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

Lately, the volume of foreign direct capital investment in the Russian economy is constantly decreasing, and the withdrawal of funds abroad has intensified. The major causes are the pressure of international sanctions, the increase of crisis tendency and the deterioration of the geopolitical situation. In the recent circumstances, the advantage is given to venture business, businesses with foreign capital investment from China and South Korea emerge.

«Foreign capital investment» — what is that?

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 creation of 25 special economic zones in the Russian Federation with legislative preferences for foreign capital investors was the practical implementation of such policy.

Foreign investor: who might become one

The legislation of the Russian Federation (art. 2 of the Law of the RF 160-FZ, dated 09 July 1999) clearly defines who can become a foreign investor:

  • foreign organization — a legal entity with/without rights, officially established and legally operating in its country, authorized to make investments abroad. The exception is foreign companies, controlled by a Russian citizen or a legal entity from the Russian Federation;
  • a legally capable and compitent foreigner, who has the right to invest abroad in accordance with the law of the country of residence, with the exception of persons with a second Russian citizenship;
  • a stateless person, who has the right to foreign investment;
  • international organization;
  • foreign state.

Interesting fact: as per results of 2017, the top ten countries, investing in the Russian Federation look like this:

  1. PRC (32 projects).
  2. Germany (28).
  3. USA (19).
  4. Italy (17).
  5. Japan (17).
  6. South Korea (12).
  7. France (11).
  8. Switzerland (11).
  9. Great Britain (8).
  10. Finland (7).

Enterprises with foreign capital investment in the Russian Federation: organizational and legal forms

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 legal entities

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.

Commercial organizations with foreign investment can be created in the form of companies (LLC, JSC, ALC), business partnerships (full and limited), farms, artels, various cooperatives, etc.

The state may also conclude investment agreements with foreign investors on municipal or state-owned objects (115-FZ, dated 21 July 2005 as amended on 03 Aug. 2019, «On concession agreements»).

Non-profit organizations (NPOs)

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.

The Civil Code of the Russian Federation does not limit the number of organizational and legal forms of NPOs. NPOs as a form of organizations with foreign capital are guided in their activities by the provisions of Federal Law 7-FZ, dated 12 Jan. 1996 (ed. From 29 July 2019), «On non-profit organizations». Thus, article 6 of the law says that non-profit organizations that take part in political actions or influence the formation of public opinion of the population of the Russian Federation, while receiving foreign capital investment in the form of money and property, as those that perform the functions of a foreign agent. This obliges such companies to register in a special state register before starting their activities. Religious associations that receive assistance from abroad are required to provide a detailed report on the funds, received annually (article 25.1 of The law of the Russian Federation 125-FZ, dated 26 July 1997 as amended on 05 Feb. 2019 «On freedom of conscience and religious associations»).

Types of organizations with foreign capital investment in the Russian Federation

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.

Enterprises, wholly owned by foreign investors

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.

Joint enterprises

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).

Representative offices and branches of foreign legal entities

According to art. 4 of Federal law 160-FZ, dated 09 July 1999, foreign legal entities, engaged in business in the Russian Federation, are entitled to establish their representative offices and branches. To do this, the parent company must be directly responsible for all its obligations in the Russian Federation, and the branch must be accredited.

If the parent company does not plan to engage in actual activities — to produce goods, sell services, etc., but there is a need to represent its interests in a particular region of the Russian Federation, it makes sense to open a representative office. The topic is covered in more detail in the article «Representation of a foreign company in Russia».

A branch can perform both representative functions and trade and production functions. Created divisions as part of the parent company are also subject to the Law of the Russian Federation 160-FZ, dated 09 July 1999, and use all the relevant guarantees and benefits.

Structure of organizations with foreign investment in the Russian Federation

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.

Recruitment and employment of employees must take place within the framework of the labor legislation of the Russian Federation. Not only a citizen of the Russian Federation, but also a foreigner, who has a work permit in the Russian Federation, can head the COFI. The management of representative offices and branches appoints the head company.

