General provisions
The Civil Code of the Russian Federation states that a legal person is an organization which has in its ownership, economic control or operational administration specific property and which is liable for its obligations with this property and which may acquire and exercise property and personal nonproperty rights in its own name and bear responsibility and be a plaintiff and defendant in court. In addition legal persons must have a personal balance sheet or budget (part 1 of the article 48 of the Civil Code of Russia).
Legal persons can be organized as commercial and noncommercial organizations.
In accordance with an article 50 of the Civil Code legal persons which are commercial organizations may be created in the form of business partnerships and companies, production cooperatives and state and municipal unitary enterprises.
Business partnership is a commercial organization which charter capital is divided on the shares of the participants. Business partnerships may be created in the form of a full partnership and as a limited partnership (also called a partnership in commendam).
Hence, in accordance with the Russian legislation, a partnership in commendam is a partnership in which the participants have obligatory rights in respect to the legal entity. Legal statute of this form of the legal person is regulated by the Civil Code of the Russian Federation (part 3 of § 2 of the Chapter 4). This form of business activity is not developed in Russia nowadays, and there is no specific law referring to this form of legal entity, in comparison with limited liability companies (Federal law № 14-ФЗ “On limited liability companies” of February 08, 1998) or joint-stock companies (Federal law № 208-ФЗ “On joint-stock companies” of December 26, 1995).
One of the reasons that partnership as a legal person is in disfavor is that this is a union of participants (unlike a union of capitals as in a limited liability company or a joint-stock company) that is incorporated for conducting business. Thus it is necessary to have trust-based (fiduciary) relations between the participants of the partnership.
Foundation documents of a Partnership in Commendam
It should be noted that a partnership in commendam is created and operated on the basis of a foundation agreement (that is without a charter), as opposed to other forms of legal persons (article 83 of the Civil Code of Russia). The foundation agreement of partnership in commendam must include the following information: name of the legal person; place of its location; the procedure for managing the activity of the legal person; the amount and components of the contributed capital of the partnership; the amount, component, periods and procedure for making by the participants of contributions; their liability for violating their obligations regarding contributions; and total amount of contributions made by the contributors.
Legislation does not answer whether the foundation agreement must be signed by the contributors or not (there is just requirement that foundation agreement must be signed by all the general partners). Also it is not clear whether it is necessary to specify the investors or the number of investors, or not. In practice if the foundation agreement has no data on the contributors, legal relations between them and the partnership are fixed with, e.g., a contract on participation in the partnership in commendam which is concluded with the partnership itself.
Civil legislation has no answer on the question if there must be any corporate decision for making changes into the foundation agreement. In our opinion, as there are no specific requirements in legislation, these changes should be made in general order established in the Civil Code of Russia (under the mutual consent of the parties, under the demand of a party in established cases, etc.).
Nevertheless, as a partnership in commendam is a legal entity, its foundation as well as changes must be registered in the order established in the Federal law № 129-ФЗ “On state registration of legal entities and businesspersons” of August 08, 2001.
Participants of a Partnership in Commendam
General partners in a partnership in commendam may be businesspersons and (or) commercial organizations, that is persons conducting business activity (art.66 of the Civil Code). However contributors in a partnership in commendam may citizens and any legal persons. It is stated that a participant (both a general partner and a contributor) in a full partnership may not be a general partner in a partnership in commendam, and a general partner in a partnership in commendam may not be a participant in a general partnership (art.82 of the Civil Code).
General partners in a limited partnership jointly and severally bear subsidiary liability with their property for the obligations of the partnership (part 1 of the art. 75 and part 1 of the art. 82 of the Civil Code); contributors bear the risk of losses associated with the activities of the partnership within the limits of the sum of the investments contributed by them (part 1 of the art. 82 of the Civil Code). The profits and losses of a partnership in commendam are distributed between its participants in proportion to their shares in the contributed capital, unless otherwise specified by the foundation agreement (part 5 of the art. 82 and part 1 of the art. 74 of the Civil Code).
Thus, property status of a partnership in commendam is substantially specified by the unlimited personal liability of the general partners for obligations of the partnership. That is why the Civil Code of Russia does not have any other mechanisms for protection of creditors because individual liability of general partners considerably protects their interests. Other mechanisms for the protection of creditors exist in the companies which participants are not liable for the companies’ debts and bear the risk of losses only within the limits of sums of their contributions.
Contributed capital
Contributed capital of a partnership in commendam is divided on contributions of its participants (part 1 of the art. 66 of the Civil Code). Legislation does not prescribe the minimum amount of contributed capital because the latter is less important than the charter capital in companies. But general partners have to make at least half of their contribution to the contributed capital when a partnership will pass the procedure of the registration. The term for making other part of contribution should be stated in foundation agreement.
Legislation does no regulate time frame and order for making contributions by the contributors, but art. 83 of the Civil Code establishes a requirement that foundation agreement should contain information on the total amount of contributions made by the contributors. This provision emphasizes importance for conclusion of a contract with each contributor to define the amount of his contribution, time limits for contribution and his part in the contributed capital of the partnership.
