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Useful information

Forms of Business in Russia

There are several forms in which a foreign company can undertake business activities in the Russian Federation:

a separate Russian entity with 100% foreign investments or joint venture;
a representative office;
a branch office;
participation in a joint activity agreement with Russian legal entity;
a combination of the above.

Russian entity

In accordance with the Civil Code of the Russian Federation, the foreign investor has the right to participate in establishment of different legal entities in the Russian Federation. The most important are:

joint stock companies;
limited liability companies;
full partnerships;
limited or mixed partnerships.

A joint-stock company (AO) is a company with charter capital divided into a defined number of shares with par value. Shareholders are not liable for the company's liabilities but bear the risk of losses arising from the company's activity only for the par value of their shares. There are two types of joint-stock companies:

Open joint-stock company (otkrytoe aktsionernoe obschestvo - OAO) is a legal entity, whose shares may be publicly traded without permission of other shareholders. OAO can distribute its shares to an unlimited number of shareholders and sell them without limitations. The statutory minimum charter capital is 100,000 Russian roubles.
Closed joint-stock company (zakrytoe aktsionernoe obschestvo - ZAO) is a legal entity, whose shares are distributed among a limited number of shareholders. The number of shareholders should not exceed 50. The statutory minimum charter capital is 10,000 Russian roubles.

Founders of a joint-stock company sign a written agreement for its formation, in which procedures necessary for the setting up of the company are carried out, the size of the authorized capital, types and categories of shares to be allocated between founders, amounts to be paid for the shares, the order of settlement of payments, rights and responsibilities of founders in connection with the formation of the company. The constitutive document is the organisation charter, which contains the following information: full and brief names of the company, address of the location of the company’s office, company’s type (OAO or ZAO); quantity, par value, categories of shares (ordinary, preferred) and types of preferred shares to be allocated; rights of shareholders of each category of shares, the sum of the authorized capital, structure and competence of company’s management bodies and boards, and procedures of decision-making process, order of preparation and conducting of shareholders’ general meeting, including list of issues, which are to be decided upon by qualified majority or unanimously, information about subsidiaries or representative offices; other information as prescribed in the federal law “On Joint-Stock Companies”.

Joint-stock companies are required to register the issue of shares with Federal Securities Market Commission. This is to enable the shares to be traded either publicly (for OAO) or among a limited number of persons (for ZAO). For registration a set of documents should be submitted to the Federal Securities Market Commission. The procedure usually requires 30 days from the moment of receipt of documents by the registration agency.

Limited liability companies

Limited liability company (obschestvo s ogranichennoy otvetstvennostju - OOO) is an entity with capital stock divided into “parts” (in Russian – dolia), the size of which are determined by the formation documents.

Dolia is not a security and it may not be treated as a property in strict juridical sense. It is rather treated as a property right. An owner of the dolia is not called a shareholder, but a “participant” of the OOO. The company's capital is formed by the contributions of the participants. Number of participants may not be more than 50. The statutory minimum charter capital is 10,000 Russian roubles. An OOO may not have another commercial organisation consisting of one participant as its only participant. Participants in a limited liability company are not responsible for the company’s liabilities and are responsible for losses only up to the value of their parts.

Since the 1st of July 2009 come into force amendments to the Federal law # 312-FZ significantly changed the way limited liability companies are regulated in Russia by introducing amendments to the Russian Civil Code, the Federal law "On Limited Liability Companies", the "Fundamental Principles of Russian Legislation on Notaries" and the Federal law "On State Registration of Legal Entities and Individual Entrepreneurs".

The new law eliminates the ambiguity in the current legislation by defining the charter as the company's sole constitutional document. This does not remove the requirement for a limited liability company with more than one participant to have a founders' agreement but will remove the necessity to amend the founders' agreement thereafter during the company's existence.

Under the current law, the list of participants and details of their respective participation interest is recorded in the company's charter. In practice this means the charter of existing OOO must be amended and re-registered each time there is a change in the participation interest up to the 31st of December 2009.

