| Foreign companies have various options when setting up a business
in Russia. Most often, the first step is to open a
Representative
Office, but then or later it is also possible
to form a separate Russian legal entity, or to participate
in a joint
activity agreement.
Russian business activity is conducted under the Civil Code, which
allows foreign companies to form Russian organisations,
including Joint
Stock Companies (JSC), Limited
Liability Companies (LLC), or Partnerships.
New
businesses have to obtain tax registration, statistics
registration and state non-budget funds registration
(Pension Fund, Social Security Fund and Mandatory
Medical Insurance Fund). The statutory timeframe for
registration of a newly established Russian company
is five business days, but taking into account certain
preparatory work preceding filing of a company documents
for state registration as well as additional filing
and registration requirements, 2 - 4 weeks is a more
realistic registration period, and that's if there
are no problems.
A
foreign investor may pay for his participation interest
(shares) in a Russian company's equity (registered)
capital either in roubles or in foreign currency.
Payment in foreign currency may be made directly from
the investor's account with a foreign bank, while
payment in roubles requires a special type "K" rouble
account, which involves registration with the Russian
tax authorities and therefore increases overall company
formation time. In fact, few banks provide this service.
Incorporated Russian companies are managed via a members' (Shareholders')
General Meeting (the supreme governance body) and
an Executive Body (represented by either a sole General
Director or a General Director jointly with a Management
Board). Should a Board of Directors be created, it
has supervisory rather than managerial functions;
members of a Management Board or of a Board of Directors
may not legally bind the company other than on the
basis of a power of attorney.
The characteristics of the various different corporate forms are
described below.
 Representative Office
The term "representative office" first appeared in Russian legislation
in the 1991 Russian Federation Law on Foreign Investment
in the RSFSR, applied to Russian enterprises operating
with foreign investment funds. The form took on more
substance when Part I of the Russian Federation Civil
Code was promulgated at the end of 1994.
A representative office is generally understood to be a subdivision
of a foreign legal entity that represents the entity
in a foreign country, and doesn't normally carry on
commercial activity, but the wording of the Civil
Code doesn't exclude such activity, and in practice
the Representative Office has come to be the primary
initial structure used by foreign companies setting
up in Russia.
Article 55 of the Civil Code states: The representative office is
a discrete subdivision of a legal entity, situated
in a different location, that represents and protects
the interests of that legal entity. A representative
office has the right to open bank accounts and engage
in activity to facilitate its work within the territory
of the Russian Federation.
In many respects, the Russian Representative Office resembles the
'branch' often used in Western jurisdictions. However,
it is taxed as a separate organism, and is widely
accepted as a normal form of business organisation.
There are however some, relatively rare, situations
in which a branch as such is to be preferred to a
Representative Office.
A representative office or a branch of a foreign company must be
registered with the tax authorities, social funds,
and other state bodies. The nature of the activities
performed will determine whether the activities are
subject to Russian taxation. Generally, tax filings
must be made even if no taxable activities are performed
or if no income is generated.
Current
procedures for legalizing the representative office
of a commercial organization are set forth in the
provisions of a December 4, 1994 law, the Interim
Statute on the Accreditation of Representative Offices
of Foreign Companies under the State Registration
Chamber, and the Maintenance of a Composite Registry
of the Representative Offices of Foreign Companies
within Russian Federation Territory.
A Representative Office is normally given a two-year
registration term, renewable. Individual employees
of the RO can be 'accredited', a status which accords
a few more or less useful privileges, on application.
Section II of the Interim Statute establishes the
procedures for the registration of the representative
offices of foreign legal entities in Russia. In order
to obtain authorization to open a representative office
of a foreign company, the following documents must
be presented to the State Registration Chamber:
- Application
- Two
letters of recommendation from Russian partners
- The
charter documents of the foreign company
- An
extract from the trade registry of the foreign company's
country of origin, or another document certifying
the registration of the foreign firm in that country
- Confirmation of solvency
- Information card about the representative office
- Documentation of state tax payment
- Documentation confirming the location of the representative office
within the Russian Federation
- Power
of attorney from the 'mother' company
Well,
those are the rules. In practice, as usual in Russia,
the reality can be different. Less information may
in fact suffice, and the process may be either more
or less complicated depending on circumstances and
individuals.
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Joint Stock Company
Joint
stock companies (JSC) may be closed, ie private, or
open, ie public. The shares of an open JSC are freely
transferable, while in a closed JSC, share transfers
are restricted and the other shareholders have pre-emption
rights.