There are no provisions about the financing method for a partnership, as opposed to limited liability companies. Therefore, increase of assets of a limited partnership is possible only in form of increase of contributed capital of the partnership. But as the Russian legislation does not prescribe the procedure for making such decisions our conclusions are based on the interpretation of the provisions of the Russian Civil Code. In our opinion, the decision to increase the contributed capital should be made by all the general partners as this is the question of management of partnership which should be settled by the common consent of the general partners (art. 71 and 84 of the Civil Code).
Transfer of share in the contributed capital by a participant of a partnership in commendam.
Under certain conditions a general partner and a contributor have the right to transfer their share in the contributed capital to another general partner or investor or to a third person (art. 79 and part 2 of the art. 85 of the Civil Code).
Transfer of share of a general partner
In case of transfer of share (or part of share) in the partnership’s contributed capital to another general partner or to a third person, it is necessary to receive consent of other general partners. It is necessary to remember that the requirement of consent is a peremptory rule and it can not be changed by the foundation agreement of the partnership. To avoid disputes it is better to state the procedure for obtaining consent in the foundation agreement or in an internal document of the partnership, if the foundation agreement allows issuing such a document.
The most important question is when the person who received shares becomes a new general partner of the partnership. Existing legislation does not specify this moment.
The moment of passing rights have different regulation in different types of companies: in a join-stock company this is the moment when the shares are fixed on the share register account of the person who received shares – from this moment the person gets the rights on these shares and rights which these share define. In a limited liability company a person exercises his rights and performs duties of a participant from the moment of notification a company about such transfer of share with provision of confirmation of this transfer.
In respect to a partnership in commendam the moment of passing rights, as we think, should be written in the foundation agreement because transfer of shares may lead to change of the amount of shares of each general partner in contributed capital of the partnership (part 2 of the art. 83 of the Civil Code). The most simple and legal way to determine the moment of passing rights and obligations to another person could be notification of a partnership about such transfer of a share and confirmation of this transfer (as in limited liability company). But in any case such a transfer of shares should be registered in the state register of legal persons pursuant to the actual legislation of the Russian Federation.
Transfer of share of a contributor
A contributor also has a right to transfer his share in the contributed capital to other contributors or third persons. In this case the law does not require receiving consent of other contributors if the share transfers to a third person. On the other hand, pp. 4 of the p.2 of the art. 85 of the Civil Code state that the contributors enjoy right of first refusal over a third person to buy share, and makes a reference to the part 2 of the art.93 of the Civil Code which regulates disposition of shares in a limited liability company. According to the part 2 of the art.93 of the Civil Code the participants of a limited liability company have first option right to purchase share of the participant (or a part thereof) in proportion to the amounts of their shares, unless the company charter or agreement between its participants provides for a different procedure for exercising this right (it is clear that in case of a partnership in commendam it can be provided in the foundation agreement). In the case when the participants in a company do not exercise their right of first refusal within one month from the day of notification or within another time limit specified by the company charter or agreement of its participants, the participant’s share may be alienated to any third person.
As for the question about the moment when a third person becomes a contributor of a partnership in commendam, it can be considered the same way as in case of transfer share to the general partner, and ruled by Federal law “On limited liability companies”.
Transactions with shares in a partnership – tax consequences
Legislation of the Russian Federation on tax and duties consists of the Tax Code of the Russian Federation and the federal laws on tax and duties.
In accordance with the tax legislation of Russia, for the purposes of taxation the same rules are applied for contributions in the contributed capital of business partnerships and for shares in the charter capital of business companies.
For instance, in accordance with the art. 39 of the Tax Code of Russia the transfer of property is not considered as disposal of goods, work or services if such disposal has investment nature (in particular, contributions to the charter (contributed) capital of business partnerships and business companies, contributions in accordance with a simple partnership (joint activity) agreement, contributions to the contribution funds of cooperatives) and also assignation to the participant of business partnership or company (or its assignee or the successor) within the limits of initial payment when the participant leaves business a partnership or a company, or when the property is distributed between the participants of a business partnership or a company under liquidation.
Accordingly, pp. 12 of the part 2 of the art. 149 of the Tax Code of the Russian Federation establishes that on the territory of the Russian Federation disposition including transfer of shares in the charter (contributed) capital of the organizations is not a subject to VAT (it is released from taxation).
Therefore, for purposes of taxation tax legislation of the Russian Federation puts an equal-sign between limited liability companies and limited partnerships (accordingly, between charter capital and contributed capital).
Certain Conclusions
In accordance with the Civil Code of the Russian Federation, limited partnership (partnership in commendam) is a legal entity to which rules of the civil, tax and other legislation on legal persons apply.
Therefore, because of absence of the special legislation in respect of such a legal entity as a limited partnership, it is necessary to look for answers to some questions regarding organization and functioning of partnership in the regulations which are established for other legal entities, for example, limited liability companies. Especially as such an opportunity is directly specified in the civil legislation of Russia.
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