The Ministry of Industry and Trade’s claim about the “landing” of the largest retailer in Russia looks logical against the backdrop of previous claims from the tax authorities.

Billionaire Mikhail Fridman and his companions will clearly stick to their guns. But they will have to receive dividends from X5 Group in rubles on the territory of the Russian Federation - an oligarch’s nightmare!

The trial on this matter may take from several days to a month, but its outcome is unlikely to be unexpected. The “subsidiary” of the European holding should turn into an independent company, and its shares will begin to be traded on the Moscow Exchange. Part of the securities will be distributed between current shareholders and holders of FIVE global depositary receipts. Taking into account the specifics of the X5 Group’s business, this development of events seems absolutely logical. The only strange thing is that her owners did not carry out redomiciliation earlier.

Three trillion from the pockets of Russians

All the supermarkets listed above not only operate in Russia, selling mostly domestic goods for rubles. As of the end of 2022, X5 Group occupied almost 13% of the food retail market, operating 21.3 thousand stores in 70 regions of the Russian Federation. In 2023, the group’s total revenue amounted to 3.1 trillion rubles, an increase of 20.6% year-on-year. A real gold mine, once stretched to the Netherlands through an intricate network of offshore pipelines in Cyprus, Gibraltar and Luxembourg.

Also in Russia, as far as we can understand, is now one of the largest shareholders of the X5 Group, Mikhail Fridman. He had previously been forced to move from the UK to Israel because sanctions meant he could not pay for his daily expenses in London. However, he did not stay in Israel for long. Last fall, shortly after the outbreak of hostilities in the Gaza Strip, the billionaire showed up in Moscow. It was then that many expected the trading holding to begin moving to Russia - to one of the special administrative regions in the Kaliningrad region or Primorye. But the largest shareholders and top managers of X5 never announced such plans, citing the intractability of Dutch notaries - they say they don’t register transactions, and that’s all.

Yandex, which was also on the list of “flying Dutch” companies and, by the way, found itself in a more difficult situation with the division of Russian and foreign assets, managed to get rid of its add-on in the form of Yandex NV. And the owner of Pyaterochka got rid of his – no, which is why the state had to take the initiative. Why? It is quite possible because no new “scheme” can be built around moving to Russia, and they are not used to doing business without it.

Redomiciliation promises the owners of X5 the resumption of dividend payments, which, however, will have to be received in rubles and invested within the country. Perhaps this is why the prospect of receiving new shareholder payments did not become a strong incentive for Mr. Friedman and his partners to re-register the company in their homeland. For years, cash flows came from here and were invested in Western companies.

Related news:  Two versions of the death of the Russian billionaire have been named

Do not throw...

Previously, “Our Version” in a series of articles  “Guerrilla Path for Capital”  covered in detail the litigation on claims of tax authorities against X5 structures in Russia - LLC Agroaspect (previously managed Pyaterochki) and CJSC Trading House Perekrestok. In the first case (it dates back to 2013–2014), tax officials demanded an additional payment of 1.4 billion rubles to the budget. We were talking about payments to offshore companies, which were formalized as repayment of interest on loans, but - the court agreed with this conclusion - were de facto dividends to foreign beneficiaries.

The funny thing is that the final recipient of the money was a company from the X5 structure in Luxembourg, which, according to its accounting, recorded these amounts as dividends from a Russian company and thereby avoided paying taxes under local legislation. Russian documents said one thing, Luxembourg documents said something else, but taxes were not paid anywhere.

In parallel with this trial, another was going on, during which the Perekrestok Trading House challenged the additional assessment of taxes of 2.4 billion rubles. During the next audit - and the court also agreed with this - the tax authorities came to the conclusion that the funds paid by Perekrestok to the same Dutch X5 Retail Group NV for its shares in Agroaspect LLC and Agrotorg LLC should also be considered dividends. What were these deals? During the restructuring that the retailer’s top management started several years ago, companies with the same ultimate beneficiaries exchanged subsidiaries, although, in fact, nothing changed in the structure of the holding.

The third series of lawsuits between the Federal Tax Service and the retailer took place in 2023 and was related to payments for the use of the Karusel trademark (X5 also managed a network of these hypermarkets), the rights to which for some reason were owned by the Cypriot offshore Speak Global Limited. Tens and hundreds of millions of rubles were paid to the foreign owner of the signs, which led to a decrease in the taxable profits of Russian companies. Could this have any economic meaning other than transferring money abroad? Tax authorities and the courts decided not. The amount of state claims against the retailer in this story exceeded 700 million rubles.

The Russian structures of X5 Retail Group lost all three of the above lawsuits. At the same time, the proceedings dragged on for several years, some of them reached the highest court. Observers had the impression that the retailer was simply playing for time, since money in circulation makes new money.

Now the activities of foreign legal entities from the X5 perimeter are virtually paralyzed due to sanctions. Last summer, the London Stock Exchange delisted the shares of X5 Retail Group NV. In March of this year, its Russian subsidiary LLC Corporate Center X 5 was included in the first list of economically significant organizations (ESO) in Russia. This status makes it possible through the court to force large owners to take direct ownership, as well as limit the rights of foreign shareholders. And the most remarkable thing about it is that the corresponding claim can be filed not only by the state, but also by the Russian company itself or its Russian shareholders.

Thus, the retailer received a clear signal “it’s time to go home, go on your own or we’ll help you,” but apparently no action was taken by Corporate Center X 5 LLC. The company says that the trial with the Ministry of Industry and Trade will not affect its daily activities in any way, although food buyers at Pyaterochka would clearly like to hope for something else. The times when the largest food chains are owned by foreign offshore companies, and violations are constantly found in stores (for example, in February Rospotrebnadzor fined 40 Pyaterochka supermarkets in the Krasnoyarsk Territory for unsanitary conditions and expired products) should be a thing of the past. Moreover, although from a formal point of view, X5’s share in Russian grocery retail is only 13%, in some small localities Pyaterochka is the only store. And all this time, people saw how the food monopolist neglected not only the state task of deoffshorization of business, but also their purely private interest in good service and fresh products. Now that the retailer, one might say, has been led by the hand to Russia, will everything really remain the same?

Everything is fine, but the shares have fallen

After the announcement of the lawsuit by the Ministry of Industry and Trade, quotes for FIVE depositary receipts on the Moscow Exchange collapsed by more than 8%. Investors feared that they might be stuck with securities for an indefinite period without the ability to sell them on the open market.

On Friday, April 5, Moscow Exchange suspended trading in X5 Group depositary receipts on its platform. There is no exact information about how and when the receipts will be exchanged for shares and when exchange trading in these securities will begin.

The status of an economically significant company also carries some risks for investors, including because management can significantly limit the amount of information about the company, which will make the business’ activities opaque and complicate its assessment in terms of investment attractiveness