In deciding to start doing business in Russia, a vital subject to consider is the type of a business organization form to select. If the organizers would like to build a company’s presence in Russia, an imperative issue to analyze is whether a representative office – short of opening a formal company – would suffice to effectuate the firm’s initial purpose.

The chief distinction in the two forms of business associations under Russian law, a representative office on the one hand and a company on the other, is that the former has no legal persona of its own, while the latter is considered to be a separate legal entity. In weighing which option to select, an entrepreneur needs to take into account the benefits that one form of business organization offers over another form and the extent of business operations that are to be conducted in Russia.   

If a U.S. company has no plans for performing any business within Russia and if its local branch is designed to assist customers and the parent company, a representative office should be set up as a first step.

Representative office

As a matter of Russian law, a representative office has no separate personality. The parent company appoints the director of the representative office, who then can act pursuant to the authority he or she was given.

As far as reporting requirements are concerned, a representative office needs to register with tax authorities, prepare a yearly tax statement, and have its books available for inspection. A benefit of choosing a representative office form is the limited degree of taxation to which the entity is subject under Russian law. For as long as the representative office does not acquire a permanent business establishment status, it is not responsible for Russian taxes, aside from social security contributions for its staff and the value-added tax (VAT) on goods and services it purchases. An added advantage is that in line with Russia’s currency control laws, a representative office has the status of a non-resident. The only event that could cause a representative office to lose its favored standing with the tax authorities is if it conducts commercial activity inside of Russia. As such, if the entity engages in in-country activities aimed at generating a profit and becomes a permanent establishment, it is taxed as a corporation under Russian law.

The scope of permissible activities that a representative office may undertake in Russia includes searching for clients, sharing information on the parent company, conducting negotiations, and signing contracts. However, the office is not allowed to sign an agreement for the supply of products or services to another Russian entity within Russia. Additionally, a representative office may not bring goods into Russia from abroad, unless the imported products are for the office’s internal use.

To open a representative office in Moscow, the following steps need to be made: (1) registration with the federal state statistics service; (2) registration with the pension fund office; (3) registration with the social insurance office; (4) registration with the health insurance fund; (5) registration with the Ministry of Justice registrar of foreign enterprises; (6) payment of the state accreditation fee; (7) registration with the Russian tax authorities to obtain a tax number; (8) mandatory opening of a Russian bank account.

Company formation

From the early 1990s, the Civil Code of the Russian Federation allowed the formation of a great variety of business organizations. These forms included
(1) partnerships, which could be general or limited; (2) corporations, which could be closed or open joint stock companies, known in Russian as ZAOs and OAOs, respectively; (3) limited liability companies, designated with an acronym OOO; (4) as well as additional liability companies, where the participants’ responsibility for the debts of the organization was several times greater than the amount of their contributions.

In September 2014, significant changes to business entity laws took place in Russia. Instead of the old system, all legal entities now became corporations and unitary entities, depending on whether or not the founders have the right to participate in the legal entities and are able to form an executive body.

Amendments to Russian law provide that joint stock companies may be either “public” and “non-public” companies, as opposed to open or closed joint stock companies. An entity with publicly-traded securities is generally classified as a public company.

The shareholders of a joint stock company, whether public or private, and the participants of a limited liability company bear responsibility for covering the debts of the company up to the value of their investment in the entity. The general rule notwithstanding, instances may arise where a parent entity is found responsible for the debts its subsidiary incurred. A notable example of that would be a situation where a parent entity issues directives to its subsidiary in regard to specific transactions. In a bankruptcy setting, if the subsidiary’s insolvency is attributed to its parent’s directives, the parent organization may be adjudicated liable for the debts of the subsidiary as well.

While companies and corporation may have among their shareholders both foreign persons and out-of-country business organizations, a Russian entity may not in its entirety belong to another corporation if that company is itself owned by only one shareholder. Thus, a holding company of a Russian entity needs to include more than one shareholder.

In Russia’s corporate practice, nearly all large companies select the corporate form of association. Foreign marker players generally select the limited liability company form.

The benefits of using a company or a corporation as a form of business organization in Russia is that it is able to transact business as a separate entity, import goods for sale in Russia, and earn a profit from operations in the Russian market. The downside of using the corporate form is that it brings the entity within the coverage range of Russian tax laws.

The following steps are necessary to set up a limited liability company in Russia: (1) registration with the Uniform State Register of Legal Entities with the tax authorities and payment of the registration fee; (2) registration with the taxing authorities in order to obtain a tax number; (3) registration for pension insurance; (4) registration for social insurance; (5) registration with the health insurance fund; (6) registration with the State Statistics Service; (7) registration of the company’s seal; (8) if necessary, notifying the Federal Antimonopoly Service of the company’s foundation; (9) mandatory opening of a rouble-denominated bank account and a dollar- or euro-denominated bank account to deposit the share capital of the company to be established.

JVs and investments

The Russian government favorably views foreign investment in the country, although some limitations do exist in such strategic areas as the defense industry or the insurance sectors, to name a few. Russia’s Foreign Investment Law enacted in 1999 sets forth the basic principle that foreign investors may not be treated on a different footing than Russian investors. The term direct foreign investment refers to a situation in which 10 percent of a company’s authorized capital gets allocated to an investor from another country.

