Foreign companies in Russian Federation: Rights and responsibilities

As Russian Federation received government sovereignty, it began developing market economy. This was what attracted investments into the country and served to bring capital from other countries. For foreign businessmen it is important to know the legal base and be acquainted with laws concerning the actions a foreign legal entity may do in RF.

What is a foreign legal entity

First off, let’s discuss what makes a foreign legal entity. Statute 48 of Civilian Codex in the Russian Law Code says that this is a category of entities that includes organizations that have civilian legal ability and have ownership of various property, both movable and real-estate. They take various responsibilities upon themselves.

Foreign entities are supposed to register and comply to all laws that the Russian government applies to them.

It must be understood that the entity complies to the laws of both its native country and the country it is operating in. All the operation it does in Russia are regulated by Russian laws. Therefore, all the characteristics and definitions used for foreign organizations in Russia are taken from Russian laws and follow the same guidelines.

Legal position of foreign entities and businesses in Russia

For classifying companies as foreign legal entities you will have to use various legal acts, including:

  • Its main vector for development
  • The type of legal standing this company has

But the prevailing condition for the company is for it to comply to all the laws of its native country

Legal position of foreign legal entities in the Russian Federation is defined by the norms that are defined by the country’s laws. You should remember, that it is possible to consider a foreign company a legal entity only if it is qualified as a company by the standards of its native country.

Foreign firms and companies have the same rights as Russian organizations. This is the reason why they can do all the same operations as native Russian companies.

Overall Russian Civil law has other criteria for defining the nationality of the company in question. The incorporation principle decides whether some organization has requirements of being considered a company. First of all, it is necessary to determine which government it belongs to.

In the context of legal position of foreign organizations we will stop to discuss the process of registering them in a government roster (This will be discussed in detail later). The procedure is done by trusted federal structures of executive government structures. In Russia this organization is called Ministry of Taxation, which will later be called MNC. The organization will be registered in the same region where it operates.

The legal status of the business activities a company does is often verified by a letter from the roster of the country the company is sourced in.

There are other proofs that may be used to show the status of a company. These are usually written in the laws of the company’s original country. Remember that the Russian laws about foreign companies also apply to any other companies inside Russia, if foreign entities own over 50% of the organization.

Legal status of foreign legal entities

In Russian law there are also a few rules about admitting foreign companies to work in the Russian Federation. In particular, these subjects must always pass procedures of government accreditation. This is the way the government controls how companies from other governments work in Russia.

The legal status of the foreign organization as a legal entity is signed by the fiscal organs, which use the Financial law ФНС № ММВ-7-14/668, signed in the end of 2014. These same organs also do the accreditation. This procedure is also equivalent to legalization.

Foreign legal entities do not require further registration procedures and can continue working in Russian territory as official representatives. They will have the same status as an affiliate of a foreign company after their information is integrated into the government roster.

Rights of foreign legal entities

The rights of foreign legal entities in Russia are agreed upon on an international level. There are a number of regimes that a company may follow.

National rights. Russia offers the citizens of a foreign country and companies from that country the same amount of rights as regular Russian citizens and companies have.

Maximum rights regime. This is a special regime that applies after two countries file an agreement about coworking. This regime allows citizens and companies from another country to have the maximum number of rights, advantages and privileges that is possible for a foreign company.

People responsible for helping a foreign company in Russia have to comply to many legal nuances. One in particular is: norms, that define a separate amount of rights for a foreign company, may contain other principles, except the base rules. These other principles usually have something to do with the way of doing transactions and paying compensations for losses.

Organization and legal definition of foreign legal entities

Foreign companies, which receive rights to do business on Russian territory, must do it in compliance with Russian laws. In this case there are no restrictions at all. In other words, any kind of organization may be registered as a foreign legal entity. The norms in the Russian law Codex describe two kinds of organizations that are allowed to operate in Russia. We will discuss them in detail:

Non-commercial foreign organizations

This category includes organizations, whose main work is not done with the intent of gaining profit. In part 3 of statute 50 of the Civilian Codex, there are listed forms, in which such organizations may be registered. Those are:

  • Consumer cooperatives;
  • Alliances of real-estate owners;
  • Popular movements;
  • Associations;
  • Social organizations;
  • Religious organizations, communities and funds

Meanwhile, it is possible and fully legal for non-profit organizations to get some profit from their activities. But this is only allowed in the case that this will help the organization reach the goal it is after.

To successfully do its job, the organization must own some kind of property. The amount of property must have a value lower than the organization’s overall capital.

Commercial foreign companies

Foreign legal entities are also given rights to work in Russia, having the aim of receiving profit. This is what makes them commercial. Their possible forms are also listed in the civilian codex, just like in the case of non-profit organizations. It is possible to create the following foreign organizations:

  • Farming organizations and associations
  • Communal farms
  • Manufacturing cooperatives
  • Municipal and government organizations
  • Partnerships

The reasons for creating such an organization should also comply to the statute.

