Doing Business in Russia: Choosing a Form of Legal Presence

Doing Business in Russia: Choosing a Form of Legal Presence

Russian corporate law provides several options for foreign investors planning to enter the Russian market. Depending on the general purposes of business, a foreign investor can: (a) open a representative office of a foreign company (hereinafter – “RO”); (b) open a branch of a foreign company; (c) act through a Russian legal entity (limited liability companies, and joint-stock companies are most commonly-used for these purposes).

A RO/branch of a foreign company does not have a separate legal personality and is treated as a part of a foreign parent company, which does not fully fall under the Russian legal and tax systems. A parent company is liable for its RO/branch’s obligations with respect to business in Russia. 

As a rule, a RO’s legal capacity is restricted, and it typically: promotes goods and services of a parent company, maintains marketing and advertisement thereof, and protects legal interests of the parent company. However, a branch is entitled to perform all business of a foreign legal entity, including the representation of its interests, and it is created in order to maintain commercial activity of a foreign company in Russia’s territory. 

Contrary to a RO/branch, a Russian legal entity with foreign investments is treated as fully independent from its owners (shareholders in JSCs/participants in LLCs). That allows the owners to limit their personal liability by the value of their shares. A Russian legal entity is liable for its own obligations. Like any other Russian company, an entity with foreign investments is entitled to maintain any kind of business (e.g.: production and sale of goods, rendition of services, etc.) that is not proscribed by the Russian legislation, with some restrictions connected with national security reasons and imposed on companies with foreign investments. Entities with foreign investments are subject to state registration in accordance with almost the same rules as the other Russian entities. Some types of business activities (e.g. transportation, insurance, etc.), require a legal entity to obtain a license.

 A Russian legal entity shall comply with all of the rules in accordance with Russian legislation, tax, and accounting laws, including the requirements of providing financial and other reports. For settlements between a Russian subsidiary and a foreign parent company, there shall be duly formulated written documents and supporting documentation. Transactions between a parent company and its Russian subsidiary are performed in accordance with the provisions on transactions between interdependent persons provided by the Russian Tax Code. Contrary to that, financing of a RO/branch by its parent company is not subject to Russian taxation. 

 There are differences with respect to cash-flows between a foreign parent company and its RO/branch and between a parent and a Russian subsidiary. According to the Russian currency laws, Russian legal entities are treated as residents, while foreign companies and their ROs/ branches – as non-residents. Thus, cash-flow between a RO/branch and a parent company is considered as an operation between non-residents, which is not subject to Russian currency control. However, transactions between a RO/branch and Russian companies, or between a Russian subsidiary and its foreign parent company are subject to Russian currency control, and thus, such transactions require strict documentary proof. 

 Procedure and conditions of attracting foreign employees for a Russian legal entity and a RO/branch of a foreign company are rather different. Generally, in order to hire foreign employees, a Russian legal entity shall obtain a special permission for that matter from a competent authority in immigration issues, and work permission or a patent must be obtained by the foreigner himself. A RO/branch hires foreign employees by procedure of accreditation, which is performed by the Chamber of Commerce and Industry of the Russian Federation (Chamber). The Chamber facilitates visas and invitations for foreign employees. A status of accredited employees helps the RO/branch of a foreign company to avoid employment quotas. Generally, a RO/branch can accredit up to 5 employees. 

Therefore, advantages of using of any form of doing business in Russia, first, relate to concrete objectives and needs of a foreign company. Thus, to choose the right form of presence in Russia, a complex analysis of a business-model should be made, the aims of company’s presence in the Russian market considered (gaining profits in Russia, representative functions, advertising and marketing, etc.), the direction of the cash-flows identified (cash-flows “in” or “from” Russia), and the character of future business transaction, including currency ones, defined.