The Executive Remuneration Review: Russia
Russian law does not provide for specific regulation of executive remuneration in the form of equity plans, and until recently, there were no special regulations related to cash remuneration. Recently, the legislator introduced special rules regulating the remuneration of executives in companies where the state has a stake (certain limits on payments in the case of termination of employment, etc.). The only non-state economic sectors for which some rules on remuneration have been introduced so far are the banking sector (on 1 January 2014, the Central Bank of Russia (CBR) implemented regulations on remuneration in credit organisations that set certain requirements for the remuneration of risk-takers in credit organisations) and the financial industry (non-state pension funds, insurance companies, certain securities markets participants, since 14 July 2016); mainly they follow the principles of the EU Capital Requirements Directive IV in this respect.
i Income tax for employees
Generally, Russia taxes the worldwide income of its tax residents and Russian-sourced income of non-residents.
In accordance with the provisions of the Tax Code of Russia (Tax Code), a Russian tax resident is an individual who spends at least 183 calendar days within 12 consecutive months on Russian territory.2 All the days an individual stays in Russia (including days of arrival and departure in the event of travelling) are taken into account when calculating the number of days for tax-residency purposes. It is important that days spent travelling outside Russia for short-term treatment or study (less than six months) are also counted as spent in Russia.
The final tax status of an individual is determined for the tax year (which is the calendar year from 1 January to 31 December).
Individuals considered as Russian tax residents are obliged to pay personal income tax on their worldwide income received (salaries, other remunerations, dividends, sale of property, capital gain, etc.). The general personal income tax rate is 13 per cent.3 However, the 35 per cent tax rate applies to certain types of income received by Russian tax residents such as, inter alia, interest on bank deposits exceeding certain limits, and prizes and winnings received within promotional campaigns where the relevant income exceeds 4,000 roubles.
Non-resident individuals pay personal income tax at the 30 per cent rate on all Russian-sourced income, except for dividends from Russian companies, which are taxed at the 15 per cent rate. Income received from sources located outside the territory of Russia is not taxable for non-residents. There are certain exceptional cases when a non-tax resident pays personal income tax at the 13 per cent rate. Foreign nationals who have the status of highly qualified specialists pay 13 per cent personal tax on their employment remuneration irrespective of their actual tax status.
Tax legislation in Russia does not specifically regulate the taxation of compensatory payments to executives. In the meantime, the Tax Code includes a list of specific compensatory payments that may be exempted from taxation, for example dismissal payments, and compensation for damage caused by injury or other impairment of health.
Those compensatory payments that are not included into the above-mentioned list are taxed under general rules.
If an incentive programme assumes the establishment of a special structure, the employee may be subject to additional reporting obligations.
For example, if an executive, being a Russian tax resident, becomes a participant in a fund, trust or partnership, that individual may fall under the controlled foreign company regulation. In such a case, the executive employee will have extra requirements regarding the disclosure of information, regular reporting on the structure and tax payment on income received by the structure in an appropriate part that belongs to the individual. The legal qualification of such special arrangements may differ and should be specifically analysed in each particular case.
As a rule, a personal tax obligation arises once an employee receives cash or in-kind income. Thus, the receipt of cash on a bank account or delivery of shares that leads to the receipt of the actual benefit may be taxable events from the Russian perspective. Generally, there are no personal income tax implications in connection with deferral of the remuneration.
In the event that the shares are granted free of charge or purchased by an employee at a price below fair market value, the employee obtains a taxable benefit. The taxable income is the difference between the fair market value of the securities and their actual purchase price.
Owing to the specifics of Russian law, there is a risk that share options may be classified as non-traded financial instruments that, in turn, may lead to double taxation of an employee at the moment when the employee is granted a share option and when the option is exercised. Although there were no public negative cases, and most incentive schemes are unlikely to be classified as non-traded financial instruments, which are subject to tax at grant, monitoring the practice and regularly assessing the possible obligation to pay personal income tax at grant of an award is recommended. Eligible employees may also apply for official clarification from the Russian Ministry of Finance to check the position of the fiscal authorities.
ii Social taxes for employees
In Russia, social contributions are the sole obligation of employers, and they should not be withheld from the remuneration of an employee. Obligatory social contributions are paid on most remuneration and benefits paid to an employee, except for certain types of payments such as dismissal payments, compensation of business trip expenses and voluntarily insurance contributions (if the insurance contract term is more than one year).
Since 2020, an employer is obliged to pay social contributions in the following schemes:
- a pension fund contribution of 22 per cent is payable on the annual income of an employee up to 1,292,000 roubles and 10 per cent above the threshold;
- a social insurance fund contribution of 2.9 per cent is payable on the annual income of an employee up to 912,000 roubles. For foreigners and stateless persons (except for highly qualified specialists), this rate is 1.8 per cent within the threshold; and
- a medical insurance fund contribution of 5.1 per cent is paid on all remuneration without any thresholds.