Government definition and personal statutes of legal foreign entity

In compliance with norms for international law there are two categories — the national and personal statutes. Russian law defines the latter as personal law. The personal law is defined as the law of the country that created the organization. To decide what law that is, it is necessary to find which country the organization belongs to. The statute 1202 of Civil law decides that.

The aforementioned law says, that the personal law of the company determines:

  • Its organization and legal form
  • Its rights
  • How it receives civil rights and what responsibilities it bears
  • Its name
  • How it is created and how it is closed, and many other, less important moments.

The nationality is not discussed in detail in that law, and it is a doctrinal question. In legal literature there is only one way to understand it, and the nationality of the organization is understood as the name of the country that created it.

Main restrictions for foreign entities

Even though national legal rights work on the territory of Russia, there is a list of federal restrictions that apply to foreign organizations and reduce their rights. The main one is the one that restricts the ability to own land.

This, of course, does not mean foreigners cannot own land in Russia. But certain restrictions and limitations do apply. In part 3 of statute 15 it is said that foreign companies do not have the ability to own land near borders. There are over 380 territories that are rated as borderline land, by order of President of Russia. Those are various areas, villages and municipal areas.

There are also restrictions applying to farmland, and it is not allowed for foreign companies to explicitly own agricultural land. Instead, they are allowed to rent it.

Also there are certain limitation for banking and insurance businesses, and also in the telecommunication sector of the manufacturing infrastructure.

What kind of property can foreign companies own in RF

Russian laws do not cover a certain type of property that foreign companies are not allowed to own. Instead, they are given the same rights as Russian companies, regarding ownership of property.

In the Russian classification for forms of ownership there is a code of identification for foreign company ownership. It is applied by Rosstat basing off documents of the organization. When a company is integrated into the list of foreign legal entities, its property is given the code 23 and named property of foreign legal entity.

What can foreign legal entities do

Russian law defines that all actions foreign companies take are done through their affiliates in other companies. They are seen as structural subdivisions of said companies and are not considered independent businesses.

Norms of law make a difference between affiliate and representative. Thus, while the latter can do any kind of activity in foreign companies, the former are created exclusively with the intent of working and furthering the company’s interest, not for any other kind of activity.

The law about foreign investments has a nuance, which we will describe. In part 21 it says that the government has control over what foreign organizations do, using accreditation. This procedure takes 25 days from the moments the papers are sent in.

After the required data is added to the roster, signifying that accreditation has begun, the foreign company receives a document that proves that the foreign company is officially recognized.

But there are recorded cases when it did not go that easily for the foreign company. Simply saying, they received a refusal and were not able to access the Russian market and make profit. But if everything goes well and the company is allowed to work in Russia, it receives the ability to do business in Russia and has all the privileges, including the permission to take loans from Russian crediting organizations.

Representatives and affiliates of foreign companies begin and finish their work in Russia by decision of their creator or by order of executive government of Russian Federation.

The accreditation provided to the organization is no longer valid from the moment the organization ceases its existence.

What taxes do foreign companies pay

Foreign legal entities in Russia have requirements to pay taxes to the Russian government on the income they receive. The transferring of funds into Pension Fund and other government funds is also mandatory for a foreign company.

In statute 307 of tax codex of RF it is said that there are many kinds of income subject to taxation. They include profits from business, profits from owning, working with and using property. The amount of tax is always equal to 20%.

The requisites for transferring tax money to Tax Police can be found in the local tax police office. This office is always located in the same area as the business. There also you bring the tax declaration after each tax period.

There are also some special things to consider, as there are special nuances about taxing foreign organizations. This information can be found in statutes 306–309 of tax codex.

Registration of foreign companies

Situations where a foreign citizen is the creator of a company, have a number of special differences. One important thing is the status of the creator. He can be both a physical and a legal entity. We will shortly pause to discuss the difference between the two.

Physical Entity

The foreign citizen fills out the form P11001. This one shows the address of the citizen in the native government. The registration of foreign citizens is done after the following papers are delivered to the local tax police:

Any document verifying the person’s identity

Document that shows where the citizen lives in his native country

If the citizen lives in Russia now, he should deliver a temporary registration note.

Legal Entity

Registration for foreign legal entities is almost the same. In this case, when delivering records to the tax police, in addition to the standard package of papers you need to bring a document from the company’s country of origin.

