National Agency for Direct Investment

Business entities

Legal framework

 

Companies setting up operations in Russia commonly find themselves in circumstances where a formal legal opinion is required for basic issues that in Western countries would be resolved very easily and usually free of charge, but which in Russia can dramatically change the feasibility of a deal.

 

Foreign investors sometimes underestimate the need to follow important guidelines. This may have serious consequences when doing business in Russia.

 

A summary of the general legal framework for investors so that their investments in Russia can be as effective as possible. Familiarisation with these basic principles may save considerable time and expense later if a projected business structure (commonly accepted elsewhere) is not advisable or even possible in Russia.

The current legislative framework for investment and business in Russia is described below.

 

Civil Code

 

Chapter 1 of the Civil Code governs certain types of business organizations and their conception. It covers requirements for foundation documents, name, location, governance and state registration of legal entities. It defines branches and representative offices and governs reorganization and liquidation.

 

Joint-stock and limited liability companies are governed separately by the Federal Laws On Limited Liability Companies No 14-FZ of 8 February 1998 and On Joint- Stock Companies No 208-FZ of 26 December 1995.

 

Registration

 

The introduction on 1 January 2004 of a onewindow registration procedure for Russian legal entities has not streamlined the business registration process. In Moscow, the situation deteriorated with a new requirement stating that only the CEO or director of a founding company may file a state registration application and retrieve the registration certificates, in personno representation by proxy is allowed. This has drawn out the registration timeframe considerably.

 

If the CEO or director cannot come to Russia to file the application in person, it should be sent by registered mail (not by courier) to the Russian registration authorities, who process the application and return it either to the address of the founding company or of the entity being incorporated.

 

The registration process may take several weeks, or even months, to complete.

Shelf companies are generally not available, and the incorporation process can take from two to three months.

Preliminary approval of the Federal Anti-monopoly Service or a subsequent notification is required in certain cases. As of 1 January 2006, the state duty to register a Russian legal entity is 2,000 roubles (approx. USD 80). There is no processing fee for registration.

 

Choice of entity

 

Foreign investors can choose from a number of different forms of business representation in Russia, from Russian legal entities to representative offices and branches of foreign legal entities. Russian legal entities may be established in various forms, including joint-stock companies, limited liability companies and partnerships.

 

Representative offices of foreign entities are strictly limited to conducting only liaison and support functions. Branch offices are nowadays only allowed to be involved in commercial activities, though they were allowed a much broader range of activities in the past. Many investors opt for branch offices at the outset because these entities are able to engage in almost any kind of commercial activity, are easier to establish and are subject to less onerous reporting requirements.

 

At the same time, for many investments, including joint ventures, production plants, licensing, customs or privatisation issues, a Russian legal entity may be better suited to an investor's needs.

 

Forms of business entities

 

Currently, the following forms of commercial legal entities (for-profit) may be incorporated in Russia:

 

Full partnerships;

Limited partnerships (kommandit partnerships);

Limited liability companies;

Additional liability companies;

Production co-operatives;

Joint-stock companies (open and closed);

Unitary enterprises (state-owned legal entities not available to foreign investors).

 

Of the above, only the joint-stock company resembles a corporation, but the limited partnership and the limited and additional liability companies also limit the liabilities of investors to the extent described below.

 

Joint-stock company

 

In accordance with the Russian Civil Code, the jointstock company's capital is divided into a definite number of shares. The participants of the joint-stock company (the shareholders) are not liable for the company's obligations and accept the risks of losses in connection with its activity within the limit of their respective stakes.

 

Russian law provides that only joint-stock companies may issue stock, which is deemed as securities and is subject to registration. Russian legislation describes open and closed joint-stock companies, which are broadly equivalent to public and private companies. Public companies must disclose certain financial and other information annually.

 

A company may be created as a new company or by reorganising an existing legal entity (consolidation, division, spin-off or a change in legal form, etc.). A company is considered created from the date of its state registration.

The share capital of a joint-stock company is composed of the nominal amount of shares acquired by the shareholders. The minimum charter (share) capital for open and closed joint-stock companies is 1,000 and 100 times the minimum monthly wage respectively.

