What it is necessary to realize about business with foreign capital investment in the Russia

The citizenry of the Russian Federation understand foreign capital investment mainly as an injection of foreign currency funds from abroad for future profit. In practice, it is more complex — investments are not only monetary, but also intellectual or material. It is correct to define "foreign capital investment" as any values (material and intellectual), which are invested in the Russian economy in order to make a profit.

Investments can be:

• direct — when buying more than 10% shares of a particular company and the investor, who is actively taking participation in its affairs;
• portfolio — holding less than 10% of shares without active participation;
• real — investment of existing projects;
• credit, intangible (acquisition of trademarks and patents), etc.

The businessman, who puts his capital in circulation in foreign country, always has a danger of losing his investment. He really need someone to advocate his interests, certain guarantees — for reinvestment, the right to pay taxes once in a particular country, etc.

The Russia is interested in attracting foreign capital investment. There are laws, protecting the investors' interests — 160-FZ, dated 09 July 1999, "On foreign capital investment in the Russian Federation", 7-FZ, dated 12 Jan. 1999 "On non-profit organizations" and etc.

The legislation of the Russian Federation, speaking about organizational and legal forms of business, does not separate residents and non-residents of the Russian Federation. All investors, wishing to register a particular form of business activity in the state register of legal entities of Russia, must follow the same laws and regulations. This approach makes it possible for every entrepreneur to expect to receive foreign investment.

The successful implementation of business activities, involving foreign capital investment largely, depends on the correct choice of business forms. It all depends on the goals and nature of the activity. For example, FDI can be both commercial and non-commercial.

Commercial enterprises are legal entities, created to extract maximum profit for shareholders (art. 50 of the Сivil Сode of the RF). Using investments from abroad allows increasing the amount of income.

Art. 50 of the Civil Code defines NPOs as those that do not consider profit and its subsequent distribution as their main goal, but rather the satisfaction of spiritual, social, scientific, educational and other needs. Non-profit organizations include:

• religious organizations (communities, missions, monasteries, etc.);
• public organizations (communities, partnerships, etc.)
• political parties;
• charitable foundation;
• associations and unions;
• educational, cultural and other organizations.

Types of enterprises with foreign investments are classified depending on the size of the shareholders' deposits. Independent business management involves both the investor’s capital and labor, intelligence and time. In this case, 100% of the profit will also belong to him.

Equity participation in business has become more widespread. With equal participation of partners, the company is based on parity principles. Depending on the amount of such participation, the investor’s influence on the company can be defined as:

• control (in the presence of a controlling stake);
• significant;
• minor.

The presence of FDI from 51 to 100% of funds from abroad ensures the right of a foreign investor to become a controlling person or owner of the enterprise. To do this, it is necessary to establish a company or buy out shares from the owners of an existing firm. This is guaranteed by Federal law of the Russian Federation 160-FZ, dated 09 July 1999. At the same time, it should be noted that this law does not apply to enterprises of strategic importance, defense, aviation, etc., educational, scientific and religious spheres.

The effect of this regulatory legal act is also limited in relation to investments in the banking sector. Thus, article 18 of the Law of the Russian Federation 395−1 "On banks and banking activities" as amended on 03 Aug. 2019, prescribes that the maximum participation of foreign capital in credit organizations is 50%, in case of exceeding this quota, the license will be revoked.

Such restrictions are intended primarily to protect country’s interests (including domestic producers) from foreign competitors.

The term "joint enterprise" (JE) in Russia appeared in the 1920s, gained popularity in the late 1980s and was used in everyday use in the 1990s. Law of the RSFSR 1545−1, dated 1991, noted that legal entities with the participation of a foreign element are subjects of international law. These are JE — commercial organizations with the participation of foreigners.

Today, the term JE is not included in the economic and legal terminology. The law of the Russian Federation 160-FZ, dated 09 July 1999, operates with a different, more capacious concept — commercial organizations with foreign investment (COFI). Moreover, not only money, but also modern technologies, equipment, securities can be investment.

A domestic enterprise acquires the status of a COFI from the moment one or more foreign shareholders join its founders (the share must not be less than 10% of the authorized capital). From this moment, the organization is subject to the above-mentioned Law of the Russian Federation 160-FZ. In enterprises with joint capital, the property of foreign investors is guaranteed to be legally protected and cannot be alienated (art. 8).

As already noted, non-resident investors of the Russian Federation enjoy the same rights as Russians.
All the powers, procedures for monitoring and managing the COFI must be spelled out in the Charter.

Most often found:

1. COFI with equal control — when partners have equal rights, founders do not actively participate in management, delegating these functions to professional managers. The head is appointed at the constituent meeting of shareholders, his rights and duties, such as representation of the company’s interests, conclusion of contracts, executive functions, etc., are defined by the constituent documents (art. 274 of the Labor Code of the Russian Federation).
2. COFI with the predominant control of one of the founders. The owner of the enterprise can independently manage and lead the company or appoint a manager.

The structure of the COFI is determined by the founders independently in accordance with the chosen organizational and legal form. For example, a generic structure of JSC includes:

• the shareholders' meeting as the Supreme body;
• Board of Directors (3, 5 or more, but always an odd number) — for managing between meetings;
• Management Board, appointed by the Board of Directors;
• position of General Director with the right of first signature;
• audit commission.

The use of foreign investment in the creation of joint enterprise provides for the achievement of several goals, the main of which is to obtain benefits. This is important not only for the direct participants of the cooperation. Thanks to the COFI, the following tasks will be solved on a national scale:

• new high-quality products/services entering the market and, consequently, import substitution;
• getting the currency;
• introduction of innovations and acceleration of modernization processes in the economy;
• providing regions with new jobs and others.

The main goal for the founders and shareholders of a joint enterprise is mutual financial benefit. Foreign participants also pursue a number of other goals:

• to expand sales area and find new partners;
• to gain a foothold in this territory in the hope of a more favorable situation in the future;
• to use highly skilled and cheap local labor;
• to get access to cheap energy and other raw materials.

Thanks to investments from abroad, Russian entrepreneurs expect to increase productivity, introduce advanced technologies, increase the material interest of employees in labor results, reduce financial risks, optimize marketing at enterprises with foreign investment and enter the world market. Obtaining the status of a COFI will allow using the right to benefits, etc.

Foreigners, who want to create FDI, can take one of the possible ways. The first method provides that the authorized capital will consist of 100% of the founder’s funds. In this case, there are two possible options:

• Organization of a company from scratch, including subsidiaries with the right of legal entity.
• Purchase of an existing Russian company.

For state registration of a company, a non-resident must submit an application, notarized constituent documents (2 copies), proof of legal address, an extract from the commercial register of the country of residence, pay the fee and registration fee.

The second method is applicable to existing companies. The creation of enterprises with foreign investment is associated with equity participation in the business. In order for an organization to receive the status of a COFI, a foreign investor needs to purchase at least 10% of its authorized capital.

Article 4 of the Federal law of the Russian Federation 160-FZ, dated 09 July 1999, grants the right to existing COFI to open structural divisions outside the location of the parent company. For accreditation of such structures, there is need to submit an application, present constituent documents with the regulations on the branch, statements about the decision to open it, etc.

Law of the Russian Federation 129-FZ, dated 08 Aug. 2001 (as amended on 03 Aug. 2019) "On state registration of legal entities and individual entrepreneurs" clearly indicates which registration authority registers legal entities with foreign capital. This is the Federal taxation service (art. 2).