The thresholds are subject to annual revision taking into account the growth of the average remuneration in Russia.
Besides the obligatory social contributions, employers are also obliged to pay accident insurance contributions. The applicable rate varies from 0.2 up to 8.5 per cent and depends on the degree of professional risk that the employer's activity entails.
iii Tax deductibility for employers
In accordance with the provisions of the Tax Code, remuneration of employees (both monetary or in-kind) is tax-deductible for the employer, regardless of whether the employee is an executive or rank and file worker.
The Tax Code requires that the expenses be documented in a proper way (including the condition that payment of a remuneration or benefit should be made on the basis of an employment or collective agreement) and incurred for business purposes of a company. As a rule, expenses on employees' remuneration and incentives are deductible on an accrual basis.
It might be important for deduction purposes that incentives are paid in connection with employees' professional results and achievements. Otherwise, if incentives are paid to an employee, for example as a birthday present, expenses will not be deductible.
Obligatory social security and accident insurance contributions are also deductible for profit tax purposes. Besides that, any employer can insure employees' health and lives voluntarily.
In this case, there is no difference between executives and other employees. Payments for such insurance may be deducted for profit tax purposes if voluntarily insurance contracts are concluded for a period of not less than five years; with a Russian insurance company having a licence for the relevant activity; and during these five years, such contracts do not provide for insurance benefits, including those in the form of rents or annuities, or both, with the exception of insurance payments in the event of death or harm to the health of an insured person.
Otherwise, if any of these criteria is not met, the insurance costs cannot be deducted.
iv Other special rules
There are no special rules on taxation of the executives or other employees with respect to a change of control in a company or reincorporation in low-tax jurisdictions.
Any in-kind benefit of an employee should not exceed 20 per cent of his or her gross monthly salary (including shares). Otherwise, the employer may be subject to an administrative liability in a form of fine. Moreover, this may result in difficulties in the deduction of relevant expenses.
Remuneration paid to the members of a board of directors is generally non-deductible and is not subject to social security contributions. This remuneration should be paid upon a decision of the general shareholders' meeting.
If the company has an employment or civil contract with a member of the board of directors (taking into consideration that obligations under this contract are not the same as a director's functions), the remuneration may be deductible. Moreover, social security contributions are to be paid.
Another important issue connected with a director's remuneration is that most double taxation treaties contain a clause on directors' fees. This clause generally states that a director's fees may be taxable in the country where the company paying the fee is registered and considered a tax resident, with no respect to the tax residency of the director.
Tax planning and other considerations
Russian legislation does not provide for the special favourable tax treatment for executives. However, there is a general possibility that may be used for the reduction of an employer's tax burden in respect of an employee being a foreign national.
Thus, Russian legislation provides a special regime for highly qualified foreign specialists (HQS) working in Russia.
HQSs are foreign citizens with experience, skills or achievements in a particular field of activity invited to work in Russia and whose remuneration is:
- not less than 83,500 roubles for one calendar month – for highly skilled professionals who are scientists or teachers, as well as for highly qualified professionals involved in the work by residents of industrial production, tourism and recreation, special economic zones and some others;
- not less than 58,500 roubles for one calendar month – for foreign nationals involved in the work by residents of a technology-innovative special economic zone;
- for highly qualified specialists – that is, medical, teaching or research workers – under an invitation to engage in a corresponding activity in the territory of the international medical cluster: not less than 1 million roubles for one year (365 days);
- for foreign nationals participating in the Skolkovo project,4 there are no requirements regarding the amount of salary;
- for foreign nationals involved in or employed by legal entities engaged in activities on the territory of the Republic of Crimea and Sevastopol, not less than 83,500 roubles for one calendar month; and
- for other foreign nationals, not less than 167,000 roubles for one calendar month.
Those employees who are treated as HQS shall be taxed personal income tax at the 13 per cent rate regardless of the tax-residency status. However, the 13 per cent rate applies only to employment remunerations. All other income (including a sale of personal property, etc.) shall be taxed based on the tax-residency status.
Another issue that should be taken into account is that the Russian law on currency regulation and currency control sets a number of limitations. These limitations apply to currency residents (Russian nationals, or foreign nationals who reside in Russia on the basis of a residence permit).
Generally, currency transactions are forbidden between currency residents.
Moreover, currency limitations should be noted when an employer grants an employee shares. Frequently this may lead to the necessity to open an account in a foreign bank or in other financial market organisation for the purposes of holding shares and receiving income (i.e., dividends and other proceeds).
Once an account in foreign bank or in other financial market organisation is opened, the currency resident is obliged:
- to notify the Russian tax authorities of such account (particularly on the opening or closing of the account, or any changes to any of the account's details);
- to report annually on cash transactions via the account except the following cases:
- an account is opened with a bank or other financial market organisation that is located in a Eurasian Economic Union member country, or in a country with which the automatic exchange of financial information under Common Reporting Standard is carried out; and
- the amount of incoming or outgoing funds does not exceed 600,000 roubles; or the balance as of the end of the reporting period is not over 600,000 roubles, provided there were no incoming transactions during the reporting period; and
- to perform only transactions that are allowed by the currency legislation.
The legislation provides for different approach to the transactions that are treated legal for bank accounts and for accounts opened with other financial market organisations. Currency resident may receive funds on declared foreign bank accounts without any limitations provided that:
- the account is opened with the bank located in Eurasian Economic Union member country, or in a country with which the automatic exchange of financial information under Common Reporting Standard is carried out, and
- such funds are received from non-resident of Russia.
If the account does not meet the abovementioned criteria, strict limitations on transactions may apply.
The Directive of the Russian Central Bank, entered into force on 17 April 2020, means that there are no restrictions on debiting and crediting monetary funds to or from accounts or deposits opened with other financial market organisations located outside Russia.
Violation of the prescribed rules may result in a fine of 75 to 100 per cent of the amount of the illegal currency transaction.
Non-competition covenants in employment relations are restricted. A ground for this lies in the provisions of the Russian Constitution and Labour Code, which declare freedom of labour, including freedom to choose work and a profession as one of the fundamental principles of the regulation of labour relations and other relations directly related to them. Therefore, a Russian court will most likely not enforce non-competition covenants in employment relations. The court practice in respect of non-compete provisions in employment contracts is very limited and so far confirms this approach.
It is not widespread practice to include non-solicitation provisions in employment contracts. However some employers, especially subsidiaries of international companies, tend to include such provisions. We believe that such provisions can be enforceable depending on their actual content and scope as well as the circumstances of a particular case, at least partly. However, court practice on this issue has not yet developed, so it is difficult to predict whether a court will uphold its enforceability. Restrictions under Russian labour law will significantly limit what a party will be able to claim in connection with a breach of the non-solicitation obligation.
A release of claims is not enforceable under Russian labour law. It will most likely be treated as a restriction of the legal capacity of a person granting a release of claims. Even if an employee voluntarily releases its employer from the claims, the release will not be enforceable.
Employment relations can be terminated only on the grounds specifically set out by law. Russian labour law does not provide for such grounds of termination of employment as involuntary termination for good cause, constructive termination or voluntary termination for good reason.
An employment contract can be terminated at any time by agreement of the parties. An employee may also terminate the employment contract on his or her initiative by giving the respective notice. An employer may terminate an employment contract at its initiative on the following grounds set out by the Labour Code:
- liquidation of the company;
- staff redundancy (reduction of the number of employees);
- unsuitability of the employee for the position or work because of insufficient qualification (to be confirmed by attestation);
- repeated breach of job duties;
- a single gross breach of employment duties, namely:
- unjustified absence from work during a whole working day or shift, or for more than four hours during a working day;
- unauthorised disclosure of a commercial secret, state secret or other secret protected by law, including personal data of other employees;
- showing up to work intoxicated;
- committing theft;
- misappropriating funds;
- intentional destruction or damage to property confirmed by decision of a court or another competent state body; or
- breaching the employers' health and safety rules if this led to major consequences (industrial accident, catastrophe);
- faulty actions are committed by an employee responsible for dealing with monetary or commodity valuables if these give grounds for a loss of trust in the employee; and
- presentation of false documents to an employer when entering into the employment contract.
Apart from the above, the law sets out special grounds for termination of employment of a CEO and some other senior managers at the initiative of an employer, namely:
- change of owner of the employer's assets. This termination ground applies only to CEOs, their deputies and chief accountants (this is a special ground different from a change in control, which it usually does not cover; it applies, for example, in the case of the privatisation of a state-owned enterprise);
- the taking of an ungrounded decision by the CEO, head of a branch or representative office, their deputies or chief accountant that resulted in making the employer's property unsafe, or the unauthorised use or other damage to the employer's property;
- a single gross breach of job duties by the CEO, head of a branch or representative office or their deputies;
- dismissal of the CEO of the company in accordance with insolvency laws;
- termination of employment of the CEO of the company on the ground of a decision of the company's authorised body; and
- dismissal of the CEO, members of the collegial managing body (management board) on other grounds provided by their employment contracts.