 

General provisions concerning the management structure of the joint-stock company are contained in the Federal Law on Joint-Stock Companies and the Civil Code. The higher management body of a joint-stock company is the General Meeting of Shareholders, which must assemble at least once a year. According to the Russian Civil Code, a company with over 50 shareholders must have a board of directors. The company's executive body may be collegiate (board, directorate) and/or one-man (director, general director). The executive body of a joint-stock company shall carry out the day-by-day management of the company's activity and shall report to the board of directors and to the general meeting of shareholders.

 

In accordance with the Federal Law on Joint-Stock Companies (article 21), a joint-stock company may be liquidated voluntarily or by court order in the procedure or on the grounds established by the Civil Code. The liquidation of a company shall result in its termination, with no transfer of rights and obligations by succession to other persons.

 

 

Limited liability company

 

Under the Civil Code, a limited liability company is established by one or several persons whose charter capital is divided into shares according to the constituent documents.

 

In this type of company, the liability of each participant is limited to the value of its contribution. Each equity holder in a limited liability company has the right at any time to withdraw from the company and to receive an amount equal to its pro rata share of the net assets of the company (provided the company is solvent). For foreign investors contributing significant amounts of time and money to a joint venture at the start-up phase, this aspect can be a problem.

 

The charter capital of the limited liability company shall determine the minimum size of the company's property guaranteeing the interests of its creditors. The minimum charter capital of a limited liability company is 100 times the minimum monthly wage*. The management structure of the limited liability company is similar to that of a joint-stock company.

 

* The term minimum monthly wage is used by the government as a ratio to calculate different payments, fines, penalties etc, and does not reflect the real minimum wage. As of 1 January 2007, the minimum monthly wage (for calculating different payments, fines, penalties, etc.) is 100 roubles (approximately USD 4.0).

 

Full and limited partnership

 

A full partnership is similar to the American general partnership, in which partners bear (full) joint and several liability for the partnership's obligations. A participant in a full partnership may not be a full partner in any other partnership. A limited partnership, which is closer to the European kommandit partnership, has both full partners and partners whose liability is limited to amounts equal to their contributions. A full partner in a limited partnership may not be a full partner in another partnership and its liability is the same as for full partners described above. Partnerships under Russian law are generally regarded as legal entities and are taxed accordingly. Contractual agreements for joint activity do not create a legal entity, although they share some of the characteristics of a general partnership, and there are special rules governing their tax treatment.

 

Branches

 

A branch or representative office of a foreign legal entity needs to register with the authorities. However, in contrast to Russian legal entities, the process of registering a branch or representative office of a foreign company involves several federal and local authorities. To register, branches and rep offices need to go through the following steps:

 

- Accreditation with federal and local bodies. Accreditation is in effect mandatory, since the local banks and administrative authorities may not recognise the branch/representative office without it;

- Tax registration;

- Registration with state statistic authorities, obtaining statistics codes;

- Registration with non-budgetary (Pension and Social Security) funds;

- Opening bank accounts.

 

Many investors confuse the concept of a branch and an accredited representative office, which is a mistake as they have certain important differences. An accredited representative office is not a Russian legal entity but an officially recognized extension of a foreign legal entity. Russian law restricts the scope of an accredited representative office's activities to certain types of representational functions.

 

A branch's legal status differs substantially from that of a representative office. For example, under Russian law, a registered branch of a foreign legal entity (but not a representative office or unregistered branch) is treated as an enterprise with foreign investment. Therefore, while a registered branch can hold a licence to conduct regulated activities (such as oil field development), a representative office or unregistered branch may not.

 

The state duty for branch accreditation as of 1 January 2007 is RUB 60,000 (approximately USD 2,400). In addition, accreditation bodies also charge a processing fee from between USD 500 and USD 2,000, depending on the period of accreditation (from one year to five years, respectively).

 

Representative office

 

An accredited representative office is not a Russian legal entity but an officially recognized extension of a foreign legal entity. Although Russian law seems to suggest that the scope of an accredited representative office's commercial activities would be limited to certain types of representational functions, in practice many foreign firms conduct additional commercial activities that, according to a strict interpretation of the law, should only be conducted through a registered branch or Russian company.

 

For the accreditation of a representative office, accreditation bodies charge a processing fee ranging from USD 1,000 to USD 2,500, depending on the period of accreditation (from one year up to three years, respectively).

 



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