The new law introduces a registration mechanism similar to that applying to joint stock companies where the company's executive body (or other body specified in the company's charter) will be required to maintain a "Register of Participants" ending the requirement to record changes in the participation interest in the charter. It appears that the 'other body' appointed to maintain the Register of Participants must be an internal body and this amendment to the law does not allow for an external registrar for limited liability companies. The responsible body will be obliged to ensure that information contained in the Russian Unified Register of Legal Entities conforms to the information provided in the Register of Participants.

The new law allows participants of a limited liability company to enter into contractual arrangements to regulate the rights of participants (ie 'shareholders' agreements) where this was thought to be unenforceable under the old law. The scope for such agreements seems broad as the text contains non-exclusive wording. Specifically, the new law states that such agreements may regulate the exercise of voting rights, the sale of a participation interest at a price defined in the agreement and/or upon the occurrence of certain events (we will be looking at this to understand if it can provide a legal framework for share options), and to suspend the right to sell a participation interest until the occurrence of a specified event (a legal framework for a 'lock in').

General partnerships

General partnership (polnoe tovarischestvo – PT) is a commercial organisation, the members of which (partners) according to the concluded agreement carry out business activities on behalf of the partnership and have personal responsibility for its liabilities. General partnerships operate under constitutive agreements, which are signed by all members of the partnership.

Limited partnerships

Limited partnership (tovarischestvo na vere – TV) is a commercial organisation in which there are partners and limited partners. Limited partners are investors who bear risk of losses up to the amount of their investments and do not participate in the business activities of the partnership.
Partnerships are generally not very popular in Russia and are usually used only for conducting limited set of activities such as legal services, audit assurance, etc.

The most popular forms of business organisation are OOO and ZAO.

Registration is done by the Tax authorities. Company also shall be registered with State Committee for Statistics and three non-budgetary funds (Pension fund, Obligatory Medical Security fund and Social Security fund). See more details about registration process.

Representative office and branch office

Representative office (RO) and Branch of a foreign legal entity are not considered as a separate legal entity. RO and Branch are subdivisions of a foreign company. They are considered as Russian non-resident entities for currency control purposes.

According to the Civil Code of Russian Federation, a RO is a division representing and protecting interests of the legal entity, whereas a branch is a division exercising any or all functions of the legal entity, including the functions of a RO. None of the two, however, is a legal entity separate from the parent company: any assets or liabilities related to a division are those of the parent company itself.

As you could see, the branch is understood as a division possessing generally more powers of the parent entity, as compared to the RO's powers. However, a RO is allowed to be involved into commercial activity also. Normally establishing a RO of a foreign
company is sufficient for doing business, though establishing a branch is also possible.

The RO and Branch of a foreign company should be accredited with one of the state registration chambers and registered with the tax authorities and other state bodies. The nature of the activities performed will determine whether the activities are subject to Russian taxation. Generally, tax filings must be made even if no taxable activities are performed or if no income is generated.

Please, see more details about registration process of RO and Branch of foreign company.

Joint activity agreement

Investors can also enter into a joint activity agreement with a Russian company to carry out business in Russia. In this case a foreign company usually contributes funds, property or know-how in the form of tangible or intangible assets to the joint activity and, in accordance with the agreement, is entitled to a share of the profit derived by the joint activity.

Participation and sharing of profits in a joint activity is contractually determined on the basis of the joint activity agreement and need not be pro rata. The joint activity is taxed at the level of its participants (with the exceptions of value-added tax and turnover taxes). One participant is obliged to maintain separate books for the joint activity. When entering into a joint activity agreement, a foreign company does not need to have any presence in Russia. In such case, income derived through a joint activity is subject to Russian withholding tax, as reduced by any applicable double taxation treaty. It should be noted, however, that there are a number of uncertainties relating to the taxation of foreign legal entities conducting activity through a joint activity agreement.