HOW TO SUCCESS IN RUSSIA (useful information)
- General information
- You decided to open representative Office
- You decided to open a company
- State approvals
- About Russian tax system
- Personal legalization of foreign employees in Russia
- Licensing
- Need to rent place
- Your protection (payments guarantee)
- Opening accounts in the banks on the RF territory
- Need staff
- Property rights
1. General information
Russia offers unique investment and trade opportunities in practically all areas of business.
You would like to produce your goods in a russian plant or to establish your own factory. You can just enter a joint venture. Whatever you choose to do in Russia, you need reliable information. You need to know lots of facts about requirements for setting up a business, government regulations and policies, tax legislation, accounting and reporting standards - it is just some of the information you need to do business in Russia. There are a lot of advantages doing business in Russia. But still some issues are very complex. To enjoy all of the advantages you need professional expert advice. Being the first Russian-swedish consulting firm established in Sweden we can offer you extensive professional and confident services and provide you with the first-hand knowledge of local regulations.
Here we place information that may occur useful for you if you are going to run business with Russia.
2. You decided to open representative Office
Representative office/branch of foreign company in Russia
In accordance with current legislation and "Regulation оf Establishing and commerce of Representative offices of foreign companies, banks and organizations in USSR" Resolution No. 1074 of Council of Ministers of USSR of 30.11.1989 (with amendments) (hereinafter "the Regulation") foreign companies may establish a Representative Office in Russia after accreditation with authorized bodies (Federal Ministries, State Registration Chamber of Ministry of Justice, Chamber of Commerce of Russia, depending on type of business of foreign company). Foreign company may establish branches of its Representative Office in various regions of Russia, but they are not considered as a separate legal entity. RO and Branch are subdivisions of a foreign company. They are considered as Russian non-resident entities for currency control purposes.
To provide legal activity on the territory of Russia, representative office/branch must go through the process"accreditation".
Accredited representative office/branch has some advantages:
- work directly with customs bodies;
- enjoy VAT exemptions when renting office space and dwellings: accredited Representative Office of foreign company pay rent without adding VAT.
- register company cars directly in the name of the representative office/branch;
- may obtain visa support for foreign citizens coming to Russia;
- in certain regions only accredited representative offices/branches are admitted to privatization and tenders;
- more flexibility in transferring funds in and out of Russia in case foreign company has representative office or branch as compared to a Russian-registered subsidiary etc.
Foreign company or organization may establish a Branch in the Russian Federation. Currently legal status and procedures of Representative Office and Branch establishment are almost the same, small differences are in the area of duties. According to the law representative office may be accredited for three years (with the possibility of prolongation) and branch may be accredited for 5 years. Branches may apply for some kinds of licenses (for example, publishing business).
3. You decided to open a company
Russian law states several types of companies (information below), and which to choose depends on your aims, economy and positions on the market. To register a new legal entity, an applicant should submit a limited number of documents, according to the legislation. Of practical importance for the foreign investor is that most of the necessary documents have to be translated into Russian and legalized and apostilled in the country of origin. It`s a big advantage to coordinate these procedures with the law firm assisting in submitting the registration.
You can open a company on the territory of Russia in a form of:
- Limited Liability Company
- Joint Stock Company
- Sole ownership
Limited Liability Company ("OOO")
A Limited Liability Company (hereinafter "OOO") is a Russian legal entity with a share capital divided into the "participation interests". The participants of the "OOO" are liable for the debts and actions of the company only in the amount of "participation interest" deposited by them.
Under russian legislation the company`s capital can consists of money, valuable securities, other private things or rights, which can have monetary estimation. Estimation of not monetary contributions is usually provided by the acceptation of all the company members.
A Limited Liability Company can consist of maximum 50 persons. Founders of the "OOO" can be either individuals (both Russian nationals and foreigners) or legal entities, but an "OOO" can't have as the only partner another entity consisting of only one person. If the number of the company's participants exceeds 50, the company must be transformed into a public company ("OAO") within one year; otherwise it will be liquidated in order provided by the Articles 61 and 88 of the Civil Code of the Russian Federation.
