Business in Russia for Foreigners: Traps and Pitfalls

What does a foreign citizen need to start a business in Russia? Are there any restrictions? May a foreigner carry out business activities in any sphere? We’ll try to answer these questions in this article.

According to the Act on the Legal Status of Foreign Citizens in the Russian Federation, «foreign citizens are entitled to dispose of their abilities to work without impediment, choose their occupation and profession, and to use their abilities, and property freely for business and other economic activity not prohibited by law subject to the restrictions stipulated by the Federal Act».

If a foreigner wants to carry out activity in Russia, he or she has several opportunities:

  • to register a legal entity. In this case, the status of a foreigner does not suppose any restrictions regarding the incorporation of legal entities on the territory of Russia;
  • to register as an individual entrepreneur. The legislation of Russia does not contain any restrictions related to the absence of the citizenship of Russia.
  • As an individual entrepreneur, a foreigner is entitled to get a patent or to choose a simplified taxation system.

    The state registration of a foreign citizen as an individual entrepreneur is carried out at a tax office at the place of residence. In this case, the residence of the foreigner shall be the address of temporary residence (registration) which is stated on the record (stamp) of a standard form in the identity document (attachment) or in a separate document.

  • open a branch of an existing foreign company. The legal capacity of branches of foreign organizations is almost the same as the legal capacity of the Russian legal entities.

 

A foreigner must register with the migration registration authorities to carry out business activity. As general, a foreigner must register with the migration registration authorities, namely in the departments of the Ministry of Internal Affairs, upon the expiry of 7 days from the moment of crossing the border. In the case of the citizenship of some countries, this period may be extended (for Ukrainian citizens, this period may be extended to up to 90 days).

If a foreigner registers a legal entity or a branch of a legal entity existing outside of the territory of Russia, he or she may obtain employment in that legal entity or branch.

The restrictions on business activities of foreigners on the territory of the Russian Federation are insignificant and are mostly related to the specifics of the activity or the specifics of the territory where a foreigner carries out business.

For example, foreigners may be restricted in residence or registration at the place of residence in closed administrative territorial units, border areas, closed military camps, etc. Therefore, it will be complicated to run a business there. Foreign citizens and foreign legal entities cannot own land plots located in border areas or within the boundaries of seaports.

The Bank of Russia may refuse to register a bank or any other credit organization with the participation of foreign capital if reached quota, i.e. the maximum amount of foreign investment in the authorized capital of credit organizations in Russia. The same is carried out by the insurance supervision body in respect of insurance organizations with foreign participation.

The insurance organizations that are subsidiaries of foreign companies or have a significant share of foreign investments cannot carry out life insurance, health and property insurance at the expense of funds allocated for these purposes from budgets as well as compulsory insurance of civil liability of vehicle owners in the Russian Federation. The payment by foreign investors of their shares (shares in authorized capital) of insurance organizations can be made only in the monetary form in the currency of the Russian Federation.

The Air Code of the Russian Federation also stipulates the restrictions for foreigners. Foreign carriers are required to obtain one-time permissions from the Federal Air Transport Agency to accept passengers, baggage and cargo in Russia as well as mail for air transportation to the territory of a foreign country or transporting them to the Russian Federation from a foreign country.

Foreign organizations and foreigners cannot be founders or participants of the private detective or security organizations as well as organizations that carry out educational activities in this sphere.

Foreigners and foreign fishing vessels are prohibited from fishing as a business activity.

Foreign citizens and foreign legal entities with a share of the foreign capital of more than 50 percent may own land plots from agricultural land only on leasehold.

Foreign citizens and foreign legal entities are not entitled to exercise ownership, control or control of the mass media, editorial offices of the mass media or broadcasting organizations.

The special conditions are set forth in relation to the acquisition of shares of strategic enterprises by foreigners. As a rule, such deals must be approved by the authorities of the Russian Federation in advance.

The Government of the Russian Federation also determined the priority of goods, works and services of a Russian origin over goods, works and services of a foreign origin. It concerns the purchases by state corporations and enterprises with a share of the Russian Federation and its constituent entities of 50% or more. When evaluating tenders, the cost of goods, works, and services produced in Russia are estimated as if the stated price was 15% lower.

Let’s have a look at the tax issues of business activities of foreigners in Russia.

A foreigner who is not a tax resident of the Russian Federation pays taxes on dividends from participation interest in the activity of Russian enterprises at an increased rate of 15%.

Foreigners running a business after the establishment of a permanent representative office of their foreign company pay income tax and VAT in the same manner and at the same rates as Russian legal entities. They are not allowed to choose the simplified taxation system. Moreover, if foreign companies did not incorporate a permanent representative office on the territory of Russia to reduce the taxable base, the Russian tax authorities may determine that the permanent representative office was established anyway and charge additional taxes (if, for example, a foreign organization has a warehouse in Russia and carries out permanent activity in Russia, etc.).

Foreign citizens, persons without citizenship and foreign legal entities that committed an administrative offense on the territory of the Russian Federation are subject to administrative liability on the usual terms. Thus, the foreign entrepreneurs who violated the requirements of labor protection, fire safety, environmental protection, etc. are subject to liability on the usual terms. It also concerns the criminal liability for crimes in the field of business activity committed in Russia.