The Labour Code provides for payment of severance in a limited number of cases, for example in the case of liquidation of a company or staff redundancy, in the amount of a monthly of fortnightly average earnings. However, in addition, in the cases mentioned, an employer is obliged to pay yet another monthly average earnings amount if an employee remains unemployed for two months after dismissal, and in some cases one more monthly average salary.
If an employment contract with the CEO of a company is terminated by a decision of the authorised body (shareholders' meeting or board of directors) before the expiry of its term, the employer should pay the CEO a compensation that cannot be less than three average monthly earnings of the CEO. The employment contract with the CEO can provide for a higher compensation in the case of such termination. Such compensation is payable in the absence of guilty acts or omissions of the CEO.
There are no specific rules in relation to severance upon a transfer of employment in connection with a corporate transaction. If a transfer of employment occurs, severance will be paid if applicable, according to the general rules.
Russian securities law does not provide for the special regulation of employee equity plans or any exemptions for such programmes from the general rules. Thus, where the law requires the registration of securities and prospectus, this rule will apply to the implementation of employee equity plans. Therefore, the application of some programmes may require registration depending on the terms of the programmes. Generally, the following programmes can be used: offering of new securities of Russian companies in Russia, offering of existing securities of Russian companies and foreign securities distribution.
Registration with the CBR is required in the case of issuance or offering of a Russian company's new securities to employees.
There are two ways to offer new securities, namely to offer new shares by subscription or issuer's options. The second approach involves the conversion of options into shares at a certain later date. For both shares and issuer's options, the issuance and distribution procedures are similar. Because employee equity programmes usually imply an offer of shares to a limited predefined group of offerees, they would normally not require registration of a prospectus where the number of offerees falls within the prospectus exemption criteria.
An issuer's option is a book-entry serial registered security in accordance with the Federal Law on the Securities Market. In compliance with Russian rules governing placement of securities convertible into shares, placement of such securities requires a special procedure of registration.
Securities laws set out certain specific rules for issuing options; of these, the most important are that the number of shares of a certain category (type) that can be acquired through options may not exceed 5 per cent of the number of shares of such type placed as of the date of the filing of documents for the state registration of the options issue; and the decision on the issuance of options may provide for restrictions on their circulation.
The transfer of existing shares in connection with employee benefit programmes should be exempt from registration requirements. For this reason, the use of existing shares may be chosen by the company to apply the programme. To implement this method, the company buys its own shares from shareholders or the market to distribute them. It is important that the company may not hold these shares for more than a year; after the expiry of the one-year period, shares must be sold or redeemed. In certain cases, pre-emptive rights may arise (depending on the type of company, etc.).
An employee stock ownership fund that is based on the use of a company's net profit can be established. This fund accumulates sold shares for their further distribution among employees. If employees pay for such shares, all the money received should be used to replenish the fund.
Under Russian securities market legislation, the offering of foreign shares to Russian employees and the acquisition of such shares by them may be considered a type of placement or circulation of foreign shares in Russia. Russian legislation permits the circulation of such shares only in a limited number of situations, which may require, inter alia:
- registration of foreign securities with a Russian stock exchange or the CBR;
- admittance to circulation in a Russian market;
- the qualification of foreign financial instruments as securities in accordance with the requirements of Russian law;
- the specific qualification of a buyer as a qualified investor.
Placement of foreign securities (that is, issue of new securities) may require registration of the prospectus with the CBR. Usually, employee equity programmes do not imply public circulation of foreign shares. However, even non-public circulation is subject to some requirements set by the securities laws mentioned above. Regulations of the Federal Financial Markets Service (the former regulator of financial markets) have introduced certain rules regulating the acquisition of foreign financial instruments by Russian employees, but they do not exclude certain general requirements to the private circulation of foreign shares. Therefore, employers should consider the possible negative consequences of offering foreign securities to Russian employees.
Generally, there are no specific rules governing company stock selling by executives. However, executives can be subject to insider trading rules if they qualify as insiders. The rules on insider trading may pose some restrictions: for example, on trading in a company's stock. In some cases, executives will be able to trade if they comply with the notification or consent procedure. Liability for non-compliance with the rules on insider trading may differ, ranging from simple consequences such as void transactions and damages to injured persons, to administrative or criminal liability. However, there are no anti-hedging or similar rules.
Furthermore, companies may set their own particular rules and procedures. The inner rules usually follow the legislation of relevant countries and the practice of its application.
Other important requirements relate to reporting and apply to executives holding or trading in company stock. Generally, they are based on the rules of disclosure of information by issuers of securities, public companies and their executives.
