13.03.09

Financial And Tax Reporting For Corporate Mergers In Russia
Galina Karagodina, Internal Auditor, Methodologist,
Alinga Consulting Group

Russia's Civil Code defines a merger as a form of corporate reorganization whereby the rights and obligations of each participant are transferred to a new company. This process takes place in accordance with an Act of Transfer and Acceptance. This document should contain statutes on the legal continuity of all obligations previously belonging to the reorganized companies with respect to all creditors and debtors, including those obligations disputed by the respective parties. As a result of the merger, the operations of the reorganized companies are continued by a newly formed company, and the reorganized companies themselves simply cease to exist.

To complete the process, a closing financial report must be created by the reorganized companies, and an initial financial report prepared by the company that will serve as the legal successor to the reorganized companies. The specific procedures for preparing these financial reports are set forth in the “Procedural Guidelines on Financial Reporting During a Company’s Reorganization,” which were approved by Russia's Ministry of Finance on May 20, 2003 N 44n. These are often referred to as simply "Procedural Guidelines."

The closing financial report must show the closure of profit and loss accounts on the day preceding the new (merged) company’s entry into the Unified State Register of Legal Entities (often referred to as simply "the Register." The composition of the closing report is similar to that of the organization's annual financial reports, which are presented in accordance with the Accounting Statute PBU 4/99 (“Accounting of Organizations” - approved by Order N43n of the Russian Ministry of Finance on July 6, 1999). The closing report must include:

• balance sheet (Form #1);
• profit and loss statement (Form #2);
• cash flow statement (Form #3);
• statement of changes in equity (Form #4);
• appendix to the balance sheet (Form #5).

The closing financial report must also reflect all expenses concerning the current operations of the reorganized company for the period beginning with the issue of the Act of Transfer and Acceptance to the date of the new company’s entry in the Register. These expenses can include:

• sale of material assets,
• settlement of accounts with creditors,
• accrual of depreciation on property transferred,
• salary payments to employees,
• payment of taxes and fees to various government agencies and funds,
• obligatory payments to state extra-budgetary funds,
• write-offs of expenses for future periods and other similar expenses.

In accordance with Item 47 of the Procedural Guidelines, the explanatory notes should disclose the following information on the reorganization:

• reasons for conducting the reorganization;
• documents showing transfer of property and obligations to the legal successor;
• documents confirming the closure of current and other bank accounts;
• information on the company’s deregistration by the tax authorities, Russia’s Pension Fund, divisions of Russia’s Social Insurance Fund, Russia’s State Statistics Committee and other agencies.

On the date of its entry to the Register, the company created by the merger must prepare an initial financial report on the basis of the information in the Act of Transfer and Acceptance and which also gives an exact accounting for the financials indicated in the closing financial reports of the reorganized companies. The totaling of index numbers from the profit and loss statements is not conducted in the initial financial report.

The initial financial report must also include the following: 

• financial investments from the individual reorganized companies to the registered capital of other companies involved in the merger;
• reciprocal receivables and payables between the reorganized companies, including dividend settlements;
• other indicators characterizing reciprocal accounts.

The registered capital of the new company created through the merger is also reflected in the initial financial report (Item 19, Procedural Guidelines). If the merger agreement stipulates that the registered capital of the new company differs from the total registered capital of the reorganized companies, the initial financial report must reflect the size of the registered capital recorded in the merger agreement. If the merger agreement stipulates a reduction in registered capital, then the difference must be reconciled in the section “Capital and Reserves” and indexed as “Undistributed Earnings (Pending Losses).”

Lastly, the registered capital and net assets in the initial balance sheet must be equalized. Any differences should be accounted for as “Additional Capital” or “Undistributed Earnings (Pending Losses)” in the “Additional Capital” section.

The choice of the date for reorganization is critical, as it will determine the volume of the financial reports. We recommend that companies be registered on the date following a reporting day. In this case, each of the reorganized companies prepares its closing financial report at the end of the reporting period in the same volume as with annual reports.

The procedures for submitting tax reporting and payments for the reorganized companies are specified in the first part of Russia’s Tax Code (Item 3, Article 55), which specifies the following tax periods for reorganized companies:

• the last tax period is the period from the beginning of the calendar year until the date the company is reorganized.
• if the company was either established and liquidated in the same calendar year or established in December of the previous calendar and liquidated anytime during the calendar year following, the tax period is the period from the date of establishment until the date of liquidation.

Exceptions to this are for those taxes with quarterly tax periods (e.g., VAT). Changes in the tax periods for such taxes in the event of a company’s reorganization must be approved individually by the tax authorities (Item 4, Article 55, Tax Code).

Payment of taxes can be made either by the liquidated company or the newly formed company, as the company formed through the merger is the legal successor of the reorganized companies with respect to the fulfillment of tax obligations (Item 1 and Item 4, Article 50, Tax Code). The legal successor is obligated to pay all taxes owed by the reorganized companies, all late payment interest due on these obligations and any fines imposed on the reorganized companies prior to the conclusion of the reorganization (merger). It is important to remember, however, that the reorganization of companies does not change the deadlines for payment of taxes; the legal successor must still pay them by the established deadline (Item 3, Article 50, Tax Code).

Accounting regulations on corporate mergers in Russia are specific and fairly rigid. Failure to comply with them can attract unwanted attention from the tax authorities. In this regard, contacting an experienced professional to help guide you through the processes can save expenses and worry.

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