Legal Forms for Business Activity in Russia
Overview of the Legal FormsRussian 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.
- 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).
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.
- 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
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.
- 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 ProceduresOne 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.
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.
Bodies of the Joint Stock CompanyShareholders’ 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.
Selecting the Right Legal Form for Your Russian Business ActivitiesIn 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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