The state requirements on disclosure of information apply to legal entities that publicly issue securities and are required to disclose the information on the compensation of their executives. Besides that, legal entities related to the state and receiving state support, such as state corporations, federal state unitary enterprises and public joint-stock companies in which the state is the major shareholder, are also required to disclose additional information on the compensation of executives in the explanatory notes to their accounting statements. These requirements will change from 1 October 2021 as the CBR issued the new Regulation on Information disclosure standards that will apply as of that date.
Disclosure of information is carried out in the following forms:
- a material fact statement;
- a quarterly and annual report;
- a securities prospectus; and
- an annual and semi-annual consolidated financial statement.
Public joint-stock companies (i.e., ones that issue publicly shares and other securities convertible into shares) are obliged to disclose information on the compensation of executives, including but not limited to their annual reports, securities prospectus and material fact statement.
Non-public joint-stock companies (i.e., ones that cannot issue publicly shares and other securities convertible into shares), if the number of their shareholders exceeds 50 shareholders, or non-public joint-stock companies that publicly issue securities, are also required to disclose information on compensation of executives (e.g., in annual reports).
All the information that requires disclosure is disclosed in the forms prescribed for disclosure of such information. The form of disclosure of information also determines the timing.
i Material fact statements
Information to be disclosed in a material fact statement
A material fact statement should outline information on changes in the percentage of held shares in the charter capital of an issuer or its controlled entities (if such entities are material to the issuer) of the following persons:
- members of the board of directors;
- members of the collective executive body (the management board);
- the sole executive body (the CEO); or
- members of the board of directors, members of the collective executive body or the CEO of the management company (if applicable).
Material fact statement disclosure timing
The information disclosed in material fact statements should be published in a newswire service not later than one day after, and on a company's website not more than two days later. The terms are calculated from the date of occurrence.
The text of the material fact statement should be available on the company's website for not less than 12 months from the date on which the term for its publication expired, and in the event it was not published within that term, from the date of publication.
ii Quarterly reports and prospectuses
Information to be disclosed in quarterly reports and prospectuses
Quarterly reports and prospectuses should disclose information on:
- persons serving in the management bodies of a company, and in particular their share (ordinary shares) in the charter capital of the issuer and the number of shares that can be acquired by such a person after the exercise of issuer options. This rule also applies to the issuer's dependent companies and subsidiaries; and
- each governing body, including all types of remuneration (base salary, bonuses, commitment fees, benefits and compensation of expenditures), remuneration payments made separately for participation in the work of the relevant management body, and other types of remuneration already paid in the course of the respective period, including information on approved decisions or actual agreements with respect to such payments in the current financial year. The regulation related to CEOs may differ from the general regulation. There is no requirement to provide information on the remuneration of the individual holding the office of CEO in a prospectus and quarterly report.
Confidentiality agreements cannot contain a clause preventing the above-mentioned information being disclosed. The only possible exception to this rule is information on a CEO's remuneration, which can be excluded from disclosure in a quarterly report or a prospectus.
Disclosure timing for quarterly report
A quarterly report shall be published by issuers within 45 days of the end of the respective quarter.
The quarterly report should be available on an issuer's website for not less than five years from the date on which the term for its publication expired; and, in the event that it was not published within 45 days of the end of the respective quarter, from the date of its publication.
Disclosure timing for prospectus
An issuer shall publish its prospectus on its website no later than the date of the beginning of share placement.
The text of the registered prospectus should be available on the website from the date when the term for its publication expired, and in the event it was not published within that term, from the date of its publication, and for not less than five years from the date of publication on the website of the text of the registered report on the results of a share issue.
In cases where the prospectus was registered after state registration by the CBR of the report on share issue (additional share issue) results or submission to the CBR of a notification of share issue (additional share issue) results, a statement on prospectus registration should be made by way of its publication in a newswire service, not later than one day, and on the company's website, not later than two days, following the date of publication of information on the registration of the prospectus on the website of the CBR, or the date of receipt of the CBR written notification on the registration of the prospectus, whichever date is the earlier.
iii Consolidated financial statement
Information to be disclosed in the consolidated financial statement
The International Financial Reporting Standards regulate the content of the consolidated financial statement.
Consolidated financial statements disclosure timing
The issuer shall publish its semi-annual consolidated financial statement within three days of its drawing up, but in any case within 60 days of the end of the second quarter, and an annual consolidated financial statement within three days of the drawing up of the auditor's report, but in any case within 120 days of the end of the relevant year.
iv Annual report
Information to be disclosed in the annual report
An annual report should contain information on the CEO, members of the management board and members of the board of directors, including but not limited to the number of their participatory shares in the charter capital of the issuer. In the event that transactions on the acquisition or disposal of shares belonging to said persons within the reporting year have been concluded, the annual report should also contain information on such transactions (date, contents, category and the amount of shares transferred).
