Taxation Upon Withdrawal of an LLC Member: New Rules and Court Practice

Rate this post

In January 2025, the Constitutional Court of the Russian Federation issued a landmark ruling (No. 2-P) that fundamentally changed the taxation approach for transactions involving the withdrawal of a member from a limited liability company (LLC). This decision affects thousands of businesses, particularly those using the simplified taxation system (STS). Below, we examine the key aspects of the new rules, their implications for businesses, and controversial interpretation issues.

1. The Core Issue: Why Did the Dispute Arise?

When a member withdraws from an LLC, two interrelated events occur:

  • The member receives the actual value of their share (in cash or property).
  • The share reverts to the company, which may redistribute or cancel it.

Before 2025, tax authorities often treated this transaction as income for the LLC, especially if property was transferred to the departing member. For example:

  • If a member’s share was valued at 10,000 rubles, but they received real estate worth 55 million rubles, tax authorities assessed additional taxes on the 54.99 million ruble difference.
  • This approach was based on a Ministry of Finance letter (No. 03-03-06/1/84931), which classified the difference between the transferred property value and the nominal share value as taxable income.

The Constitutional Court ruled this approach unconstitutional, stating:

“The value of transferred property cannot be considered income—it represents a loss, not a gain. Taxes should only apply to real economic benefits received by the LLC.”

2. New Rules: How Is Tax Calculated Now?

The Constitutional Court established a temporary taxation procedure pending amendments to the Tax Code:

  1. Taxable income arises only if the LLC gains an economic benefit.
    • Example: If the market value of the returned share exceeds the value of the property given to the departing member.
  2. Tax base = Market value of the share at the time of transfer to the LLC.
    • Calculated as a proportion of net assets corresponding to the share.
    • May be determined via valuation (e.g., accounting records or an independent appraisal).
  3. No tax is due if there is no economic benefit (e.g., if the share lost value due to asset depletion).

Example Calculation:

  • A 99% member receives property worth 55 million rubles.
  • The LLC’s net assets after withdrawal = 60 million rubles.
  • Market value of the share: 99% of 60M = 59.4M rubles.
  • Taxable income: 59.4M (share) – 55M (property) = 4.4M rubles.

3. Key Implications for Businesses

For LLCs Using STS (Simplified System):

  • Penalties for unpaid taxes before January 21, 2025, are canceled.
  • Taxable income is now determined based on actual economic benefit, not automatically.

For LLCs Using OSNO (General System):

  • Similar rules apply, but separate profit tax calculations are required.

Risks & Unresolved Issues:

  • Valuation disputes: No uniform valuation method exists—conflicts with tax authorities are possible.
  • Share redistribution: If the LLC later redistributes the share, will it trigger new taxable income? The law remains unclear.

4. Court Practice & Expert Opinions

  • The Constitutional Court emphasized that a share itself does not generate income—it merely grants rights that may yield future benefits.
  • The Ministry of Finance previously insisted on taxing the difference, but its stance now requires revision.
  • Experts are divided:
    • Some praise the ruling for eliminating double taxation.
    • Others criticize vague wording, which may lead to new disputes.

5. What should companies do?

1. Review past transactions (if the tax is disputed in court, you can refer to the decision of the Constitutional Court).

2. Evaluate the share when a participant exits through accounting data or an independent assessment.

3. Follow the amendments to the Tax Code of the Russian Federation — the Ministry of Finance should clarify the rules of calculation.

The decision of the Constitutional Court of the Russian Federation is a step towards more economically sound taxation, but there are still questions.

It is important for companies to:

• Document share cost calculations.

• Consult with lawyers in case of disputes.

• Prepare for changes — new tax rules may appear as early as 2025-2026.

Share: