Legal Forms for Business Activity in Russia

15/11/2021
Legal Forms for Business Activity in Russia
Opening a Representative Office    Activities of the Representative Office    Special Case: Branch    Subdivision    Limited Liability Company    Creation of the Charter    Change in Ownership    Joint Stock Company    Issuance of Shares    Bodies of the Joint Stock Company    Tips, Opportunities, and Warnings    

Overview of the Legal Forms

Russian law offers the following legal forms for entrepreneurial activity:

  • Representative Offices/Branches/Subdivisions (predstawitelstwo/filial/ obosoblenoe podrazdelenie): dependent branches of a foreign company in Russia that represent its interests or partially carry out its duties. They especially play a role in the initial phase of engagement or for temporary projects in Russia.
  • Partnerships: a full partnership (polnoje towarischtschestwo), in which the partners assume liability for the company’s liabilities with their own assets or a trust partnership (towarischtschestwo na were), in which at least one partner is personally liable and at least one other partner is liable only for the amount of their contributions.
  • Limited Liability Company (OOO or obschtschestwo s ogranitschennoi otwetstwennostju) is a company in which the partners are liable only for the amount of their contribution to the share capital of the company (this corresponds to a GmbH). 
  • Joint Stock Company (AO or akzionernoje obschtschestwo) is a company whose share capital is divided into a specific number of shares. The shareholders are liable only for the value of their shares. 
  • Investment Partnership (investizionnoje towarischtschestwo) is a simple partnership created by the merger of deposits through a notarized contract and is intended to be a joint investment activity for profit without forming a legal entity.
  • Economic Partnership (chozajstwennoje partnjorstwo) is a commercial organization that can be formed by at least two natural persons or legal entities that are liable only for the amount of their contributions.
  • Cooperative (proiswodstwennyi kooperatiw) is an association of natural persons to perform joint production or other business activity based on membership and personal labor or participation. 
  • Peasant Farming (krestianskoe (fermerskoe) khosiaistvo) is a voluntary association of persons for joint production or other economic activity in the field of agriculture.
  • Individual Entrepreneur (indiwidualnyi predprinimatel) is a natural person who has been registered as economically active on a register. 
  • State Enterprises, such as the unitary enterprise (gosudarstwennoje unitarnoje predprijatije), are legal forms for state and municipal enterprises.
For economic activity and especially for foreign investment some legal forms have proved to be particularly suitable. These are the subdivision, representative office, branch, Limited Liability Company, and Joint Stock Company. They are therefore presented in detail below.
  • Often suitable for the achievement of short-term goals, in exceptional cases a long-term solution for a solid business in Russia.
  • Not a legal entity, but rather represents the interests of a foreign legal entity, acts on behalf of a foreign company; it is justified and compelled by the acts of representation, so there is no liability limitation umbrella.
  • Subject to Russian law; legal bases for their establishment and activity: “On Foreign Investment in the Russian Federation” Law and a series of orders by the Federal Tax Service of Russia (FTS).

Opening a Representative Office

For taking up the activity, the representative office has to be accredited by the Federal Tax Service of Russia. Therefore, a corresponding application along with associated documents must be submitted to the authorities. These include, but are not limited to, a certificate of incorporation, the statutes of the foreign company and of the representative office, the decision regarding the opening of the representative office in Russia, power of attorney for the head of the representative office, the certificate of registration of the foreign company as a domestic taxpayer, proof of a registered office in Russia and some others. Documents not produced in Russia must be legalized. In the relationship between Russia and Germany or Austria (and many other countries), a so-called apostille is sufficient. Legalized document must then be translated into Russian with the further certification of the translator’s signature by a Russian notary.
The accreditation as well as the entry into the register of accredited representative offices takes place within 30 business days. The state accreditation fee is 120,000 rubles. Before submitting the application to the FTS, a so-called documentary expertise for foreign legal entities with the establishment and certification of the number of foreign employees in the representative offices or branches in Russia must be applied for with the Chamber of Commerce and Industry of the Russian Federation (RF CCI). A fee for this procedure is 18,000 rubles. The entire process takes about 3 months to be completed, including preparation and completion of the required documents. After tax registration of the representative office, the registration with the state social insurance funds and the opening of a bank account takes place.

Activities of the Representative Office

The legal basis of the activity of a representative office is its statutes. The statutes must regulate the following issues:
  • Trade name of the foreign company and of the representative office 
  • Legal form of the foreign company
  • Address of the foreign company 
  • Status of the representative office
  • Documents, that define the activity of the representative office
  • Registered office of the representative office
  • Objectives for opening and areas of activity of the representative office
  • Administrative bodies of the representative office
  • Information on the assets of the representative office
  • Procedure for hiring employees and procedures for the conclusion of temporary employment contracts
  • Procedure for filing reports by the representative office to the authorized relevant authorities of the Russian Federation
  • Procedure for suspension of activity of the representative office
The primary figure is the head of the representative office, who conducts the business of the representative office based on the power of attorney granted by the foreign legal entity and in accordance with the competences specified in the statutes of the representative office. The representative office is entitled to hire employees. However, the foreign company acts as an employer.
A foreign employee needs a work permit before starting work in the representative office, which is granted for the term of their employment contract, but for a maximum of 3 years (with possible prolongations). Changes in the number of foreign employees in the representative office must be entered in the state register. Regarding the tax liability, the Russian taxation laws are subsidiary to double taxation treaties (DTT) that Russia has concluded with other states. According to these DTT, a representative office is not taxed unless it is a subdivision of the foreign company in Russia. When exactly such a subdivision arises depends on the DTT’s provisions and on each individual case.
No subdivision is established by merely preparatory or auxiliary activities. The representative office is subject to foreign exchange control in business relationships with Russian clients so that for some transactions between the representative office and its Russian clients, a transaction certificate must be filed with the bank. This rule also applies to branches as well as subdivisions of foreign companies.

Special Case: Branch

The most important difference from the representative office is that a branch can act fully on behalf of the company, while the representative office acts exclusively in a representative capacity. The establishment of a branch is therefore expedient if the foreign company intends to have active business (commercial) operations in Russia. The accreditation of a branch is similar to the procedure for a representative office.

Subdivision

A subdivision is a dependent subsidiary of a foreign company and one of the simplest legal forms used especially for temporary projects. The registration of a subdivision is similar to the procedure for representative offices, but instead of accreditation, a simple tax statement is sufficient.

Limited Liability Company

The LLC (OOO obschtschestwo s ogranitschennoi otwetstwennostju)

  • The most common legal form in Russian business.
  • General legal basis: Civil Code and Law for the LLC.
  • Nominal capital divided into shares (“participatory interests”).
  • It is a separate legal entity, can have rights and obligations; obtains its legal capacity only after state registration (a “pre-LLC” does not exist in Russia as compared with Germany, for example).
  • Liability affects all assets of the LLC; the participants are liable for the liabilities of the LLC only if they have not fully paid their contribution into the charter capital.
  • In some cases a parent company shall be liable as a joint debtor by way of lifting the corporate veil.
  • LLC is subject to foreign exchange control (in business relations with foreign companies).

