Can a foreigner open a business in the Russian Federation?

The Russian Federation as every other civilized country, does not limit foreigners legally living in the country, in law to conduct business. Moreover, for attracting foreign investments, business in Russia for foreigners is governed by the same rules as for Russians. Still, there are nuances. We will review them in more detail.

Advantages of doing business in Russian Federation

Despite the manifestations of crisis, national currency devaluation, commodity dependence of the Russian economy and numerous other problems, including problems of bureaucratic character, the Russian federation still continues to be attractive for foreign investments. During the previous decade, their volume changed unevenly, but there are logic and regularity patterns in this. For example, in 2008, $74,7 billion of foreign capitals has been invested in the Russian economy. Against this background the 2017 indicators seem modest — only $28 billion. However, there were also obvious failures — for example, 2015, when the volume of foreign investments barely exceeded $6,8 billion. This clearly shows that today the foreign capital is gradually returning to Russia — investment attractiveness is growing.

But opening a company in Russia by a foreigner must also consider features of the Russian economy and the legal system. The following are some arguments in favor of business foundation in Russian Federation:

  • outflow of foreign capital has quite «thinned» the business environment. This «sanitary clearing» greatly reduced market competition. Actually, it did not take place in profitable types of economic activity;
  • liberalization of legislation. Foreign capital is guaranteed the domestic legal regime — similar as for Russians, and besides, law guarantees the investment protection, the possibility of their smooth withdrawal to native land, etc.;
  • target market. The RF population is approaching 150 million people, plus there are many large cities in Russia: for example, the number of St. Petersburg residents 4 times higher than the whole population of Estonia;
  • overall lack of professionalism of Russian entrepreneurs. A foreign businessman offering a high-quality product/service at an affordable price will be beyond competition;
  • simplicity and cheapness of business registration, of course, without compare with New Zealand and Singapore, but still;
  • low labor costs — the average salary in Russian Federation is about $500, because of that many Chinese enterprises have already transferred their productive capacities to Russia;
  • ability to own entire business, and not only its share, unlike numerous other countries.

 

Conditions for doing business by a foreigner in Russian Federation

As pointed out above, Russian legislation is quite loyal to foreign investors: according to article 4 of the Federal Law № 160 of 09.07.1999 «About foreign investments in the Russian Federation», in respect of foreign capital, national legal regime is established. This means that companies with foreign capital are provided with the same conditions, working rules and privileges for business as Russian organizations, with few exceptions. Features of maintaining business in Russia for foreigners include only their legal status as organizers of this business.

To start own firm, a foreign citizen must comply with few simple conditions:

  • legally stay or reside in Russia, particularly on the basis of refugee status, TRP (Temporary Residence Permit) or Residence Permit;
  • at the time of opening business to pass the registration at place of residence/stay;
  • obtain the employment authorization or patent — if a foreign founder plans to assume a post in a company, or he does not have TRP/Residence Permit;
  • necessarily to register ITIN (Individual Taxpayer Identification Number) in tax authorities;
  • apostillize, translate and notarize all the documents provided to the registrar, if they are executed in a foreign language.

 

Russian legislation does not include any other features, procedures or registrations specifically for foreign beneficial owners and entrepreneurs. The rest of the procedures, beginning from application, time frames and methods of registration, and ending with the submission of accounting to funds and the tax service, is implemented in the same way as by Russians.

 

Main forms of doing business in Russian Federation

Russian legislation provides for many forms of ownership, available also to foreigners. The most popular are the following:

  • Individual proprietorship (IP);
  • Limited Liability Company (LLC);
  • Joint Stock Company (PJSC, JSC).

Choosing a particular form depends on the specifics of business — its size, the number of organizers, the level of capital investment, form of economic activity and other factors. Consider these forms in more detail.

Individual proprietorship

Individual entrepreneur is an individual (regardless of nationality) that does business without forming a company. As a general rule, such forms are used for micro- and small businesses: retail trade, service delivery, independent performance of works, etc.

 

Such form is characterized by a simple procedure of registration/elimination of business, freedom of using revenue, simplified reporting procedure and other advantages.

 

However, there are drawbacks. So, individual proprietorship cannot be separated from the identity of individual, therefore in all commitments IP-foreigner is responsible by his/her property. For the same reason, IP registration, according to paragraph 3 article 8 of the Federal law № 129 of 08.08.2001 «About state registration of entities and IP» (hereinafter the Federal Law № 129), is carried out at the place of residence. And that means that only a foreigner who has TRP/Residence Permit in Russia can register as an entrepreneur — these documents establish the fact of residence. In the presence of a visa, a foreigner can confirm only the place of the stay, and thus his registration as IP is impossible.