The minimum capital requirement for incorporation
of a JSC is equivalent to 1,000 minimum monthly wages
for an open JSC and 100 minimum monthly wages for
a closed JSC. The maximum number of shareholders is
unlimited for an open JSC, but cannot exceed 50 for
a closed JSC.
A
JSC cannot be established and/or owned by a single
shareholder if the latter, in turn, has only one shareholder/participant.
The governing bodies of a JSC are general shareholders’
meetings and the board of directors.
Ordinary
and preference (non-voting) shares may be issued;
bearer shares are not allowed.
Shares
are treated as securities under Russian law, and,
therefore, JSCs are subject to securities market regulations,
including statutory procedures for issue, offering
and placement of shares, registration of shares prospectus,
redemption and conversion of shares, issue, offering
and placement of convertible securities, keeping of
shareholders' register, corporate information disclosure,
etc.
At
least 50% of a company's foundation capital must be
paid up within three months from the company formation
(state registration) with the balance of outstanding
stock to be paid up within one year from the company
formation. All company shares issued at the time of
its formation shall be subscribed for by the company
founders (incorporators); no public offering or placement
is allowed at that stage.
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Partnerships
Partnerships formed under the Russian civil law possess a separate
legal identity; therefore, the principal difference
between partnerships and companies in Russia lies
with the rules governing shareholders' and partners'
liability. In partnerships, partners have unlimited
liability for partnership obligations, whereas in
companies shareholders' liability is obviously limited
to the value of their shares, although some other
types of liability are possible under the Civil Code.
Although
there are only very few cases where the law or subordinate
legislation requires that a certain type of business
must be operated through a company, the combination
of the unlimited liability rule and the immature professional
liability insurance system results in partnerships
being significantly less popular with Russian entrepreneurs
and foreign investors as compared to companies. Besides,
the tax treatment of partnerships under Russian tax
law is exactly the same as that of companies.
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Limited Liability
Companies
As
in many other jurisdictions, LLCs occupy a position
between partnerships and companies in terms of liability
and members' rights. In particular, members of an
LLC, unlike shareholders of a JSC, may exercise supplementary
rights and bear supplementary obligations without
regard to the size or value of such members' participation
interest, as determined by the company's statutes,
or as approved by unanimous vote of all company members.
Moreover, in some circumstances a member of an LLC
may be expelled by a court at the request of other
members holding at least 10% of the equity capital
in the aggregate.
The
maximum number of members of an LLC members is 50.
The statutory is equivalent to minimum capital 100
minimum monthly wages. At least 50% of the equity
capital must be paid up before the company documents
are filed for state registration with the balance
to be paid up within one year from the company formation.
Normally this requires that a local bank should open
an interim bank account that may only be used for
the purposes of new company registered capital formation;
once the company formation is completed and relevant
documentation is filed, the interim account can be
converted into a current account.
LLCs'
equity (registered) capital is composed of participation
interests that do not qualify as securities under
the Russian law and, therefore, LLCs are exempted
from securities market regulations. No type of public
offering or placement is possible. Participation interests may be of unequal size and
value; however, all participation interests confer
on the holders the right to vote in the company members'
meeting (pro rata to the size thereof unless otherwise
provided by the company statutes).
LLC
members have statutory pre-emption rights in connection
with offering of participation interests to third
parties and the company constitutive documents may
(optionally) prohibit the transfer of participation
interests to third parties. Other forms of disposal
of participation interests (including pledge thereof)
are also subject to certain restrictions.
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Joint Activity Agreement
A joint activity agreement with a Russian company to carry out business
in Russia (in formal terms, a partnership) usually
involves the foreign company in the contribution of
funds, property, or know-how in the form of tangible
or intangible assets to the joint activity. The JAA
provides for division of profits which need not be
in proportion to the partners' contributions.
The joint activity is taxed at the level of its participants (with
the exception of value-added tax). One of the participants
must maintain separate books for the joint activity.
The existence of a joint activity agreement with a foreign company
does not automatically lead to creation of a permanent
establishment (PE) in Russia. However, it can be very
difficult in practice to defend the “non-PE” position
since the law is not very clear in this regard.
A JAA must be registered with the tax authorities (despite the fact
that a simple partnership itself is not a taxpayer),
the State Registration Chamber for representative
offices, and the various social funds.
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