal Tax Service according to this system starting from 2018. In case of filing a false report or refusal to file it, the company may be penalized with a fine amounting up to RUR 500.000, effective from 2020. Companies may file this report in each country that has joined the information exchange system. By the moment more than 90 countries have joined the International Agreement, including many offshore jurisdictions.  

Moreover, the banks and financial organizations will have to gather information on the beneficiary of the account, client’s investment revenues, stock trading, percentage on deposits, obligations, payments and balance on accounts, and transfer this data to the Federal Tax Service.

10.07.2017 — Supreme Court: Financial Difficulties Do Not Overweight Arbitration Agreement And Do Not Allow to Litigate in Russian State Courts

In the case adjudicated by the Supreme Court, the financial difficulties of the claimant precluded him from paying the arbitration fee to the Arbitration Institute of the Stockholm Chamber of Commerce. Therefore, the claimant resorted to the Russian state court, arguing that under these circumstances the refusal of the Russian court to adjudicate the dispute will violate his right to legal protection and access to justice. The decisions of the courts of different instances were varied on whether the Russian state court has competence to resolve the dispute. However, the Supreme Court ruled that since the parties have entered into an arbitration agreement that was valid and effective, the dispute should be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce.

In the case at hand, the parties entered into an arbitration agreement, under which all disputes were to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce under its arbitration Rules. However, when the dispute arouse, the claimant resorted to the Russian state court, arguing that he did not have funds to pay the arbitration fee (€ 2.000).

The court of first instance dismissed the claim with reference to the fact that the parties have entered into an arbitration agreement. Still, the court of appeal agreed with the claimant’s argument that he was unable to pay the arbitration fee and under these circumstances he cannot be deprived of legal protection and his claim may be adjudicated by the Russian state court.

The court of cassation, however, agreed with the court of the first instance. These conclusions were reaffirmed by the Supreme Court, which noted that the parties shall follow their initial arrangements and therefore the disputes between them shall be resolved by the competent court in accordance with the arbitration agreement.