Selling shares of a company to a foreign citizen

Such deals are regulated by Federal Law N 14-ФЗ от 08.02.1998, which says that the creator of the company, who decided to sell a share of the company to any other entity, must tell about his intent to the other owners of the company. If the other partner refuse to answer in 30 days and have nothing to say against the deal, then the owner may make deals with third people. These third parties may even be citizens of other countries. This is actually profitable for the economy of Russia, since this attracts foreign capital to the country.

Therefore, the procedure for selling a share of a company to a foreign resident is purposefully made very simple and is done with the same procedure as selling a share to a Russian buyer. The only difference is that the documents may have to be translated and notarized. Those interested in the procedure may refer to the article about selling shares in a company to a non-resident.

Representatives of a foreign company in Russia

A representative is a special subdivision of a legal entity, which is located away from its main location. It is given rights to execute the functions of the company or part of these functions and serve as its representative in another country or location. This structural unit complies to the same rules as the founding company.

We should note that even though the representative is located in Russia, it complies to the laws of its founding country. This concerns the following aspects:

  • Procedures of creating company
  • Rights and responsibilities
  • Functioning and ceasing existence
  • Rules for the organization’s governing

To get the organizations working the founder will have to pass accreditation, that is, receive permission from the Russian government. And after accreditation, the organization is put into the list of organizations for taxing and transferring income to the federal budget.

Opening bank accounts for foreign organizations

Foreign companies and bank accounts in Russia are not self-defeating definitions. However, it must immediately be stated, that it is only possible to open accounts in certain banks, the definitions of which are covered in п. 1 ст. 13 № 173-ФЗ «On currency regulations…»

To finish this procedure, the nonresident will have to show the following documents:

  • Request
  • Agreement
  • Registration proof
  • Power of Attorney for person who will receive power to open bank account from the name of the nonresident and sign certain document concerning the bank account
  • Copy of document that names a book-keeper
  • Bank card that has original signature of founder
  • The documents from Tax Inspection
  • Signed agreement with bank

The second, third and fourth documents must be signed and legalized with apostille after translation. The fifth document should be sent with a notary-approved translation, and the sixth should be the original of the translation.

What are controllable foreign companies

Foreign structures, whose actions are controlled by Russian taxpayers are not a new occurrence. However this was only recently accepted as a legal practice — after the revision to the Tax Codex in 2014. The controllable foreign company is an organization that is registered on a foreign address, which:

Is under control of residents of Russia (legal and physical entities)

Is not a taxpayer for Russian Federation

For example, a company, whose judicial address is located in an offshore zone, like Belize, with a capital of 1.5 million dollars and a resident of Russian Federation, who owns 51% of the capital.

How to check validity of foreign company

There are often multiple reasons to check a foreign company for validity. This is done to assess how profitable it will be to work with this company, to exclude possibility of losing capital from allying with the company and preventing risk to finances.

To check the legality of a foreign company, you may use two different ways:

Request relevant information from the company’s origin country through the internet. Government rosters, equivalent to the Russian ЕГРЮЛ and ЕГРИП, exist in most countries, and contain accessible information on all companies in the country. Sometimes you may even get more information than you would in Russia.

Or you may send a request to the company that keeps the information in a letter form. This allows you to receive a letter in return, which will have a notary approved document with true data on the organization in written form.

Foreign companies in Russia

Foreign companies moving towards Russian markets do this for the following reasons:

Globalization increases integration processes;

Lowering the production prices for certain good or increasing the number of potential clients. Also improving quality by using trusted Russian specialists.

Foreign companies based in Russia receive additional production benefits by using competition advantages over foreign companies by using new technologies.

It is also important to note that in different territories of Russia foreign companies will have the ability to use different methods of doing business, which are practiced by them depending on which region they are based in.

Many are interested about the number of foreign companies working in Russia. The number of new foreign companies registered in Russia in 2017 was 12.6 thousand. This is probably a meaningless number for must Russians. However it would be more informative to say that the amount of foreign investments into the Russian economy was 27.9 billion dollars. This is 12.4 percent of all the money that went into the Russian budget that year.

Even though certain anti-Russian sanctions were applied, foreign companies did not leave Russia or close their affiliates here. PepsiCo, for example, continued their work, earning up to 5 billion dollars a year, or over 7% of their yearly revenue.

General Electric and Rosneft signed an agreement in spite of the sanctions, and the American brand is going to build innovative equipment for improving Russian tanker ships.

Other companies like Toyota Motors, Volkswagen Group Rus, IKEA and others did not close their projects in Russia.

Conclusion

Foreign companies receive national rights depending on Russian civil law and do not need to comply to any additional rules. The national rights may exceed or be different than Civil Codex laws, but the Russian federal law or an international agreement should be the judicial base for deciding the rights and responsibilities of the company.

Foreign legal entities may take part in Russian organizations and cooperatives or create new ones. The allegiance of the company to a certain country is decided by its statute.

Blog