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Border Lands: Privatization by Companies with Foreign Investment
08.11.2010
Oksana Derevyanko, Associate at DLA Piper A buyout of state-owned and city-owned land encumbered by immovable objects is an important business decision. Yet in a number of instances the way from decision-making by an investor about land acquisition to actual achievement of the desired result proves thorny and time-consuming as investors have to grapple with unfounded denials by public officials.
The possibility of land privatization can be limited or excluded on account of certain encumbrances imposed on a given plot of land, a special status of the land or other bans and limitations endorsed by the legislator. Thus in practice investors are often confronted with snags related to the buyout of plots located on border territories (the notion of border territories is defined by the Federal Law "On the state border"). The possibility of this land privatization is limited by the legislator, namely: they cannot be acquired by foreign legal entities, foreign citizens and persons without citizenship (Article 15.3 of the Land Code of the Russian Federation). The answer to the question whether or not the land plot located close to the state border is located on the border territory is not obvious. The law does not permit to transfer the land plots on border territories, the list of which is established by the President of the Russian Federation, into the ownership of foreign legal entities, foreign citizens and persons without citizenship (Article 15.3 of the Land Code of the Russian Federation). Since this list has not been approved so far, the abovementioned persons are prohibited to privatize land plots located on any border territories as they are defined in the law (Article 3.5 of Federal Law No. 137-FZ of 25 October 2001, entitled "On the enactment of the Land Code of the Russian Federation"). The problem is that the effective legislation does not contain the definition of the notion "border territories" and discloses this notion by referring to facilities and territories the uniting feature of which is the location in the vicinity of the state border. The result of this lawmaker's approach in practice is that it often appears problematic to make a conclusion whether a specific land plot is located on border territories or not. Border lands: banning frontiers Despite the clear wording of the above-stated norm (par. 3 of Article 15, RF Land Code) regarding a range of persons and entities barred against privatization of border lands, government and city authorities sometimes wrongly construe it, spreading the specified ban to Russian legal entities with foreign participation. This misinterpretation normally takes place whenever a public subject is not willing to allocate a plot of land to the investor. Meanwhile barring Russian corporations with foreign participation against privatization of land on border territories is unlawful. The legislator discriminates between the concept of “foreign legal entity” and “Russian for-profit organization with foreign investments”. The use of the given notions in legislative norms is quite consistent. Thus, in keeping with a legislative enactment, a corporate entity is considered Russian if it was incorporated in the Russian Federation in line with Russian law and a corporate entity is deemed foreign if it was founded in a foreign country pursuant to the law of this foreign state. Russian for-profit corporations with foreign investment are Russian legal entities with foreign investors adding their charter capital. It’s important to note that the presence of foreign investment in the authorized capital of a certain legal entity (regardless of a foreign share) does not change the status of such a legal entity into a foreign one. In a number of cases the rights of foreign legal entities and Russian for-profit organizations with foreign investment, including the right of land ownership, are restricted by the legislator. Introducing some or other prohibition, though, the legislator clearly defines a range of persons for whom it is valid. Thus formulating a ban on the privatization of agricultural lands, the legislator clearly points to the fact that the given ban is addressed to Russian for-profit corporations with foreign investment. Therefore the legislator avoids any substitution of the “Russian for-profit organization with foreign investments” notion for “foreign legal entity” and does not allow any restrictions of the rights of the latter to the privatization of border lands. Federal Court of Arbitration is given the floor In June 2009 one of the Russian companies with foreign investment submitted a request to the administration of a municipal district of the Leningrad region regarding the buyout of land located on border territories. The municipal authorities based their refusal on the fact that a company 100% owned by a foreign investor cannot be entitled to a plot of land on border territories by virtue of the ban imposed by current law. In the opinion of the company’s lawyers, the administration’s thumbs-down is unlawful, since the current legislation bans privatization of land on border territories only for overseas legal entities while Russian companies with foreign investment are not prohibited from the acquisition of such land. The wrongful acts of public officials towards the company brought the parties to a court of arbitration which had to resolve the dispute about the very possibility of a Russian closed joint-stock company with foreign investment to privatize a plot of land on border territories. The hearing of this case was not limited to first and second judicial instances. Thus the company’s writ of appeal was considered by the Federal North-Western District Court of Arbitration in September of this year. In its final verdict the court declared the JSC incorporated in Russia in line with the Russian law as a Russian legal entity, regardless of foreign participation in the authorized capital, thus confirming the right of a Russian company with foreign investment to the privatization of lands on border territories. Notable in this regard was the involvement of the Public Prosecutor’s Office in the Leningrad region which sided with the administration of the municipal district. This time the Prosecutor’s Office stood up for the interests of a public subject, whereas the law allows the Prosecutor to get involved in this type of legal proceedings with the sole purpose of defending the rights and lawful interests of participants to entrepreneurial and other economic activities. The given case actually creates a precedent, since for the first time in Russian history it was admitted at the level of the court of cassation that a legal entity with foreign investment incorporated under the Russian jurisdiction cannot be barred against the ownership or acquisition of land on border territories. The Russian legal system is known to disown unwritten or case law. At the same time the importance of the said legal proceedings for the investors owning border land is obvious. It appears that the said verdict by the Federal North-Western District Court of Arbitration should add confidence and optimism to the Russian companies with foreign investment contemplating the acquisition of leased lands on border territories. The Rules of the game are to be transparent The transparency of legal regulation is an indispensable condition for the development of contemporary market relations. Any prejudice against the participants of economic activity is possible only on the condition of an absolutely clear and competent formulation of such bans (restrictions) in the current legislation and their substantiation. The extended interpretation of legal regulations, impairing the rights of subjects of entrepreneurial and other economic activity is inadmissible and incompatible with the idea of creating a favorable investment climate. |
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