Matryoshka companies are now legal in Russia. What will this mean for businesses?

Large-scale changes to corporate legislation came into force in Russia on 1 August, lifting a ban on the creation of so-called matryoshka companies that had been in place for almost 30 years. Introduced in 1995, this rule prevented the formation of interconnected chains of single-member companies and was intended to combat opaque ownership structures, evasion of responsibility and tax abuse.

What was the situation before, and what has changed?

Previously, the law expressly prohibited a single-member business entity from acting as the sole founder of another legal entity with only one owner. Despite some state-owned corporations being exempt, most companies had to find workarounds, such as attracting nominal shareholders or artificially creating micro-shares in the authorised capital.

The new law completely removes this prohibition. Now, companies with a single participant have the right to be the sole founder of similar structures. The key condition is that the position of sole executive body (e.g. CEO) cannot be held in all related companies. This is an important safeguard against abuse.

Why is this necessary for business?

The business community first proposed the initiative to lift the outdated ban back in 2022, when external sanctions pressure required more flexible and adaptive ownership structures.

According to experts, this innovation opens up a number of opportunities:

– Flexible business structuring: It simplifies the creation of holding companies and the launch of investment and venture projects. It becomes easier to separate new areas of activity into separate legal entities.

Simplification of corporate governance: There is no longer a need to involve technical nominal participants, reducing administrative and financial costs.

Transparent tax planning: Small and medium-sized enterprises (SMEs) no longer have to consolidate all revenues from different areas of activity into one company. It is now possible to legally divide business processes between different legal entities, provided they have a single ultimate owner. The law specifically emphasises that such a division will not, in itself, be considered a tax avoidance scheme.

What needs to be taken into account?

The legal community has noted that lifting the ban also has negative aspects. Simplifying corporate structures could enable creditors and regulatory authorities to hold ultimate beneficiaries more easily accountable. In the event of insolvency of one of the entities in the chain, it may become easier to prove the guilt of the main beneficiary.

Overall, the lifting of the outdated ban is considered a timely and positive step towards adapting Russian corporate law to modern economic realities.

Old-new opportunities for business

Improvements to corporate legislation open up new opportunities for Russian companies. One of the most significant changes was the abolition of the long-standing ban on creating so-called ‘matryoshka’ structures for managing legal entities.

Previously, a business entity with a single participant could not be the sole founder of another company that also had only one owner. This legal mechanism was designed to ensure the transparency of ownership chains and prevent abuse.

In practice, however, businesses had long found ways to circumvent these restrictions by introducing nominal participants with minimal shares into the ownership structure. Such schemes allowed businesses to formally comply with legal requirements while retaining actual control over the ‘nesting doll companies’.

Outdated Restrictions in a New Reality

However, modern realities have shown the ineffectiveness of the existing restrictions. Today, tax authorities have sophisticated data control and analysis tools that enable them to detect any attempts at illegal process optimisation. Even publicly available information from the Unified State Register of Legal Entities is sufficient to build a complete picture of interactions between legal entities, their founders and their CEOs.

These changes are particularly relevant in the context of external restrictions. Many Russian companies and individuals need to protect their assets from the pressure of sanctions. The new legal reform allows for the creation of more flexible corporate structures, providing an additional level of confidentiality.

What is the outcome?

The lifting of the ban gives businesses practical advantages when it comes to legitimately structuring their activities.

– The ability to create specialised legal entities for specific business areas

• Risk sharing between different assets

– Simplification of corporate governance in holding structures

– Optimisation of tax and accounting

These changes will allow companies to organise themselves more effectively by creating separate legal entities to manage logistics, production and other specialised functions, keeping assets and liabilities separate.

The new rules represent a shift towards a more modern approach to corporate regulation, with the focus moving from formal restrictions to the actual control and transparency of companies’ activities. This is in line with international best practice and the needs of the domestic economy.