For the time being, the minimum authorized capital of a Limited Liability Company is 100 minimum wages (approx USD 300).
Joint Stock Company ("AO")
Joint Stock Company ("AO") is a Russian legal entity with share capital divided into certain amount of shares and limited liability of the shareholders. "AO" may engage in any form of commercial activity envisaged by the charter documents provided such activity is not prohibited by Russian legislation.
There are different types of Joint Stock Companies:
- "OAO" (publicly held company) is a legal entity whose founders may transfer shares not with standing the consent of the other shareholders. Shares of the company are allocated on the public basis. The amount of shareholders is not limited. The minimum authorized capital of an "OAO" equals to 1 000 minimum wages.
- "ZAO" (privately held company) is a company, shares of which can be allocated only among the shareholders or strictly definite persons. The amount of shareholders must not exceed 50 persons. In case the number of shareholders exceeds the above-specified amount, the company must be transformed into an "OAO" within one year. Such company cannot exercise public offer and shareholders have a priority right to purchase the shares in case they are sold by the other shareholders of the company. The minimum authorized capital of a "ZAO" equals to 100 minimum wages.
Sole ownership (ИП)
Limited Liability Company or Private Joint Stock Company can be founded by an individual (russian or foreign) or by a legal entity.
The founding document at Sole ownership company is a Charter. Such company doesn't have some management bodies such as General Meeting of the Founders. There is no Board of Directors. All the decisions are taken by the sole founder. Accordingly legislative requirements on calling of the general meetings, and other procedural requirements do not apply to such company.
The management of the company is done by issue of written decisions of the fonder. If the fonder is also a General Director in the company the decisions are made by issuance of orders.
At the same time such company is a separate legal entity, its assets are legally isolated from the assets of the founder.
4. State approvals
Under Russian legislation after the company registered it`s company or Representative Office or branch on the territory of Russia and got accreditation, it must be registered in the following governmental authorities:
- Registration in Tax Inspection, receiving INN (Taxpayer Identification Number).
- Registration in State Funds (Pension, Medical Insurance, Social Insurance).
- Registration in State Statistic Committee.
5. About russian tax system
The tax system in Russia cyrried out a comprehensive reform in the year 2001. This reform is designed, in principle, to simplify the classes of payments.
The given below analysis outlines the most significant taxes in Russia.
Russian Income Tax for an Individual
An individual is liable for tax on his income as an employee and on income as a self-employed person. Tax will be payable on income earned in Russia and overseas by an individual who meets the test of a "permanent resident" of Russia.
A foreign resident who is employed in Russia pays tax only on income earned in Russia.
- To be considered a Russian resident, residence must be established of at least 183 days in Russia during any calendar tax year.
- An employer is obligated to deduct, immediately, each month, the amount of tax and national insurance due from a salaried worker.
- A self-employed individual is obligated to make advance payments on income tax that will be offset on filing an annual report. In the case of a new business, the advance payments will be calculated on the basis of the business owner's estimate. The advance payments will be made at least 3 times in each year.
Russian Corporate Tax
- The tax on company profits is made up of 2 rates:
- Federal tax - -6.5%.
- Regional tax - 17.5% (with a possible incentive reduction of up to 4%). - The maximum profit tax is 24%.
- Small/medium companies and individuals meeting certain criteria can choose an alternative "simplified tax system".
Certain criterias: - the number of employers isn`t more than 100;
- total revenue for 9 months isn`t more than 11 million rubles (appr.310.000 EUR)
The simplified tax system substitues profit tax,individual tax, v.a.t. and property tax. The tax rate is 6% of the profit (from the total revenue), or 15% from the differences between revenue and expences.
VAT
A tax that is simple in concept and complex in practice.
VAT is based on the European model. Object of taxation is the following: sales and transfer of goods (services, work) in Russia, transfer of goods (services, work) for own purposes, expenses of which are not deductible for profit tax purposes, etc. Import of goods into the customs territory of Russian Federation is also subject to VAT. The taxable basis in import is the customs value of the goods plus customs duties, customs fees, and excise if applicable.
