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Federal Tax Office vs. IKEA: Conclusions for transactions with foreign persons

The Arbitration Court of the Moscow Region recently decided to demand the return of 8 billion roubles from the Russian IKEA subsidiary. The reason for this is that the company concluded a transaction that, in the court's opinion, violates Russian “sanctions” (this special regulation in accordance with the decrees of the President of the Russian Federation has been in force since 2022). Even if the system used by IKEA (not without the help of lawyers, of course) does indeed appear to be illegal, the court's decision and the way it justifies it raises serious concerns. 

Background

An Irish company in the IKEA group, Fami Ltd, granted a loan to a Russian company in the same group, Torg OOO (LLC). The companies are interdependent under the Tax Code of the Russian Federation.

In March 2022, Decree No. 95 of the President of the Russian Federation was issued, limiting the repayment of loans to "unfriendly" creditors to an amount of 10 million roubles per month (beyond that only to the "C" account, which effectively means that the money is "frozen"). In the middle of 2022, IKEA announced its withdrawal from Russia. In November 2022, the remaining IKEA products were sold to Market.Trade (one of the Yandex.Market companies) for 12.9 billion rubles.

As the Russian IKEA was now unable to repay the loan to the Irish company, a complex plan was developed: Torg transferred to Yandex.Market the rights to pledge payment for the goods to Fami. Fami foreclosed on the pledge, and Torg undertook a so-called redirection of foreclosure by asking Yandex.Market to pay directly to Fami. Without this agreement, the bank would probably simply not have completed the transaction, cancelled the loan agreement, etc.

The court's position

The court found that Torg had not proved that it could not have obtained the money from Yandex.Market itself. Nor had Torg proved that it could not have settled its debt to Fami by crediting a C-account (as this would have been a proper performance of the loan agreement under Russian special rules).

As a result, the court concluded that the funds had been withdrawn from the territory of the Russian Federation in violation of the restrictions in place, and therefore reclaimed 12.9 billion roubles from Torg for the benefit of the Russian Federation in accordance with Article 169 of the Civil Code of the Russian Federation. 

What should be noted here?

1. This is one of the rare cases where the consequences of non-compliance with a special rule are obvious. We have already pointed out that in a situation where there is no direct liability for non-compliance, the unexpected rules may apply. The most obvious is, of course, the nullity of a transaction. However, the most obvious would be the application of Article 168 of the Civil Code of the Russian Federation (nullity of a legal transaction that violates the requirements of legal acts) with the result that the parties are returned to the initial situation. This in itself is a severe ‘sanction’, as under this provision not only the repayment of a loan, but also the sale of shares and (theoretically) even the establishment or liquidation of a company can be declared null and void. In this case, however, the court unexpectedly applied Article 169 of the Civil Code of the Russian Federation (invalidity of a transaction concluded for a purpose contrary to the principles of public order and morality), which allows the parties to the transaction to reclaim the proceeds of the transaction as income of the Russian Federation (!).Most lawyers agree that this opens a Pandora's box - it will be possible to recover money from the budget for almost any transaction that violates the law.
2. The court agreed that the tax authority, which was the plaintiff in this case, had the right to challenge the transaction.
3. The court seems to have been confused about which transaction it was trying to invalidate. It clearly did not intend to harm Yandex.Market, which is why it is not mentioned in the operative part, and the court's decision does not indicate the invalidity of the contract for the purchase of IKEA shares or the payment from Yandex.Market to Fami itself. However, in declaring the transaction of money transfer from Torg to Fami invalid, the court did not take into account that Torg itself did not make any payment.
4. The court's simplistic approach to defining a particular transaction or series of transactions that it considered invalid meant that it was no longer clear who owed what to whom. The court acted like a gendarme, awarding money to the household without considering the consequences: whether Fami had to pay the money back to Torg, whether Torg still owed Fami, etc.
5. Finally, it is not entirely clear why the court demanded the money back from Torg and not from Fami, who had received the payment. This is exactly what the courts have done in similar cases in the past: the person who received the money has been given a right of recourse. In this case, the court apparently assumed that Fami would never enforce the judgment and Ireland would never recognise it, so it simply decided to recover the money from whoever was closer - the Russian company.

It's complicated. What should we consider in our work?

1. You have to make a clear distinction between two situations:

Firstly, payments are not made through the bank (violation of regulations by a foreign bank, including a correspondent bank, your bank is on the EU/US sanctions list, etc.) and you want to formalise a system of assignments, set-offs, diversions of execution, etc. This is allowed.

Secondly, the transaction is prohibited by specific Russian regulations ('sanctions') and you are looking for ways to circumvent this prohibition by redistributing the cash flows. This may be illegal or considered a circumvention of the law.

2. The main risk in such situations is still that the transaction will be declared invalid and the parties will have to return to their original position (which can be very difficult).

3. there is also the risk that in such cases the court will recover the amount of the transaction from the household that is "closer", i.e. from whom it is easier to recover the amount.

4. Administrative and criminal liability should not be forgotten. So far, no such cases have come to light, but this does not mean that they do not exist or that they will not occur soon.

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