Goals and objectives of creating a COFI

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.

Options for the establishment of enterprises with foreign investment

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.

Registration procedure

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).

Public services are provided through on-site inspections. Addresses and contact details are listed on the website of the Federal taxation service of the Russian Federation nalog.ru.

The algorithm of actions in this case is as follows:

  1. To determine the legal form of the business and come up with the name of the future firm.
  2. To make a decision on the establishment of the company.
  3. To find the legal address.
  4. To prepare the Charter.
  5. To pay the fee
  6. To submit an application and a package of papers to the FTS Inspectorate. This can be done in person, as well as on the website of the Federal taxation service, through «Gosuslugi» or Multifunctional center.

Registration, entry in the register and registration of securities takes 3–5 days from the date of acceptance of the application.

Acquisition of a share or company in its entirety

The laws of the Russian Federation do not discriminate the rights of foreigners to buy and sell property and securities on the territory of Russia, including the acquisition of a controlling stake or entire enterprises. When purchasing a share or an already established Russian company, a transaction must be concluded to transfer ownership of the share or enterprise in full. After that, you need to register changes in the composition of shareholders and authorized capital. The agreement is made in Russian and in a foreign language.

The buyer-a-foreign entrepreneur, who intends to invest in fixed assets, must deposit money or property within the established time frame. Payment can also be made by adding property — such as imported equipment.

Sale of a share in a Russian LLC to a non-resident of the Russian Federation

The procedure for a non-resident of the Russian Federation to purchase a share in the authorized capital of FDI is no different from making such a transaction by Russian citizens. For its registration, there must be prepared official documents — a notarized contract of sale, a decision of the General meeting, a list of founders, a decision to agree to a major transaction or a certificate of non-exceeding the amount of 25% of the property value, etc. A foreigner with the rights of a legal entity is required to provide an extract from the commercial register.

If a foreigner purchases 5% or more shares of the authorized capital of an enterprise of strategic significance, the buyer must notify the authorized state body within 45 days (Federal law 129-FZ, dated 08 Aug. 2001, ed. from 03 Aug, 2019).

What it is neccesary to realise about taxes

The Russian state guarantees tax stability to bussinesses that have 25% or more of foreign capital in their authorized capital for a period of up to 7 years. Foreign legal entities are required to register with the tax Inspectorate from the moment they start operating in the Russian Federation.

The following benefits apply to COFI:

  • the general rate of income tax is 20% (article 284 of the Tax Code of the Russian Federation).
  • tax break for two years;
  • the opportunity to get an investment preferential tax credit, when the organization is calculated with the budget as it pays off the accrued interest, the loan body and the amount of income tax within 1–5 years.

In general, tax pressure does not contribute to increasing foreign investment in the Russian economy.

About accounting at enterprises with foreign investments

Book keeping at FDI in the Russian Federation has to be performed in line with the requirements of Russian legislation. Reporting documents cannot be transferred abroad and are kept in Russian. All responsibility for accounting lies with the management of the FDI, and the accounting policy is approved at the shareholders' meeting.

The distribution of profits among shareholders is an internal matter for each company, but all necessary income taxes have to be transferred to the budget. All COFI pass a mandatory audit and provide self-reporting to tax and statistical authorities at the end of the year.

Let’s take stock

Despite the negative role of sanctions from the USA, Canada, Australia and the European Union, the interest of foreign capital investors in Russian Federation is not fading. Only geographical coordinates have shifted — Europe is losing its position, Asia (primarily China) is strengthening.

Among the capital investments, direct investments in the mining industry, the agricultural sector, high-tech technologies, etc. The government is interested in the inflow of funds and new technologies from abroad, creating jobs, so it provides legal protection of the interests of foreign investors. KOII became the most popular.

Commercial organizations-legal entities with the participation of a foreign element are subjects of international law. Such companies arise as a result of:

  • creating a new company or buying an existing one;
  • acquisition of shares of the company (equity participation);
  • opening branches and representative offices, according to the current law of the Russian Federation.

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