The annual report should also include the criteria for the determination of the amount of remuneration or compensation of expenditures and information on each governing body, including all types of remuneration (base salary, bonuses, commitment fees, benefits and compensation of expenditures); remuneration payments made separately for participation in the work of the relevant management body; and other types of remuneration already paid in the course of the respective period. Regulation related to CEOs may differ from the general regulation. There is no requirement to provide information on the remuneration of the individual holding the office of CEO in an annual report.
Disclosure timing for the annual report
The annual report shall be published within two days of drawing up minutes of the annual general meeting of shareholders or the meeting of the board of directors for the approval of the annual report.
The text of the annual report should be available on the website for not less than three years from the date when the term of its publication expired, and in the event that it was not published within that term, from the date of its publication.
Information in the form of an annual report, a prospectus, a quarterly report or a material fact statement should be disclosed on a group basis with respect to each governing body. This obligation applies to the board of directors, the management board and the CEO (the sole governing body).
Regulations on disclosure do not currently set a materiality threshold for executive compensation or require specific disclosure of perquisites.
Quarterly reports and prospectuses should disclose information on actual agreements with respect to payments made during the current financial year. However, the CBR has issued no clarification as to how and in what form this information is to be disclosed, and as a matter of practice, companies disclose only the fact of the existence or absence of such agreements, and not the agreements themselves.
In Russia, only certain public companies are subject to some corporate governance requirements regarding remuneration.
The rules are set by the CBR for companies whose securities are traded or intended to be traded at the stock exchange.
The Code of Corporate Governance approved by the CBR in 2014 (Code) sets out some recommendations in this respect. The Code is not mandatory for Russian companies, but is recommended for joint-stock companies admitted to trading at the stock exchange. However, the annual report of joint-stock companies must contain the report on compliance with mentioned recommendations of the CBR. In particular, the Code recommends forming a remuneration committee consisting of independent directors that develops the remuneration policy of a company subject to approval by its board of directors. It further recommends implementing a remuneration policy that sets forth transparent mechanisms for setting the remuneration of executives, board members and other key employees, and sets out types of payments. The Code also recommends limiting compensation payments to executives and other key employees in the event that a company terminates their employment on its own initiative (golden parachute) to twice the annual fixed remuneration of the respective employee.
Russian law does not set specific rules allowing clawback or recoupment of remuneration previously paid in the event of a financial restatement, misconduct, adverse change in business or other circumstances, save for special regulations for certain officials or employees of credit and some other organisations (see Section VIII for more details). The excess salary paid to an employee can be recovered only if this was caused by a calculation fault or a court confirmed an employee's fault in his or her failure to perform work normatives, or an excessive amount was paid because of the illegal actions of an employee (and this has been confirmed by a court).
The Federal Law on Joint Stock Companies and the Federal Law on Limited Liability Companies require the approval of payments to members of the board of directors, interested-party transactions and major transactions.
The law does not require the payment of any remuneration to members of boards of directors. A general meeting of shareholders or participants may decide on setting and paying any remuneration to members of the board of directors.
In Information Letter of the Central Bank of Russia No. IN-015-28/41 on sources of remuneration payment to the members of the board of directors (supervisory council) of a joint-stock company, the CBR clarifies that the Federal Law on Joint-Stock Companies and the Code do not link the payment of remuneration to members of the board of directors (supervisory board) of a company with a company's profit for the reporting year, allowing the general meeting of shareholders to decide on the payment of the said remuneration, and in the absence of the company's profit for the reporting year.
Existing court practice treats employment contracts with CEOs or relevant provisions of employment contracts setting their remuneration, including bonuses, other compensations, remuneration under incentive programmes as interested-party transactions and, where applicable, major transactions.. In fact, existing court practice stems from the position that CEOs have no authority to make decision on setting and paying remuneration or increased remuneration to themselves. This authority is vested in other competent bodies. Thus, actions of CEO aimed at unauthorised changes to his remuneration are deemed as breach of fiduciary duties and such sums can potentially be recovered as damages. Therefore, currently such transactions are deemed to require prior corporate approval.
Starting from 1 January 2017, rules on the approval of major transactions were modified. Currently, major transactions include:
- transactions that provide for the acquisition or disposal, or the possibility of the acquisition or disposal, of property which value makes up 25 per cent or more of the asset value of a company as per its latest balance sheet; and
- transactions providing for the company's obligation to grant temporary use of its property or to grant a licence to use its IP objects whose value makes up 25 per cent or more the assets value of the company as per its latest balance sheet.