Founding Procedures

One or more persons or legal entities can found the LLC. However, when establishing a 100% fully owned LLC, the founder may not itself consist of only one participant. A subsequent two-time 100% participation is thus precluded. The founding takes place at a foundation meeting, where the founding partners make a decision regarding the formation of the LLC and approve the charter for the company. Although no longer submitted for registration, the founding contract is recommended to be concluded when LLC is founded by more than one participant. Mandatory information to be included in the charter of an LLC is regulated in Art. 12 of Law for the LLC. A creation of a company stamp is not obligatory, but recommended, because it is still formally required not by the legislation, but by several documents’ forms to be submitted to the tax authorities. The tax authorities at the registered office of the legal entity to be established are responsible for the registration of the LLC according to the registration law. Registration of the LLC is carried out by registry in the “Uniform State Register of Legal Entities” (“EGRUL”). The application for state registration must be submitted in the prescribed form and with the notarized signature of the applicant(s) along with the necessary documentation (minutes of the founding meeting, charter of the LLC, certificate of registration of the parent company, proof of a registered office and some others). The process of registration takes place within three business days following the submission of the application. The entire procedure including all steps of preparation and registration usually takes 2–3 months. Upon completion of registration, the LLC receives a registration certificate. The charter capital of an LLC must be paid within 4 months of its official registration.

Creation of the Charter

Although the law only requires a few items to be included into the Charter, the registration authority often expects repetition of the legislative provisions in the charter. The share capital of an LLC must be at least 10,000 Rubles and can be provided in cash or in-kind contributions. If an in-kind contribution exceeds the value 20,000 rubles, an independent appraisal must be obtained. The supreme body of the LLC is the participant’s general meeting. The fundamental decisions and important administrative and control rights fall under its exclusive jurisdiction. Once a year an ordinary participants’ meeting must be held. Further extraordinary meetings of the participants may be convened. The voting rights of the participants depend on their capital participation. A simple majority of votes by all participants generally passes resolutions unless otherwise provided for by the legislation or the charter. The management body of the LLC can be an individual (General Director, CEO) or a collegial executive body (called “directorate” or “executive board”), both to be appointed by the general meeting. Such management body has exclusive powers of representation; the other representatives’ act only based on the power of attorney. However, the charter of the LLC may provide that the power to represent the LLC may be delegated to several persons acting jointly or individually (multiple Directors option), which is subject to registration. The CEO runs the business and acts without power of attorney on behalf of the company. However, the charter may limit the scope of the power of representation. In case the General Director acts outside the power of representation a transaction may be, under certain circumstances, declared invalid by the action of a participant of the LLC. In addition, the General Director is responsible for the management of the list of participants. The charter of the LLC may provide for the formation of a Board of Directors as a supervisory body as well as provide for an audit commission. For an LLC with more than 15 participants, an audit commission (an auditor) is mandatory.

Change in Ownership

A participant of an LLC may dispose of its participation interest in the charter capital even to third parties without the consent of the company or the other participants, if not forbidden by the charter of the LLC. Current participants have a legal pre-emptive right for purchasing a participatory interest in proportion to the size of their own participation. If the transfer of a participatory interest to third parties cannot take place due to the lack of consent, the LLC shall pay the affected participant or heirs the actual value of the participatory interest determined based on the accounting reports. The transfer of participatory interest requires notarial form. An LLC participant furthermore has the right to declare his withdrawal from the LLC, if the charter explicitly provides for this right. The withdrawing participant must then be paid the actual value of the share within 6 months after the end of the fiscal year in which the withdrawal was declared. Finally, a participant may face expulsion from the company if he/she grossly violates his/her obligations or significantly impedes or prevents the activities of the LLC.

Joint Stock Company

The joint stock company exists in Russia in two legal forms: public (shares and convertible bonds are publicly placed or publicly traded) and non-public (shares and convertible bonds may not be publicly issued or otherwise offered for sale to an unlimited group of persons).
The joint stock company is liable for its assets. Shareholders, on the other hand, are liable for commitments of the joint stock company only within the amount of their shares. In rare cases, for example, if the parent company issues binding instructions to the subsidiary, the corporate veil may be lifted.

Issuance of Shares

Rights to shares only arise when they are indicated in the register of shareholders. Public joint stock companies with less than 50 shareholders may independently manage their shareholders’ register. With 50 or beyond shareholders, an expert registrar is required. The issuance of shares by a joint stock company is mandatory in order to register with the Russian Central Bank. Otherwise, shares may not be transferred to third parties. Subsequently, the shares are registered by issuing a state registration number for the respective share issuance. Then the Russian Central Bank issues a formal notification to the joint stock company about the share registration and the decision on the issuance of shares, the issue prospectus, and the emission report, accompanied by an official note on its registration.

