Foreign Business: Four Ways to Work in Russia

Russia aims to be open to foreign investment. It seeks to create favorable conditions for foreign business, including clear and convenient conditions for starting and running a business. Any investor who has decided to work on the territory of the Russian Federation has to make a decision, which of the four existing alternatives is appropriate:

• to register as a legal entity in Russia;
• to buy a stake in an already operating Russian enterprise;
• to open a branch or representative office of a foreign legal entity;
• to work with distributors.

Let us analyze the options in more detail and assess the conditions and opportunities that exist for a foreign investor.

A limited liability company (LLC) and a joint-stock company (JSC) are organizational and legal entity forms that conducts its business under its own charter. The registration of LLC and JSC coincides in many points. Therefore, we consider the conditions, terms and cost of establishing a company on the example of LLC as the most common form of doing business in Russia. LLC is responsible for carrying out its obligations, has a separate budget and maintains accounting records independently. The operation of an LLC will be familiar to and understood by a foreign investor in many respects.

Benefits: A company member bears no responsibility for the debts of the whole company — his/her responsibility is limited to the size of his/her stakeholder share. LLC may apply a simplified taxation system (STS), which is beneficial to small and medium businesses, since the government has provided a preferential taxation for this type of organization. To register an LLC, a foreign citizen or a foreign legal entity may be a 100% stakeholder, i.e. sole proprietor.

When creating an LLC from scratch, a foreign founder can be sure that the development and business reputation of the company will depend entirely on him/her.

Conditions: A legal address, authorized capital (at least 10 thousand rubles), the general director and chief accountant are necessary for registration.

A foreign citizen who intends to become a founder of an LLC must legally reside in the territory of the Russian Federation, i.e. must have a commercial visa, permission to stay or residence permit.

Nuances: if a foreign citizen plans to hold any position in an LLC, a work permit is required. Obtaining such permit according to the standard procedure is time consuming: first, a quota and/or permission to employ foreign labor is required, only then you can apply for a work permit that may be obtained within 30 calendar days from the date of application. However, these terms and conditions do not apply to highly qualified specialists who receive at least 167 thousand rubles a month before tax. When hiring such a specialist, a permission to employ foreign labor is not needed, and neither is placing a vacancy in the Employment Center, providing a document confirming Russian proficiency and medical certificates.

The opening of the joint venture involves the creation of a new company with participation in the authorized capital of a Russian individual or legal entity. In addition, a foreign investor can acquire a share in the authorized capital of the Russian society or become a new member of this society through an increase in the authorized capital.

Advantages: the Russian partner is aware of the situation on the market, is familiar with the law and has the necessary knowledge and contacts in the industry for the confident start of a new joint venture. At their end, a foreign founder can ensure, for instance, the import of industrial equipment that has no counterparts in Russia. In accordance with paragraphs 7 p. 1 art. 150 of the Tax Code of the Russian Federation such equipment is exempt from import tax.

Conditions: the procedure and costs are similar to those applicable to the LLC, if the joint venture is established by Russian and foreign founders. If a foreign investor buys a share in an already existing Russian company or becomes a new participant in this company by increasing the authorized capital, then the registration of changes takes 7 working days, while notarizing the documents usually costs about 15−17 thousand rubles. In addition, in the case of an increase in the authorized capital, the state duty of 800 rubles must be paid. Additionally, the costs of translation, certification and transit of documents are required.

Example: the Danish company Pindstrup Mosebrug, a manufacturer of substrates (peat products for farming), has been doing business in Russia since 2013. The Danes acquired a Russian company that produced peat products for greenhouses, open-ground agricultural enterprises, landscape gardening, etc. The experience of the Russian company allowed Pindstrup to quickly adapt to the local market, which contributed to a significant growth of business in Russia.

A branch and representative office of a foreign company are separate subdivisions acting on instructions from the parent company and performing all or part of its functions. The divisions are fully subordinate to the company that established them; the parent company is responsible for the obligations.

What is the difference between a branch and a representative office?

Branches and representative offices can open and close accounts in Russian and foreign banks, enter into transactions, sign agreements.

Branches and representative offices are managed by appointed heads/directors of these separate divisions. The parent company itself, each branch/representative office or one of them can submit the documents to the tax service.

When opening a branch or representative office, a foreign company will be considered a non-resident, and its taxation will be governed by a bilateral agreement on the avoidance of double taxation, if such is concluded between countries.

When renting an office by a branch/representative office in Russia, in accordance with the Tax Code of the Russian Federation, VAT is not included in the rent.

Material support of branches and representative offices is carried out at the expense of the property and assets of the parent company. "Transfers" of such property and assets between the parent company and branches/representative offices occur within the company itself, which is much simpler than, for example, in the case of transferring the property of a foreign company to a subsidiary in the Russian Federation. This applies to bank transfers as well. Thus, a foreign company will be able to more quickly transfer funds for expenses related to activities in Russia.

Example: the British company Forward 3D Limited works in the field of advertising and marketing. The company decided to cooperate with Google and Yandex in Russia. For these purposes, a branch was opened in Moscow, and employees who had previously worked on the Russian direction at the head office in London began to work in Russia on an ongoing basis. The main work of the Moscow office is related to the organization of advertising campaigns in Russian social networks, as well as the Russian segments of international social networks. These processes are directly related to understanding public opinion in order to form an effective advertising strategy. The presence of the Forward 3D Limited branch in Russia allows the company to carry out all these processes and interact with counterparties in our country more quickly. In addition, payments from a settlement account of a branch in a Russian bank are much faster than payments from an account of the parent company.

Working with distributors is the best and economically viable option for foreign small businesses. At this stage, the company does not yet have full-time employees in Russia or reliable sales mechanisms. Therefore, a foreign company appeals to distributors and concludes supply agreements. The company sells its products to a distributor who then sells them in Russia.

Conditions: This form of work does not require the registration of a separate legal entity in Russia. A reliable distributor and a legally correct supply contract to guide the parties in their cooperation are necessary. It should be borne in mind that the customer base is not constant, since the distributor may decide to cooperate with other companies, and foreign investors may need to look for another way out to the Russian market.
So, we have considered the main forms of entry of foreign business into the Russian market.