Tax relief is not generally granted at the federal level, but various incentives are provided in the regions. Regional authorities are in a position and often do grant property tax exemptions. Additional support for a particular investment project may become available as a result of involving the Russian authorities, such as a regional governor, or the Economy Ministry. Furthermore, if a company imports machinery and equipment as part of its share capital at the time of its foundation, the entity would not be liable for import duties.

In line with the law on Special Economic Zones of 2005, Russian authorities carved out particular regions of the country, where tax support measures incentivize development in given economic sectors. There are currently 25 zones in Russia, and the segments of the economy they are designed to bolster include technology and innovation, manufacturing, tourism, as well as logistics. The zones have been set up for 49-year terms. Over 400 investors have already invested in the special economic zones.

Benefits of setting up a business in a special zone include a lower profit tax of two percent, instead of 20 percent for manufacturing and logistics, and zero percent for technology and tourism. Businesses located in the special economic zones also receive a property tax holiday for a 10-year period. Some zones provide additional exemptions from customs duties, as well as value-added taxes. There are other opportunities available in the Kaliningrad and the Magadan regions, where additional tax preferences apply.

Investors from abroad are free to set up Russian companies by bringing up to 100 percent of the share capital from outside of Russia. Foreign investors similarly can buy out an existing Russian company. The law imposes no requirement to have Russian business partners in any venture, and a foreign entity’s participation in a joint enterprise with less than a 51-percent stake in the company is not advisable. A position of a minority owner is fraught with danger of the majority shareholder’s usurping control of the business and its finances. In order to ensure control over the enterprise, it is ordinarily recommended that the investors have a specific managing position within the company created in Russia.

Under a law passed in 2008, foreign investment in Russia is not allowed for 42 specific sectors of the economy that are deemed as strategic. Investing in these areas requires approval from a commission presided over by Russia’s Prime Minister. A similar approval is necessary if a foreign investor desires to purchase a more than 10-percent stake in a company that extracts significant mineral resources.

Taxes

Russia is a country that does not have high tax rates overall. Nonetheless, regulatory changes relative to tax administration at both the federal level and regionally make the Russian tax system appear complicated. Some of the most important tax items that businessmen come across in running a company in Russia include profit taxes, property taxes, land taxes, transportation taxes, as well as value added taxes.

Business taxation

The tax on the profits of companies is 20 percent and it is payable in advance payments on a quarterly basis. The methodology utilized for computing the taxable amount is analogous to the model used in the U.S., with the exception that Russian tax law gives more narrow definitions to operating expenses that reduce one’s tax liability.

A U.S. company’s representative office would not be subject to Russia’s profit taxes, so long as its activities do not bring it within the ambit of a permanent establishment definition.

Subject to certain exemptions for assembly services, whenever a company renders services within Russia’s borders, a profit tax of 20 percent is to be withheld by the recipient of the services as the receiver’s tax agents.

Under Russian law, the amount on which property taxes are assessed is the mean yearly book value of the tangible or the intangible asset at issue. The value can well vary from one region of the country to another. The property tax rate is 2.2 percent, and its reduction is a prime tool for attracting investment to Russia’s regions. On a case-by-case basis regional governments may exempt a company of property taxes for certain tangible investments.

The land taxes are applied only on the local level, with the upper limit for the tax set at 0.3 percent for agricultural land and 1.5 percent for housing. Land taxes are assessed at the closing of a purchase transaction, and the land value used is the price listed for the property in the official land register.

Transportation taxes are collected from vehicle owners annually and the rates increase progressively depending on engine characteristics. Regional authorities are free to vary the rates by as much as 10 times.

Valued added tax

The valued added tax, uniformly referred to as VAT, is at 18 percent in Russia, although a lessened rate of 10-percent is applicable to select foodstuffs, children’s goods, print media, as well as medical equipment. Products exported out of Russia are spared Russia’s VAT assessment. Exportation is similar to a sale free of taxes. By contrast, VAT does apply to imports into Russia at the rate of 18 percent or 10 percent based on the kind of item imported. It is to be remitted to the taxing authority in addition to whatever other customs tariffs are applicable. The principles behind Russia’s VAT regime bear similarity to the VAT system used in the E.U.

Russia’s law does provide for certain VAT exemptions, such as the importation of securities and cash. Other untaxed categories of imports include aids for the disabled, non-commercial shipments for social needs, scientific research, or humanitarian aid. Printed matter, films, and objects of art tendered as gifts or exchanged with organizations, libraries, and museums are similarly VAT-free.

Any VAT taxes paid during importation may be later used to offset any VAT amounts owed.

In situations where a foreign entity without its own VAT number provides services within the Russian territory, the recipient of the services must retain the appropriate VAT as a tax agent of the non-resident contractor.

Taxes on income

Russia has a flat-rate income tax of 13 percent that is withheld at the time the salary is paid and remitted to the taxing agency. Individuals who are self-employed are required to give periodic income reports to the tax authorities. Foreign persons working for a Russian company are required to pay income taxes at the rate of 30 percent for the initial 183 days of working in the country and then at the rate of 13 percent, with any overpaid amount refunded.