From Inactivity to Resolution: Legal Strategies for Dormant Subsidiaries

Since March 2022, many subsidiaries of foreign companies have been in a state of dormancy: their operations are effectively inactive, not officially terminated, and the companies remain without formal liquidation or cessation of activities. Previously, this strategy was considered relatively safe. However, in recent years, the risks for such companies have increased significantly.

Key Risks of Dormant Companies

1. Tax risks

We see a growing number of cases where payables (debts) owed by subsidiaries to other companies within the group, if left uncollected for an extended period, have been reclassified by tax authorities as donations. This reclassification can result in tax liabilities of up to 25% of the outstanding amounts.

2. Corporate risks

In recent years, there has been a noticeable increase in cases where dormant companies, due to their inactive status, have become targets of hostile takeovers or unauthorized changes in management or beneficial ownership. Such situations often involve a series of illegal corporate decisions, fraudulent transactions, and unauthorized banking operations, which can materially complicate the restoration of lawful corporate control and result in significant financial and administrative costs.

3. Civil liability and bankruptcy risks

For dormant companies with debts to independent creditors, creditors can file claims against the company and initiate bankruptcy proceedings. During bankruptcy, management and shareholders may be held liable for all unsettled debts to independent creditors. It is important to note that a Russian bankruptcy judgment may beenforceable even in some “unfriendly” jurisdictions (e.g., the United States, the United Kingdom, EU states).

Solutions to Mitigate Dormancy Risks

Despite these challenges, effective legal solutions exist, depending on the company’s ability to cover its debts:

• Option 1: Voluntary Liquidation – If the company’s assets are sufficient to repay its debts, a structured liquidation allows debts to be settled and any remaining assets to be distributed among shareholders (subject to the Russian countersanctions if applicable).

• Option 2: Bankruptcy – If assets are insufficient, bankruptcy provides a formal write-off of debts, including intragroup obligations.

This option can be particularly relevant for companies that only have intragroup debts to other group entities, as unlike standard bankruptcy, it does not carry the usual risks of subsidiary liability or clawback actions. Bankruptcy can therefore be a practical solution for dormant companies that cannot be liquidated due to the presence of intragroup obligations.

Benefits of Taking Action

• Debt Resolution: All unsettled debts are addressed, either through repayment or formal write-off.
• Clean Break: The company is legally dissolved, eliminating long-term legal and financial risks.
• Time-Bound Process: Unlike indefinite dormancy, these procedures have a defined timeline.
• Risk Mitigation: Early preparation and professional oversight reduce potential exposure.
• Legal Certainty: Professional legal action provides a clear and structured resolution of the legal uncertainty surrounding dormant subsidiaries, restoring control and formalizing their status.

Dormancy carries serious consequences, but proactive legal action can definitively resolve the legal uncertainty of dormant subsidiaries, mitigate risks, and ensure a controlled, compliant exit strategy.