According to the article 30 of the Russian Federal Law “On limited liability companies” in case the net asset value of the company remains less than its charter capital after the end of the fiscal year following the second fiscal year or every subsequent fiscal year, at the end of which the net asset value of the company proved to be less than its charter capital, no later than within six months after the end of the corresponding fiscal year the company is obliged to take one of the following resolutions, about reduction of charter capital of the company to the amount not exceeding its net asset value or about liquidation of the company. Tax authorities, are entitled to file a claim to court about liquidation of LLC in case of gross violation of legislation. Could you please describe all possible ways of avoidance such risks for the company?

Walter Wenzel, Hamburg, Germany 09.02.14

A situation when the net assets of a limited liability company become less than the minimum amount of the authorized capital may lead to the limited liability company being liquidated on suggestion of the tax authorities. However, as existing court practice shows, a reduction in the net assets of a limited liability company does not necessarily result in its automatic liquidation.

And there are also ways to increase the net assets of limited liability companies and to exclude risks of such problems arising with tax authorities. Among the more practicable options may be named a contribution to the property of a limited liability company and also the issuance of a loan with a subsequent waiver of the debt.

Net assets means the balance-sheet value of the property of a company less its obligations. Here we are talking about the actual value of the property that a company has which is determined annually after the subtraction of its debts as per latest and approved in the established procedure balance-sheet of the company.
A negative value of the net assets of a company evidences the ineffective work carried out by the limited liability company and the need to meet the demands of the company's creditors.
In holding inspections the tax authorities pay particular attention to the value of net assets and namely to whether the amount thereof is in compliance with the requirements of applicable laws on the minimum prescribed amount of the authorized capital.

Analysis of existing arbitration practice shows that the only basis on which the tax authorities may press for the liquidation of a company, the value of whose net assets is less than the minimum prescribed amount of the authorized capital, is the fact that such liquidation is directly provided for by the Tax Code of Russia and by the Law “On Limited Liability Companies”.

In adopting decisions on cases on the liquidation of limited liability companies for the above-specified reason, judges take both the side of the tax authorities and the side of taxpayers. There are court decisions in which the judges took into account the position of the Supreme Arbitration Court of Russia (Clause 3 of the Information Letter of the Supreme Arbitration Court of the Russian Federation dated 13.08.2004 No. 84), in accordance with which a legal entity cannot be liquidated if violations made by it are insignificant or if their negative consequences have been removed.
Overall, analysis of existing arbitration practice shows the following main arguments used by judges to adopt decisions in favor of taxpayers in similar situations:

- a reduction in net assets does not by itself entail an immediate liquidation of a limited liability company in question but must be viewed as a sign of a deteriorating financial position of the taxpayer which makes it necessary to take appropriate measures;

- a limited liability company takes actual measures to improve its financial position in order to attain a positive ratio between its net assets and the amount of its authorized capital, does not have debts to the government budget while ongoing changes in its liabilities testify to its ability to fulfill its obligations to the creditors;

- a limited liability company constantly makes settlement transactions through its bank, pays wages to those employed by it based on employment contracts, quarterly submits to the tax inspection all required tax and accounting reports and statements, fulfills its duties to make payments to the budget and off-budget funds;

- there are no claims by the creditors.

So if the value of the net assets of a limited liability company becomes less than the minimum prescribed amount of its authorized capital, it does not automatically mean the liquidation of the limited liability company. And in the event of certain acts on the part of the tax authorities, a taxpayer can prove that it pays taxes and submits all relevant reports and statements, takes all necessary measures to improve the financial position while there are no claims by the creditors then it is most likely that liquidation will be judged an unnecessary measure.

In addition, a limited liability company may increase the amount of its net assets and accordingly remove the risk of the above problems completely.

1. A contribution to the property of a limited liability company. The Law On Limited Liability Companies allows the members of a company to make contributions to the property of the company if it is provided for in the charter of the company.

2. The provision of a loan with a subsequent waiver of its repayment. This method to increase the net assets of a company is all about providing a loan from the parent company to a dependent company and the parent company then waives the repayment of the loan.

3. Gratuitous transfer of property. To increase the net assets of a limited liability company, its members may also transfer funds or other property gratuitously.

4. Contributions to the authorized capital. The Law On Limited Liability Companies provides that it is possible to make contributions to the authorized capital of a limited liability company. However this method does not solve the problem of increasing the net assets in comparison to the authorized capital.

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