Clarification on permitted control over Russian subsidiaries

The precise distinction between generally permitted control over a foreign subsidiary and a prohibited support service and / or the prohibited circumvention of sanctions was clearly not feasible for a long time.

In the meantime, however, both the Federal Ministry for Economic Affairs and Climate Action (“BMWK”) and the EU Commission have stated the following in their answers to frequently asked questions (“FAQ”):

Federal Ministry for Economic Affairs and Climate Action

49. Can commercial transactions of a Russian subsidiary (or a subsidiary in a third country) with goods specified in Annex XXIII of Regulation (EU) 833/2014 with Russian persons in Russia or for use in Russia be recognized as a violation of Article 3k para. 1 by a German parent company?

Generally, it is possible that certain transactions of a foreign subsidiary owned or controlled by the German parent company may be recognized as a violation of the EU sanctions law by a German parent company. This may be the case, in particular, if the parent company exerts a controlling influence on specific EU-sanction-relevant transactions of the subsidiary, if the subsidiary was established in order to circumvent the sanctions or if the subsidiary takes over supplies that were carried out by the German parent company or subsidiaries located in the EU prior to the imposition of the export bans (reference to circumvention transactions).

However, the mere fact that goods within the meaning of Annex XXIII are produced entirely abroad (including Russia itself) by a foreign subsidiary and distributed from there to (in) Russia is not sufficient for recognition of a violation. This also applies if the German parent company provides certain basic services to the foreign subsidiary that have no relation to the specific business decisions that may be relevant to EU sanctions (e.g., IT and accounting services) and do not in and of themselves constitute technical assistance within the meaning of Article 3k para. 2 (a)."

Commission of the EU - General Questions

14. Does Council Regulation 883/2014 apply to Russian subsidiaries of EU parent companies?

“EU sanctions do not apply extra-territorially. In accordance with Article 13, the Regulation applies:

i. within the territory of the Union

ii. on board any aircraft or any vessel under the jurisdiction of a Member State

iii. to any person inside or outside the territory of the Union who is a national of a Member State

iv. to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State

v. to any legal person, entity or body in respect of any business done in whole or in part within the Union. 

Therefore, EU sanctions must be complied with by all EU persons – both natural and legal – and therefore by all EU incorporated companies, including subsidiaries of Russian companies in the EU. Russian branches of EU companies remain EU persons, and thus bound by the Regulation. By contrast, Russian subsidiaries of EU parent companies are incorporated under Russian law, not under the law of a Member State, hence they are not bound by the measures. However, it is prohibited for EU parent companies to use their Russian subsidiaries to circumvent the obligations that apply to the EU parent, for instance by delegating to them decisions which run counter the sanctions, or by approving such decisions by the Russian subsidiary.”

Export-related restrictions

35. To what extent are the sanctions measures binding on (i) subsidiaries of EU companies outside of the EU and (ii) EU nationals residing or working outside of the EU? How should Russian entities, which are owned or controlled by an EU company, act in light of the Sanctions Regulation? Can a Russia-based subsidiary of an EU company sell products covered by the Sanctions Regulation to other Russian entities if these products are in stock on the premises of the Russian subsidiary? Would this be seen as a circumvention? 

“The scope of application of the Sanctions Regulation is set out in Article 13; EU sanctions do not apply extraterritorially. The Sanctions Regulation applies, inter alia, to any person inside or outside the territory of the Union who is a national of a Member State, and to any legal person, entity or body, inside or outside the territory of the Union, which is incorporated or constituted under the law of a Member State. Subsidiaries of EU companies are incorporated under the laws of the host country, thus bound by the host country laws. Nevertheless, EU nationals working for that subsidiary are personally bound by EU sanctions and can be held personally liable for participating in transactions which breach EU sanctions. For example, even if the subsidiary itself entered the transaction, EU nationals facilitating the transaction could still be covered by the anti-circumvention clause if they "participate in activities" the object or effect of which was to circumvent the main prohibition. In addition, decisions taken by the foreign subsidiary that need to be cleared/green-lighted by the EU parent company would be relevant, in that the latter is bound in respect of its own actions.”