Major transactions are subject to approval by general meetings of shareholders or participants if the value exceeds 50 per cent of the assets value of the company as per its latest balance sheet. Such transactions should be approved by three-quarters of the votes of shareholders holding voting shares who attend the general meeting. Major transactions subject to approval by the board of directors are major transactions whose value is more than 25 per cent and up to 50 per cent of the assets value of the company as per its latest balance sheet. Such transactions should be approved unanimously by all members of the board of directors. The following are not subject to approval as major transactions:
- transactions entered into in the course of the usual business of a company;
- transactions on placement (sale) of ordinary shares or issuable securities convertible into ordinary shares;
- transactions mandatory for a company by law; and
- a number of other transactions.
Starting from 1 January 2017, the requirement for approval of interested-party transactions was also changed. According to the introduced amendments, interested-party transactions are transactions in which a CEO, a member of a collegial managing body (management board), a member of the board of directors (supervisory board), a controlling person or any person who is entitled to give binding instructions to the company, if such person (or such person's spouse, parents, children, foster parents or children, siblings or controlled persons) is:
- a party to, beneficiary of, an intermediary or a representative in, the transaction with the company;
- a controlling person in the company who is a party to, beneficiary of, an intermediary or a representative in, the transaction with the company; or
- the holder of a position in the management bodies of the company that is a party to, a beneficiary of, an intermediary or a representative in, the transaction with the company.
Persons indicated above should notify the company about the entities controlled by them, and entities to whom they can give binding instructions and where they hold managerial positions, as well as about potential interested-party transactions, within two months of the date when they became or should have been aware of the facts that qualify them as interested persons.
The law no longer requires mandatory preliminary approval of interested-party transactions. Instead, companies are obliged to notify boards of directors or management boards of interested-party transactions before entering into them. Where all members of the board of directors are interested in a transaction or there is no board of directors in a company, such notification should be made to the shareholders or participants of the company. CEOs, members of the board of directors or management board, and shareholders or participants holding at least 1 per cent of voting shares are entitled to request prior approval of an interested-party transaction. In a non-public joint-stock company, such consent shall be granted by a majority of votes of non-interested members of the board of directors; if such directors do not make the quorum set by the company's charter, the transaction shall be subject to approval by the general meeting of shareholders. In a public joint-stock company, such transaction shall be approved by the majority of non-interested directors who are not (and were not during one year preceding the decision):
- a CEO or a managing company of a company, a member of its management board or a member of managing bodies of the managing company;
- a person whose spouse, parents, children or siblings are members of managing bodies of the management company or a manager of the company; or
- a person controlling the company or its managing company who performs a CEO's functions or who is entitled to give mandatory instructions to the company.
In a limited liability company, the interested-party transaction shall be approved by a majority of votes of non-interested members of the board of directors or a majority of general meeting of shareholders.
In a joint-stock company, an interested-party transaction is subject to approval by the majority of votes of non-interested shareholders in the following cases:
- if the cost of the property that is a subject of a transaction or series of related transactions is 10 per cent or more of the balance sheet assets value of the company on the last reporting date, except for transactions described in the following two paragraphs;
- if a transaction is, or series of related transactions are, the sale of ordinary shares that number more than 2 per cent of ordinary shares previously placed by the company and ordinary shares into which previously placed issuance securities convertible into shares can be converted; and
- if a transaction or series of related transactions are a sale of preferred shares that amount to more than 2 per cent of shares previously placed by the company and shares into which earlier-placed issuance securities convertible into shares can be converted.
In a limited liability company, interested-party transactions are subject to approval by the majority of votes of non-interested shareholders if the transaction price or value of assets that are the subject matter of a transaction is 10 per cent or more of the balance sheet assets value of the company on the last reporting date.
The charter (articles of association) of a limited liability company or a non-public joint-stock company may establish a different (than set out in the law) procedure of approval of interested-party transactions or totally exclude a requirement for the approval of interested-party transactions.
Where an equity remuneration plan involves the issue of shares, such issue is subject to the requirements and procedures set out by the Federal Law on Securities Markets. These procedures include, inter alia, a general meeting of shareholders (or board of directors, if the charter of a company provides so) taking a decision on the placement of securities and approval of the decision on the issue of securities by the board of directors. The issue of securities is subject to registration with the market regulator (currently the CBR).
Government approvals are not required in respect of the remuneration of executives of companies where the state does not hold a stake. Certain restrictions are set for amounts of remuneration of executives of state-owned companies.
Specialised regulatory regimes
Generally, there are few special regulations for specific industries in terms of remuneration regulations (we do not discuss the rules and limitations applicable to executives of companies or enterprises with state ownership in this chapter).