Bodies of the Joint Stock Company

Shareholders’ meeting (general meeting): solely responsible for amendments to the statutes, the appointment of the Board of Directors (the Supervisory Board), the decision on dividend payment, conversion measures, and the liquidation of the company. Once a year, an ordinary shareholders’ meeting must take place. Ingeneral, the shareholders’ meeting passes its resolutions with a simple majority of votes of the participating shareholders. Amendments to the statutes or a resolution to liquidate the company require a three-quarters majority. Other majority requirements cannot be prescribed in the statutes. Board of Directors: elected and dismissed by the shareholders’ meeting; supervisory tasks, responsible for basic issues of corporate governance that do not fall within the authority of the shareholders’ meeting. General Director: manages the company’s day-to-day business, represents it, the scope of the power of representation may be limited by the statutes. A collegial management body (“directorate” or “executive board”) may be set up; the chairperson is the General Director. Audit Commission (the auditor): controlling body, type of internal auditor who audits the financial and economic activity.

Tips, Opportunities, and Warnings 

Selecting the Right Legal Form for Your Russian Business Activities

In a typical evolutionary manner many western companies start their Russian business with pure export from their home country (if speaking e.g., about supply of goods), often paired with advance payments and EXW delivery clauses to avoid “Russian-related risks.” Once a significant volume of contracts and clientele has been reached, many companies tend to establish a representative office first to promote their products directly on Russian soil, participate in network events and trade fairs with one or several representatives permanently present in Russia, conduct client seminars and activate structured client acquisition and marketing activities. However, all commercial terms and final contracts are still negotiated and signed by the headquarters in Western home countries. Once business gained sufficient traction, the seemingly logical next step is to either continue business with a trusted network of distributors or decide to perpetuate the market by their own and establish a commercial branch or a real independent legal entity (mostly in form of an OOO, the Russian LLC) which allows for full commercial activity under Russian law.  While this evolutionary approach seems consistent, one should note the following when selecting the right legal form for an engagement in Russia: 
  • In general, setting up a representative office, a branch or legal entity in Russia tends to be more time and cost intensive as compared to Western Europe jurisdictions.
  • Medium and long-term goals should be considered when establishing a permanent Russian presence because restructuring in Russia takes more time and is often associated with greater effort than in western jurisdictions.
  • It is not possible to “convert” a representative office or a branch to a LLC at a later stage. Either these two will co-exist once a decision to establish a real commercial entity has been made or the representative office or branch will be liquidated. Liquidation procedures in Russia are even costlier and take more time than the incorporation procedures in the first place.
  • The chosen corporate structure must be suitable for future developments in accordance with the real business goals and financial planning.
  • LLC is flexible in the formation of its statutes and simple in its management, allows at the same time for a functioning corporate governance.
  • A joint stock company is more complex in its governance than an LLC, but shareholders are more closely tied to one another.
  • The decision for the right legal form in order to establish a Russian business case in my opinion shall not be bound by evolutionary phases of business activity only and driven by costs and estimated effort. Especially the start-up phase requires significant financial, time and human resources for a proper set up, so a dedicated team of professionals shall accompany this venture to streamline the processes most efficiently. 
  • A thought through business case for Russia with enough space for variables and unexpected delays shall serve as the base and then one shall build on that. In many cases, the right decision will be to go directly for establishing a full commercial legal entity, despite the initial costs and administrative efforts. In other cases, the representative office may serve as the right choice of a Russian presence for a decade or more and headquarter still are happy with profits gained from a stable Russian business.
  • Many other important aspects such as taxes, financial management, employment and customs law to name just a few fields that require as well diligent analysis and professional knowledge have not been touched in this article (due to format) and should be taken into consideration when deciding on the right legal form.

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