Affiliated Branch and LLC: What is Better to Open to a Foreign Company in Russia?

Affiliated Branch of a Foreign Company and LLC with Foreign Participation (Sub-company): Differences, Advantages and Disadvantages

The two most common options for foreign companies to operate in the Russian Federation are affiliated branches and limited liability companies.

Offices are less popular, as their main purpose is to represent the parent company in Russia; representative offices cannot engage in commercial activities of the parent organization — their functions are limited to represent the interests of the company in Russian Federation (partners search, marketing research, promotions, etc.) and to officially protect its rights. Offices are not considered in this review.

Affiliated Branch of a Foreign Company and LLC with Foreign Participation (Sub-company): Differences, Advantages and Disadvantages
Foreign companies open their branches in Russia to carry out activities of a commercial nature and bear property responsibility for the obligations assumed in connection with the conduct of activities in Russia. Foreign companies can carry out such activities through branches only from the date of their accreditation. Currently, accreditation is issued indefinitely.
Foreign companies can also conduct their activities in Russia by establishing a limited liability company (LLC), which can carry out commercial activities only after registration with the tax authorities for an unlimited period of time.

The table below shows the key differences between branches of foreign companies and sub-companies of foreign legal entities registered in the LLC legalform.

Affiliated Branch

The branch is part of a foreign company, not an independent legal entity (in fact, it is the same as another office of the company, only in Russia).

Therefore, if we talk about financing, you can freely transfer to and from the branch account and it does not require the drafting of additional agreements for the provision of various services, and one does not need to adapt to the requirements of the rules of currency control (according to the law, Russian banks are required to request a special set of documents from the customers for processing transactions in foreign currency). The registration process takes 1.5−2 months. When accrediting branches it is necessary to pay a one-time state fee in the amount of 141,000 RUB.

LLC

In most cases, the liability of LLC participants (it can be both Russian and foreign individuals and legal entities) is limited to their authorized capital in the Company. The minimum authorized capital is 10,000 RUB (we recommend increasing it to at least 100,000 RUB, which will cover local expenses and help not to look suspicious in the eyes of the tax authorities and banks, which apply formal criteria for monitoring suspicious transactions and identifying one-day companiesin the course of their inspections). LLC conducts commercial activities without restrictions, interacts with customs and can obtain licenses (if necessary). Since it is an independent legal entity, its financing can be carried out either through the authorized capital or through service contracts. Transactions between a Russian company and any foreign company are regulated by the currency control authorities, and the Company must issue a transaction passport under certain criteria.
Starting from January 1, 2018, both residents and non-residents will submit supporting documents and information on foreign exchange transactions to the authorized banks, and export contracts instead of the transaction passport will be recorded in the bank in this connection.

Labor Relations

From the point of view of Russian labour legislation, both the branch and the LLC are subject to the same provisions and are allowed to employ Russian and foreign citizens.

In order to employ foreign citizens, LLC or branch is required to obtain a work permit. There are two types of work permits in Russia: 1) ordinary and 2) for highly qualified specialists (HQS). A standard work permit is issued for a period of one year only. The procedure for obtaining a permit for HQS is simpler, and the validity of such a permit is 3 years. Employers do not pay a social contribution from the salary of employees with a permission for HQS. Income tax for highly qualified foreign employees is 13% excluding time spent in Russia. (In the case of an ordinary work permit, the income tax will be 30% if the employee had spent no more than six months in Russia). The main condition for obtaining a work permit for HQS is an annual salary of at least 2,000,000 rubles (before tax).

Summing It Up

The main practical difference between a branch and an LLC is the way of financing transactions. In the case of a branch, its head office (since they are considered to be the same legal entity) can send money from abroad only by crediting a Russian bank account. An LLC (which is a subsidiary and a separate legal entity) requires a commercial reason for financing: a contract, loans or services that the LLC provides to the parent company. LLC financing can also be carried out by increasing the authorized capital.
There is a third option, which is quite often used in practice: financing is carried out by making additional contributions to the property by participants without increasing the authorized capital, but auditors in foreign countries can prohibit to consider such operations as expenses in this case.
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Ranking of companies by HR records management in Russia 2021
Ranking of companies by payroll in Russia 2021
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Ranking of outsourcing service providers in Russia 2021
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Ranking of the largest consulting companies in Russia 2021
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