As of March 27, 2023, the Russian Federation requires all western businesses seeking to divest from the country to make a direct donation to the Russian state. This leaves western companies between a rock and a hard place. On the one hand, companies seeking to exit Russia are generally doing so because they don’t want their operations to fund Russia’s war effort, and/or because continuing to do business would otherwise face very heightened economic sanctions risks imposed by the west. However, paying any such divestment donation has its own sanctions risks, including potentially violating relevant U.S. economic sanctions laws in the process. Therefore, for businesses finding themselves in this precarious position it is important to appreciate relevant prohibitions under OFAC administered laws and regulations, as well as the agency’s published guidance on this specific issue of Russia’s so-called “exit tax.” This blog post provides an overview of applicable prohibitions and a breakdown of OFAC’s related Frequently Asked Question (“FAQ”) 1118 for U.S. businesses.

The Financial Times reports that prior to March 27, companies leaving Russia could choose between making a certain “voluntary contribution” to Russia’s state budget—set at 10% of the value of the sale—or acquiesce to having the payment from the sale deferred by several years. However, as of March 27, there is no longer such an option, and Russia’s Ministry of Finance has converted the voluntary contribution into an “obligation” for asset sales involving foreigners from countries that have imposed sanctions against Russia (e.g., the U.S.). Such a “contribution,” “donation,” or “exit tax” as OFAC calls it, to the Ministry of Finance invokes the prohibitions of OFAC’s Directive 4 Under Executive Order 14024 (a.k.a., the “Russia-related Sovereign Transactions Directive”). Even where the payments aren’t necessarily made to the Ministry of Finance itself, OFAC holds any such payments to the Government of the Russian Federation to still involve entities subject to Directive 4. See, OFAC FAQ 1118.

Directive 4 Under Executive Order 14024

In pertinent part, E.O. 14024 authorized OFAC to impose sanctions on any person determined to be a political subdivision, agency, or instrumentality of the Government of the Russian Federation. Accordingly, on February 28, 2022 the agency issued Directive 4, where it specifically determined the Russian Federation’s Central Bank, the National Wealth Fund, and the Ministry of Finance to be such political subdivisions, agencies, or instrumentalities (the “Directive 4 entities”), and identified them on OFAC’s Non-SDN Menu-Based Sanctions (“NS-MBS”) List. The Directive prohibits U.S. persons from engaging in any transaction involving the Directive 4 entities, including any transfer of assets to such entities, or any foreign exchange transaction for or on their behalf, unless authorized by OFAC. It also further prohibits any transaction that evades or avoids, or causes a violation of the foregoing prohibition, which essentially extends the prohibition on U.S. persons to non-U.S. persons that otherwise have a “U.S.-nexus” in their transactions involving such entities (check out our prior blog post’s “Example 3: U.S. Sanctions Risks for Foreign Entities,” here). OFAC has since published FAQ 1002, which also clarified that the scope of the Directive’s prohibitions includes both direct and indirect transactions. 

Although the Directive states that “[a]ll other activities with [such entities], or involving their property or interests in property are permitted, provided that such activities are not otherwise prohibited by law,” it is difficult to discern what such transactions could be when the prohibition’s scope already applies to any transaction involving the Directive 4 entities, even where they are indirectly involved. OFAC does maintain General Licenses (“GL”) 8F, 13D, 14, and 53, authorizing limited types of transactions involving such entities. For purposes of this post, keep in mind that GL 13D authorizes the payment of taxes, fees, or import duties, and purchase or receipt of permits, licenses, registrations, or certifications, to the extent otherwise prohibited under Directive 4, provided such transactions are ordinarily incident and necessary to the day-to-day operations in the Russian Federation of U.S. persons, or entities owned or controlled by a U.S. person. 

In consideration of the scope of Directive 4 and a survey of the foregoing related general licenses, the payment of an exit tax by U.S. businesses seeking to divest from Russia would be prohibited and not otherwise authorized by any of the available general licenses, including under GL 13D. If you’re thinking that since GL 13D authorizes the payment of taxes to the sanctioned entities, including the Ministry of Finance, that the exit tax would also be covered, OFAC has already dispelled this notion by underscoring that such payments are not “ordinarily incident and necessary to the day-to-day operations” of the U.S. business, as required by the authorization terms of the license itself. 

OFAC FAQ 1118

OFAC initially published FAQ 1118 on February 24, 2023, apparently based on reports that as of December 2022, U.S. businesses’ divestment efforts from Russia could potentially involve the levy of an exit tax by the Russian Federation. The initial publication noted that in consideration of such a possibility involving a Directive 4 entity, “U.S. persons whose divestment will involve an ‘exit tax’ may require a license from OFAC.” However, OFAC amended FAQ 1118 on March 30, 2023—a few days after Russia making the exit tax obligatory—to firmly state that payment of any such exit tax by U.S. persons for divestment from Russia indeed do require a specific license from the agency prior to payment (at least for the time being), and regardless of which Russian Federation entity they are being paid to (i.e. even if not being paid to Ministry of Finance). The amendment also further emphasized that the scope of authorizations in GL 13D would not cover the payment of an exit tax.

The amended FAQ 1118 provides valuable details on the specific licensing process, which is a rather unique move by OFAC. First, the agency delineates some of the information that should be included in any such specific license request (which I’ve rarely seen them do): 

• Information regarding the amount of the exit tax; 
• Amount of ongoing taxes that would otherwise be paid to the Government of the Russian Federation should divestment not occur; 
• The impact of a failure to pay the tax on the employees of the exiting company;
• The specific economic activity in Russia of the exiting company; and
• The impact on the Russian Federation of the divestment.

Second, OFAC notes that it will expedite its review of such requests (also a rare statement to be made by the agency). Anyone who has ever requested specific licensing from OFAC will attest to the very lengthy processing times of a specific license application. Submission of such a specific license request does not guarantee that OFAC will approve it, as FAQ 1118 states that they will be evaluated on a case-by-case basis. 

Finally, another piece of valuable detail OFAC has provided in the amended version of FAQ 1118 includes its acknowledgment of a Commission established by the Russian Federation to review divestment requests, which may include individuals from entities subject to Directive 4 or individuals identified on the Specially Designated Nationals and Blocked Persons (“SDN”) List, while noting that U.S. persons do not need to seek authorization from OFAC for their Russian buyers to submit an application to the Commission regarding a divestment transaction. However, it is a bit strange that OFAC would make such a statement in an FAQ and not in a general license authorization, since under Directive 4 or applicable prohibitions related to any SDNs, even an indirect dealing with such sanctioned persons would be prohibited. 

The author of this blog post is Kian Meshkat, an attorney specializing in U.S. economic sanctions and export controls matters. If you have any questions please contact him at [email protected].