Limited Liability Company

The LLC form of business is the easiest way to open a firm in Russia for a foreign national. This organizational and legal form has the following advantages:

  • minimal nominal capital, which should be paid in money (10 thousand rubles);
  • possibility of establishing not only by individuals, but also a foreign company registered, for example, in Cyprus;
  • limited liability — founders are responsible for commitments of LLC only by the value of their shares in the nominal capital (LLC is separated from the identity of founders).

 

After registration, such firm acquires the status of a legal entity with foreign capital that distributes on it all legislative provisions (including protection guarantees) about foreign investments.

 

Registration scheme has not any differences from the establishment of LLC by Russians. The only distinctive feature is legalization of documents through apostilization and notary certification.

 

Joint Stock Company

One of the options for registering a foreign business is opening a joint-stock company. Distinctive feature is that nominal capital in this case turns into shares, which owned by shareholders. Joint Stock Company can be public; at that time its securities are in free circulation and are purchased by a wide range of persons. Shareholders, similarly as within LLC, are responsible on commitments only by the value of their shares and have not any personal liability.

Joint Stock Companies are typically established for large and middle business, but due to difficulty of registration procedure and issue of shares they are not popular.

If a business in Russia is established by already existing abroad company, one of the options is opening a branch or representation.

This structural unit will not be an independent legal entity, but a separate structural department of a foreign company that is competent to perform both representative and management functions. In doing so, a branch/representation will have an opportunity to operate only after accreditation.

Taxation of company with foreign capital

Despite the statements of officials, the lion’s share of business income in RF is spent on tax payment. Meanwhile, many foreigners wonder how a non-resident can do business in Russia. The fact is the non-resident status of a founder affects only the dividend receipt. The company itself, despite a foreign capital, will have a Russian residence basis. As a rule, such enterprise pays:

  • Corporate income tax — 20%;
  • Enterprise wealth tax — 2,2%;
  • VAT — 18% (in exceptional cases — 10%);
  • Insurance contributions — 30% of the labor compensation fund.

Additionally, dividends paid to a foreigner are taxed at the rate of 15%.

 

Another advantage of the Russian Federation for doing business is the possibility of applying a simplified taxation system. For this, the following conditions must be met: a company employs not more than 100 people, its annual income is no more than 150 million rubles, net book value of fixed assets is no more than 150 million rubles.

 

High-priority spheres of business in Russian Federation

Crisis had changed the cost structure of Russians, thus many previously profitable niches of maintaining entrepreneurship in the territory of the Russian Federation had been markedly reduced. Taking into account market conditions, today the most popular areas to starting small business are considered the following:

  • retail trade of foodstuff in the budget segment — food expenses in comparison with 2014–2018 grow up gradually;
  • transport sector — from organization of public transport to car services and car washes. For example, in the last 5 years, transport costs of Muscovites increased by 93%;
  • real estate — demand for warehouse real estate over 2019 year increased by 15%. Residential real estate demonstrates a progressive falling of cost; therefore soon it is also expected increase in demand;
  • IT-sector — one of the most progressively developing industries, the benefit is relatively low labor cost in comparison with foreign specialists;
  • service sector — continues to be in TOP, which is driven by population’s needs.

Capital city or regions

It is considered that Moscow is the best place for doing business, because it is the most populous area, where it is easier to find the target audience. However, the competition is several times higher here. It is worth to pay attention on business in province due to the following aspects:

  • In regions, production is less expensive. Rental value and labor force is cheaper, consumer basket is less costly.
  • In province it is easier to become a pioneer, because all new trends firstly get to a capital and only then spread to regions.
  • Specificity of the region can form the basis of business. For example, when delivering goods from Asia, it is logical to have a representation in Vladivostok, not in Moscow. Plus, transportation of goods from East to West is less expensive.

Potential challenges

It is worth noting that foreigners may also face with several challenges in Russia:

  • Mindset. It is important to understand logic of behavior of target market, and in Russia it is based on mentality. Without knowing its features, it is impossible to build a business in Russian Federation.
  • Legislation. Like in any other country, Russian laws have their own specificity. Thus, a foreigner needs to investigate relevant regulations in advance or use the services of related lawyers.
  • Markets. The success of any business depends on knowing the market. Its analysis can be carried independently — statistics is generally freely available.
  • Bureaucracy. Excessive faultfinding and constant checks of control authorities might be perceived by an entrepreneur as a pressure. However, it is another feature of doing business in Russia.
  • Lack of free consultations. It is true that in Russian Federation, in contrast to other countries, there is no one affordable government agency, which would contribute the opening of business.

Conclusion

Despite several challenges, Russia remains an investment-attractive country for foreign capital, which is encouraged by:

  • simple registration of business and relatively low costs of this procedure;
  • low-cost labor and a variety of new markets;
  • possibility of applying simplified taxation system.

One more advantage is that the same regulations are relevant for foreigners, as for Russians. It is enough to obtain a residence permit — and you can open your own business.