Agricultural Producers' Co-operatives (Kolkhozes) as the Object of Investments

A) General provisions

The organizational and legal form of kolkhoz is producer’s co-operative (agricultural type). Distinctive features of a producer’s co-operative are:

- mandatory personal labor participation of the members in the operation of the co-operative;
- minimal number of the members of the co-operative is 3 persons;
- secondary liability of the members of the co-operative for obligations of the co-operative;
- decisions on many issues are passed by the General assembly of the members of the kolkhoz.

In connection with the peculiarities of the legal status agricultural producer’s co-operatives (kolkhozes) may not be used for attraction of investments and need to be re-organized.

According to the legislation re-organization of a kolkhoz (merger, accession, division, severance, transformation) may be carried out:

1) pursuant to the decision of the General assembly of its members. Meanwhile transformation of a kolkhoz into a commercial company or a unitary enterprise on the occasions when less than 3 members in the kolkhoz are left, may be carried out pursuant to a unanimous decision of the General assembly;

2) re-organization of the unprofitable kolkhozes – pursuant to the decision of the authorized government bodies under the procedure stipulated by the legislation (please see below for details).

Concerning the choice of the form of re-organization, in our view, a transformation into another organizational and legal form of a juridical person, for example, a commercial company, would be an optimum alternative.

B) Legal regime of kolkhoz assets

Assets of a kolkhoz are its property. Divisible (share) and indivisible funds are distinguished in the property of a kolkhoz. An indivisible fund consists of permanent assets and part of floating assets. Indivisible fund is not subject for distribution between the members of a kolkhoz and may be used only according to its destination pursuant to the decision of the General assembly of the (authorized) members of the kolkhoz.

Assets from the divisible fund of a kolkhoz are distributed among the members of the kolkhoz and form a share of a member of the kolkhoz. Cost of the share is paid in case of withdrawal (expulsion) of the member of a kolkhoz. In case of retirement the member keeps his share in the share fund for the term of life, and interest is charged on this share, or, at the kolkhoz member’s discretion, a sum of money equal to the cost of his share in the share fund is paid.

In case of transformation of a kolkhoz all of its members can become members of the juridical person – legal successor of the kolkhoz, if they do not file applications for withdrawal from kolkhoz and repayment of their share.

In case of transformation of a kolkhoz a possibility of redemption of the share of the member of kolkhoz by third persons should be considered. Model charter of a kolkhoz does not provided for such a possibility, however, Article 111 of the Civil Code stipulates that member of the co-operative may hand over his share or part thereof to another member of the co-operative, if otherwise not provided by the legislation or charter of the co-operative. Transfer of the share (part thereof) to a citizen who is not member of the kolkhoz may be carried out only subject to approval by the co-operative. In this case other members of the co-operative have a preferential right to purchase such share (part thereof). Thus, if otherwise not provided by the charter of the kolkhoz, third persons may purchase shares of the members of kolkhoz, and the members of kolkhoz that sold their shares will not become members of the juridical person – legal successor of the kolkhoz.

C) Peculiarities of re-organization of the unprofitable kolkhozes

Law of the Republic of Belarus “On Re-organization of the Unprofitable Agricultural Organizations” dated June 9th, 2003 stipulates a special procedure and conditions of re-organization of the unprofitable kolkhozes, specifically: an unprofitable kolkhoz may be re-organized by the decision of the authorized government bodies (Ministry of Agriculture and Food, local Soviets of deputies, local executive and administrative bodies according to their competence).

Decisions on re-organization of a kolkhoz, as well as realization and cost of the property may be made by the authorized government body only subject to approval by the General assembly of the members of kolkhoz.

An unprofitable kolkhoz is an organization whose financial condition and results of business activity indicate that during the last three years monetary receipts from realization of goods (work, services) did not cover its expenses, did not create profit. The grounds for making a decision on re-organization of an unprofitable kolkhoz by the authorized government bodies are results of business activity reflected in the accounting of the kolkhoz during the last three years before these bodies make a decision on re-organization.

Rights and duties, as well as property of the re-organized unprofitable kolkhoz left after satisfaction of the creditors’ claims under procedure stipulated by the legislation of the Republic of Belarus pass to the juridical person newly created in the course of transformation of the reorganized unprofitable kolkhoz.

D) Purchase of the kolkhozes as property complexes.

Effective legislation of the Republic of Belarus does not provide for possibility of purchase of the producer’s co-operative, including agricultural ones (kolkhozes).

At present a draft of the Edict of the President of the Republic of Belarus “On the Procedure and Terms of Sale of Property Complexes of Unprofitable Agricultural Enterprises to the Juridical Persons” is being discussed. The Edict should create a supplementary mechanism of attraction of investments in the agriculture.

The draft of the Edict will provide for a possibility of sale of the property complexes of the agricultural enterprises, including kolkhozes, at the price equal to 20 % of the cost of net wealth subject to the following conditions:

- preservation of the agricultural profile;
- guarantees of the labor and social rights of the employees and local inhabitants, including disabled ones;
- fulfillment of the obligations before the creditors.

2. On the right to the land.

Pursuant to Article 38 of the Land Code of the Republic of Belarus lands of agricultural destination may not be transferred into private property.

Land plots are granted to the agricultural enterprises and organizations for permanent use and running of farm-market agriculture. These enterprises and organizations may additionally lease land plots (Article 99 of the Land Code of the Republic of Belarus).

In case of reorganization of a kolkhoz rights to the land plots of the kolkhoz do not pass to the legal successor automatically. A juridical person – legal successor of a kolkhoz – is granted a new state act on the right of permanent use of land, with observance of the procedures stipulated by the legislation and pursuant to the decision of a local executive body.

3. Tax and other privileges granted to the kolkhozes and other agricultural organizations.

Legislation of the Republic of Belarus stipulates for special tax and other privileges for the kolkhozes and other organizations that manufacture agricultural products:

- opportunity to pay single tax at the rate of 2 % of the gross receipt that replaces payment of all taxes, duties, and other mandatory payments to the budget and off-budget funds, except for the dividend tax, excise taxes, and some others;

- decrease of the rates of several taxes or exemption from taxes (for comparison – agricultural organizations pay VAT from realization of the agricultural products at the rate of 10 %, rate of the tax for other organizations is 18 %);

- exemption from the taxes, including the income tax, in relation to the gratuitously received material, technical, and financial resources subject to direction of these resources to development of the agricultural production;

- provision of deferment until January 9th, 2009 in relation to the indebtedness in payment of taxes and other mandatory payments, indebtedness in payment of economic sanctions imposed by taxation bodies and fines calculated for violation of the legislation on taxes and entrepreneurship, indebtedness for consumed gas, electricity, and thermal energy accrued until January 1st, 2004;

- opportunity of amortization of the debts in payment of the imposed economic sanctions and calculated fines, subject to fulfillment of certain conditions.

If a juridical person, regardless of its organizational and legal form, purchases rights and obligations of the unprofitable agricultural organizations by means of their re-organization or purchase as a property complex before January 1st, 2006, and subject to such juridical person conducting business activity aimed at manufacture of the agricultural products, it will be additionally provided with:

- five-year deferment in fulfillment of the obligations of unprofitable agricultural organizations on return of the diesel oil and gas received from the governmental material reserve on a temporary basis;
- three-year deferment in fulfillment of the obligations of unprofitable agricultural organizations on return of the bank credits, obligations under the agreements of financial leasing, as well as obligations related to purchased goods, performed work and rendered services;
- six-month deferment in repayment of indebtedness of unprofitable agricultural organizations arising from payment of the customs duties, payments to the Fund of social protection.