Special regulations are set for banks by the instruction of the CBR on the evaluation of the labour remuneration system in a credit organisation (Instruction). The Instruction came into force on 1 January 2015.
The Instruction sets forth the criteria for the evaluation of labour remuneration systems in credit organisations by the CBR (its Department of Surveillance of key system credit organisations).
In particular, the Instruction provides that remuneration of employees of credit organisations should be set depending on the risk level to which a credit organisation may be (or has been) exposed (as a result of employees' actions), inter alia:
- for departments of a credit organisation that conducts transactions with risks, the calculation of the variable remuneration component is based on:
- quantity figures characterising these risks, and the planned profits for these transactions;
- the amount of its own funds that are sufficient to cover the risks taken; and
- the volume and price of loaned and other attracted funds sufficient to cover the risks taken;
- at least 40 per cent of the total target remuneration (before adjustment) of risk-takers should be variable. Risk-takers are the members of the executive body and other employees taking the risks; and
- internal policies of a credit organisation provide (and these policies are applied) in respect of the risk-takers:
- deferral and further adjustment of not less than 40 per cent of the variable component of a remuneration based on terms of receiving the financial results of a credit organisation's activity (the deferral must be not less than three years). Internal policies of a credit organisation must provide also a possibility to reduce or eliminate a variable part of a remuneration if the financial result of a credit organisation is negative in a general or a particular activity;
- a combination of monetary and non-monetary forms of labour payment that is sensitive to the financial results of a credit organisation and to risks taken by a credit organisation (in the case of the absence of a non-monetary form of remuneration, employment contracts with risk-takers must provide for adjustment of a deferred part of remuneration based on the price of the shares of a credit organisation); and
- the preceding paragraph is not applicable to a credit organisation established in the form of a limited liability company, or if a fair market price for shares of a credit organisation cannot be determined based on listed share prices.
Further, the Instruction requires that operations of compliance departments and risk management departments be organised in accordance with the Instruction, and in particular that fixed remuneration makes at least 50 per cent of the total remuneration of employees of compliance departments and risk management departments.
The Instruction establishes a board of directors (supervisory board) of a credit organisation as the corporate governance body responsible for the organisation, monitoring and control over the labour remuneration system.
The Instruction also sets forth the obligation of a credit organisation to disclose information on the labour remuneration system on a regular basis, but at least once per calendar year.
Special regulations are set for non-state pension funds, securities market participants, management companies and insurance organisations by Information Letter of the CBR No. IN-06-54/53 of 14 July 2016 on recommendations on the remuneration system organisation and disclosure of information of the labour remuneration system in the above-mentioned organisations (Information Letter).
The Information Letter recommends establishing a remuneration system in such organisations taking into account their risk management policies.
It recommends establishing fixed remuneration and variable remuneration for the sole executive body, members of the collective executive body and other employees taking risks. In accordance with the Information Letter, a significant part (40 to 60 per cent) of risk-taking employees' remuneration shall be variable. However, for employees undertaking activities on internal control, risk management, report preparation or valuation of assets or liabilities, establishing a significant part (40 to 60 per cent) of remuneration as fixed remuneration is recommended.
The Information Letter also recommends determining the list of risk-takers.
The Information Letter provides that a board of directors (supervisory board) of the organisation or its general meeting of shareholders (or participants) shall:
- create a special committee (remuneration committee). The main duties of this committee shall be preparation of the management body's decisions on remuneration system organisation;
- consider questions on the organisation, monitoring and control over the labour remuneration system;
- confirm (approve) and review the organisation's policy on remuneration on a regular basis, but at least once per calendar year;
- organise work on the assessment of the conformity of the remuneration system of the organisation's business model and its strategy; and
- confirm the amount of the organisation's wage funds. It is important that payment of variable remuneration does not lead to the loss of financial sustainability.
The Information Letter also sets forth the obligation of organisations to disclose information on their labour remuneration system on a regular basis, but at least once per calendar year.
The Information Letter is of a recommendatory nature and shall not be binding, because CBR information letters are not normative legal acts. However, following the provisions of the Information Letter is strongly recommended for all relevant organisations.
1 Irina Anyukhina is a partner and Elena Novikova and Olga Pimanova are of counsel at ALRUD Law Firm.
2 Because of the covid-19 pandemic, alternative rules were implemented for 2020. An individual may voluntarily become a tax resident in 2020 provided that he or she spent at least 90 days in Russia and filed an application to the Russian tax authorities.
3 According to the initiative of establishing of a progressive taxation scale from 2021 personal income tax rate may be increased: 13 per cent – on the amount of income up to 5 million roubles per year; and 15 per cent – on income over 5 million roubles per year. It is expected that the draft law will be submitted to the State Duma of the Russia in the autumn of 2020.