General tax rate at which VAT is levied is 18%. But certain goods and services (some medical products, food products, children's goods, etc) are subject to a reduced rate of 10 % rate. There is also 0% rate, which applies to the majority of export operations and some other specific supplies (sales to diplomatic missions, etc).
Unified social tax (payroll Taxes)
This tax is assessed on the gross payroll and is payable by employers to state funds (Pension fund etc.) The basic tax rate at the moment is 35,6%.
The taxation of foreign legal entities.
The foreign companies which don`t have representative offices in Russia deemed a permanent presence all incomes in RF, since 2002 are taxed at the rate of 20% at the source of payment.
If there is an additional agreement,e.g. in a double-taxation agreement, that income has to be taxed only in the country of origin of a foreign company, the foreign company can draw up the preliminary exemption in Russia. If the tax has already been withhold, to carry out it`s return from the budget (Clause 312 of Tax Code of RF).
Companies, which have commercial activity in Russia through a representative office considered as permanent establishment for the purposes of taxation. The income of such companies is taxed at the same rate as Russian companies at the rate -24%.Exemptions:
- income as dividends
- income as interests on state and municipal securities, which are taxed at the rate 15%.
6. Personal legalization of foreign employees in Russia
This section clarifies the situation with business visa and work permits for foreign citizens who wish to be legally employed in Russia. We look into 3 cases:
1) Standard business visas;
2) Employment by foreign company representative offices;
3) Employment by Russian companies.
Case 1:
Personal legalization of foreign visitors that have a business trip in Russia
This case deals with the most common situation when the foreigners arrive to the Russian Federation on a standard business visa.
According to the russian legislation foreigners that are travelling to russian companies, Representative Offices and Branches of foreign companies in Russia should obtain business visas. Types: 1 month single entry, 3 month single entry, 1 month double entry, 3 month double entry, 6 month multiple entry and 1 year multiple entry business visas.
Standard business visas provide a legal way for a foreigner to visit Russia for a business trip without being employed full time by an organisation in Russia. It is also a common way of staying in Russia for a long period, as standard tourist visas are valid for up to 1 month only.
Case 2:
Personal legalization of foreign employees working in Representative Offices and Branches of foreign companies in Russia. This case shows a legally correct way for a foreigner to be invited by a foreign company's representative office to work in Russia.
Russian migration legislation stipulates a complicated procedure of legalization of foreign citizens in Russia.To work legally in Representative Office or Branch a foreigner should obtain
(I) Accreditation card, “Foreign Representative Office Employee” visa”;
(II) Work permit.
Case 3:
Personal legalization of foreign employees working in Russian legal entities
This case deals with the situtation when a foreigner has an intention to be employed long-term by a Russian company.
A system of legalization of foreigner working in Russian legal entity differs from the above-mentioned mixed procedure. To stay and to work legally in Russia every foreign employee should obtain a work visa, which is issued only on the basis of a work permit. Work permit can be obtained only after the company has got an employment permit.
7. Licensing
Licensing is one of the main methods of public monitoring of the commercial activity. Though the list of activities requiring a license has been shortened recently, a number of activities are subject to licensing from the appropriate government authority.
For instance:
- Banking
- Audit
- Aviation (production, repair)
- Military technology
- Activities related to construction
- Pharmaceutical, medical and veterinary activity
- Transport
- Tourism
- Insurance
- Investment funds (including management) and others.
A license should be issued for a period of not less than 5 years.
8. Need to rent a place in Russia
Either you register Representative Office/Branch or open a restaurant, entertainment center, medical clinic or shop you need a place. In some cases, success of your business depends on the location.
Renting or buying a place might be stressful in Russia, so you must be sure you're in safe hands.
We definitely advice you to cooperate with professional real-estate companies, which are for a long time on the market and have excellent reputation.
We supply our Clients with the information about real-estate companies we can trust. It`s also important to point out even if you find professional real-estate company or agency it`s necessary for your legal adviser or consulting company to protect yourself in a contract in details, especially the clause of contract extinguishment.
