Phantom stock in Russia: the tool exists, but there is no regulation

Let’s start with the fact that the name of the instrument itself is misleading. A phantom share is not a share in the sense of securities market legislation. It does not confirm participation in the company's capital and does not grant the "holder" any corporate rights. A recipient of phantom shares:

• does not become a participant in an LLC or a shareholder in a JSC and does not acquire voting rights;
• does not receive the right to dividends and is not entitled to dispose of any part of the authorized capital;
• does not acquire the right to information or other rights of a company participant.

In essence, it is a conditional right to a cash bonus, the amount of which is calculated based on the company's value, the value of its shares, or other pre-established metrics. Economically, the employee receives a result comparable to the growth in a shareholder's equity value. Legally, they do not acquire shares, equity, or any rights derived from them.

The phantom lives up to its name: the money is real, but the rights are ghostly.

This is precisely how a phantom program differs fundamentally from a classic stock or equity option: the participant receives the economic benefit of business growth without becoming a co-owner.

The instrument has been partially recognized. And this is where it gets interesting.

The Information Letter of the Bank of Russia and the Ministry of Finance of Russia dated March 17, 2026, No. IN-01-28/9 / 05-08-05/21339, explicitly provides for the possibility of using phantom shares in long-term incentive programs. Regulators define them as cash payments equivalent to the current value of the company's shares, while immediately noting the downside: the burden on the company's cash flow.

Specifically, the recommendations establish:

• Key indicators. Total Shareholder Return (TSR), or market capitalization if dividends are not paid. These are set as a target range or minimum growth rate and are reviewed every 3-5 years.
• Program volume. At least 30% of the participant's total compensation.
• Term. A minimum of 3 years for a short investment cycle, with a 5-year target and a 10-year limit.
• When to choose phantom shares. A cash-based form is recommended if the payout volume exceeds the average daily trading volume of shares over the last 6 months or if the program exceeds 5% of the company's share value. The logic is simple: avoid creating pressure on your own stock price.
• Approval authority. The program implementation procedure is governed by the Board of Directors, while KPI achievement is evaluated by the Compensation Committee.
• Early exit. In the event of termination without employee fault, payments are made pro-rata based on time served; in the event of termination for cause, no payments are made.
• Disclosure. The annual report must include: program objectives, timelines, participant categories, KPIs, total value, percentage of shares involved, and payment forms.

As we can see, the framework is quite functional. However, one should not confuse recommendations with comprehensive legal regulation that parties could reliably rely on in the event of a dispute. First, these are primarily addressed to public joint-stock companies and those planning an IPO. Second, the document itself explicitly states that it does not regulate matters of labor law application.

Yet, it is often non-public joint-stock companies and LLCs that are most interested in phantom programs. For an owner of such a company, transferring an actual stake to a key manager is not just an economic incentive; it introduces a new participant into the company with all the corporate rights provided by law. A phantom program allows them to avoid this.

The second document is the letter from the Ministry of Finance of Russia dated June 17, 2025, No. 03-15-05/58680, in which the agency addressed the taxation of payments to employees under phantom (virtual) option programs. This addresses exactly one issue—the tax consequences of the payment. Moreover, it does not resolve it completely: we analyze the Ministry of Finance's position and the inherent contradiction within it in detail in the second part. The document does not define the legal nature of a phantom share itself.

In our view, it is possible to use phantom shares in LLCs and non-public joint-stock companies: the absence of specific regulation does not in itself imply a prohibition. The basis for this is the principle of freedom of contract enshrined in the Civil Code of the Russian Federation—parties are entitled to enter into contracts not explicitly provided for by law and to determine their terms themselves, provided that mandatory legal requirements are met. This means a company can commit to paying money to an employee, manager, or other person in the future if pre-agreed circumstances occur:

• an increase in business value;
• the achievement of financial targets;
• the sale of the company;
• attracting an investor;
• an IPO;
• maintaining a relationship with the company for a specified period.