9. Your protection
You are going to enter a new market and you want to reduce your risk to minimum. How can you protect yourself? Here are our several advices.
First of all it`s a right decision to work with consulting company, which you trust.
It can be useful to have information about the company, you are dealing with.
The information in the state register is now open and publicly available. You can require Registration Authority the information you need for a reasonable fee (appr.1500 Rbl). The required information includes, among other items, the legal entity`s official name, organizational structure, location and mailing address (that is usually different from the location), information of it`s founders, names and taxpayer identification numbers of the persons acting on the behalf of the legal entity without a power of attorney.
Russian legislation states several forms of payment, so you have to get acquainted to each and choose the form, that suits you. Working with Russian companies it`s always good to state terms of payment in details in the contract, and have different steps of payments, including payment in advance. The most important thing to state consequences for the parties in the cases if the payment hadn`t been made in time.
Letter of credit (L/c) is the most preferred payment option for exporters. Compared to other payment options, L/c has many safeguards for sellers and at the same time assurance for buyers. It is usually issued by larger banks and contain a promise to pay a seller (beneficiary) upon receipt of goods by a buyer if certain conditions outlined in the letter have been met.
10. Opening accounts in the banks on the RF territory
The procedure of opening rubles and other currency accounts in the banks on the territory of Russia is regulated by Russian Central Bank Instruction No. 93-I "On procedure of opening and using of bank Rubles accounts by non-residents in authorized banks" from 12.10.2000.
Foreign legal entities are able to open foreign currency bank accounts in Russia without a license from the Central Bank of Russia.
Foreign legal entities may also open three types of roubles accounts in Russia: a current (T-type) account, an investment (I -type) account and a special (C-type) account, with no restrictions.
A T-type account is used for servicing export and import transactions and maintaining the operations of the representative office or branch in Russia. This account may be used for paying obligatory taxes, making social insurance contributions and covering other expenses related to the local office's operations.
An I-type account is used for various investment activities, including payments in transactions involving the sale/purchase of assets with foreign investment..
A C-type account is used to invest in Russian government securities.
Each of these accounts may only be used in accordance with the procedure established by the Central Bank of the Russian Federation and has certain restrictions.
Lots of famous respectable banks opened their representatives in Russia, including NORDEA and HANSABANK. So you are able to choose the bank you would like to deal with.
Working in Russia we suggest you Bank-Client electronic system, which enables a client to use the Bank’s services without leaving the office. They can forward payment and other orders to IMB for clearing, and receive electronic statements on IMB accounts as well as information on the balance of the account, etc.
For the benefit of Bank-Client system users a longer banking day has been introduced for receiving payment and other orders.
11. Need staff
All labor relationships in Russia are covered by the Labor Code (2003) and federal laws of the RF. Labor law in Russia protects interests of employee and employer.
Finding the right people for the job is becoming an exact science, which through internet-based technologies and best practice, may save you thousands of dollars over the next few years. There are lots of job agencies in Russia, rendering services in finding right persons. We advice to work with those agencies, who have good reputation and specialize on the certain categories, ether you need top-manager or yard-keeper. Usually the contract between company and job agency include numbers of attempts in finding the right person the employer has, if the person he hired doesn`t suit the company for some reasons in a limited test-time.
We supply our Clients with the information about job-agencies we can trust.
12. Property rights
Foreign companies as well as Russian companies with the participation of foreign shareholders are entitled to obtain property rights on plot of land. Before the Land Code stated they were able to use plots pf land only on the temporary base. In 2002 the State Duma adopted the Federal Law on Farm Land Circulation. According to the article 3 of the above mentioned Code the foreign citizens as well as legal entities, in which the share of foreign citizens foreign legal entities and stateless persons exceed 50%,can only poseses land plots of shares in the right of joint property in land pertaining to farm land or leasehold basis. Lease contracts may be entered maximum for 49 years.
We believe the above information will be useful for you and we wish you luck and success, doing business with Russia.
Ekaterina Komarova,
lawyer
For further information contact EKATERINA LAW CONSULTING AB