Therefore, it is more accurate to view a phantom share not as a specific corporate right, but as a contractually defined mechanism for determining the company's future monetary obligation to an employee.

The difference here is not merely theoretical. The content of a corporate right is determined by law, whereas the content of a phantom share is determined solely by the program documents. You will have to define for yourselves what the number of phantom shares granted to an employee means, when they become "vested," and at what point the obligation to pay arises.

Furthermore, it is impossible to categorize a phantom program under a single branch of law. At its core is a civil-law obligation to make a payment upon the occurrence of certain conditions. If the participant is an employee and the right to payment is linked to job functions, tenure, or KPIs, labor law comes into play. If the program is approved by the company, establishes significant obligations, or applies to the CEO and members of management bodies, corporate law applies, along with questions regarding the competence of those bodies. Finally, the payment itself has tax implications.

As a result, a single program rests on four pillars simultaneously: civil, labor, corporate, and tax law.

This is where the main difficulty with foreign Phantom Stock Plan and Phantom Equity Plan models lies. Translating a document into Russian is not at all the same as translating it into Russian law: a condition that is standard for a foreign program can easily conflict with Russian labor payment rules.

The question of whether phantom stocks are permitted in Russia is no longer an issue: there is no basis to consider the instrument prohibited. The real question is different: what exactly should a business include in its documentation to ensure that its program is legally enforceable?

There is no specific law to fill the gaps in such a program. This means that, without answers, the following questions remain at risk:

• at what point the participant's right arises;
• whether it can be revoked;
• what happens upon termination of employment;
• how the value of a phantom stock is determined;
• when a monetary claim arises;
• whether the program terms can be changed unilaterally;
• how to classify payments made to an employee;
• which corporate body has the authority to make the relevant decision.

Some guidance can now be drawn from the recommendations of the Bank of Russia and the Ministry of Finance as a description of best practices. Beyond these, businesses must answer these questions themselves—and this is not just an inconvenience. A program can be tailored to a specific company, its cycle, ownership structure, and cash flow, rather than forcing a business to fit an standardized model prescribed by law.

Phantom stocks in Russia occupy a middle ground: the law does not recognize them as an independent legal instrument, yet regulators are already explicitly acknowledging and describing how they can be structured.

Phantom stocks can be used in Russian LLCs and JSCs, but the legal robustness of any specific program will depend primarily on the quality of its structuring. A phantom stock in Russia is not a ready-made, legally defined instrument, but a contractual arrangement that a company must create on its own. This is the source of both the flexibility for the business and all the primary legal risks. They are two sides of the same coin.

At the same time, the direction is clearly positive. Not long ago, phantom stocks were absent from Russian documents entirely, but today there are detailed recommendations from two government agencies, covering metrics, timelines, payment forms, and participant exit rules. For private companies, these are not yet mandatory, but they already serve as a benchmark that can be referenced when speaking with investors, auditors, and program participants themselves.

The next question is how this structure will take root. Western models cannot be translated into Russian law word-for-word; they are adapted gradually through contractual practice, agency clarifications, and initial court cases. This work is already underway, and we will monitor which recommendations become established in practice and which eventually make their way into law.

In the second part, we will examine the practical side of the issue: how to determine vesting and the moment a right to payment arises, what to provide for in the event of termination, how to calculate the value of a phantom stock, as well as the tax classification of payments and the associated uncertainty.

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Sources

1. Civil Code of the Russian Federation.
2. Labor Code of the Russian Federation.
3. Tax Code of the Russian Federation.
4. Federal Law No. 39-FZ of April 22, 1996, "On the Securities Market."
5. Federal Law No. 208-FZ of December 26, 1995, "On Joint-Stock Companies."
6. Federal Law No. 14-FZ of February 8, 1998, "On Limited Liability Companies."
7. Letter of the Ministry of Finance of Russia No. 03-15-05/58680 dated June 17, 2025.
8. Information Letter of the Bank of Russia and the Ministry of Finance of Russia No. IN-01-28/9 / 05-08-05/21339 dated March 17, 2026.