SPECIAL PROJECT OF PPT.RU

16 OCTOBER 2015
How a Foreign National Can Start Business in Russia
Russian legislation is thorny – even experienced Russian businessmen find it hard to learn the ropes on their own. And what shall a foreign national who chooses to start business in Russia do? Alexander Rostov, a senior lawyer for Castrén & Snellman, explicates the main steps for a foreign entrepreneur to take on the way to the Russian market.
Text: Alexander Rostovsky
Senior lawyer for Castrén & Snellman

Doing Business in Russia
Russian economy still remains attractive for foreign investors despite the economic recession caused by the decline of prices on energy. Alongside this, Russian legislation is being constantly improved, business climate is getting better, which is particularly proved by the position of Russia in the Doing Business Index, annually published by the World Bank Group.

Types of Companies in Russia
The law allows foreign citizens to do business without forming a legal entity, as well as through establishing a commercial company.

There are two types of companies: public and non-public.
A public joint-stock company places its shares publicly, by public subscription, or publicly trades them under conditions established by the securities laws – i.e., a wide range of individuals may buy the shares of the company.
A non-public joint-stock company does not meet the above criteria. A Limited Liability Company (LLC) also belongs to non-public companies, and its authorized capital is divided into stakes (in contrast to the authorized capital of the joint-stock company, which is divided into a definite number of shares).
Sole Proprietor is a natural person engaged in entrepreneurial activity without establishing a legal entity, but on the register of Proprietors, and responsible for the obligations of all his/her assets, including personal.
Limited Liability Companies and non-public joint stock companies are the most popular types of legal entities in Russia.

Registration of Companies in Russia
In order to open a company, an applicant should contact the Federal Tax Service of Russia (FTS) at the location of the permanent executive body of the legal entity – i.e., in the city where the company will conduct business. If a foreign citizen wants to register as a Sole Proprietor (SP), he/she must apply to the Federal Tax Service in the place of his/her residence.
There are three equal options of application to the Federal Tax Service
1
By letter
with a declared value (with the list of contents)
2
Via a local multi-purpose center
providing state and municipal services (MPC)
3
In the form of electronic documents
signed by electronic signature.
If the entrepreneur's signature on the application is notarized, these documents can be submitted through the notary.
To register as an SP, an applicant must submit the relevant application to the registration body, a copy of his/her passport and the state duty payment receipt (800 rubles). After 5 days, the applicant is given a certificate of registration, as well as a document confirming his/her entry in the Unified State Register of Sole Proprietors (USRSP).

It should be noted that foreigners may have a permanent registration only if they have a temporary residence permit (TPR) or a permanent residence permit (PRP) in the Russian Federation. And since SP registration is only possible in the place of permanent residence in the Russian Federation, only those who have such documents can register as an SP. It turns out, that to set up a company remains the most convenient way to do business in Russia.
It takes from 5 to 10 days to establish an LLC and includes three basic steps:
1
State registration
takes 5 days from the submission of the necessary documents, including an application, minutes of the founders' meeting (the founders' decision) on the establishment of the company, the company charter, and the state duty payment receipt (4000 rubles).
2
Making a Seal
takes 1 day, on average, 350 rubles. (Since April 7, 2015 commercial companies are entitled but not obliged to have a seal. The company charter should contain the information on the seal).
3
Opening of a Bank Account and Authentication of Signature
of the person authorized to manage the funds of the company takes from 1 to3 days, from 500 rubles.
Foreign organizations acting as the founders of an LLC also provide an extract from the register of foreign legal entities of the country of origin, with a certified translation into Russian and an apostille. If the applicant complies with all requirements of the law, the Federal Tax Service makes decision on the registration of the legal entity and on making a corresponding entry in the Unified State Register of Legal Entities (USRLE).
But the law has certain particularities related to the registration of a company or a sole proprietor. E.g., if the application for the registration of a company or an SP is submitted by the authorized representative, and not the applicant in person, the signature on this statement should be notarized.

In order to fight fly-by-night companies, the Federal Tax Service prohibits to register companies at the so-called "mass registration addresses". One can check the address on the Federal Tax Service website.

Establishing of a joint-stock company also means registration of its share issue, which is carried out by the corresponding territorial unit of the Bank of Russia. For this, the established joint-stock company must submit a set of documents to the Bank of Russia, in accordance with the Regulations on Standards of securities issue.

The registration procedure of the primary issue of shares lasts for 30 days from the date of the company registration in the Unified State Register of Legal Entities. The state duty for registration of the share issue, placed by subscription, is 0.2 percent of the nominal amount of the issue, but does not exceed 200 000 rubles.

The law regulates the minimum authorized capital for companies, it is 10 000 rubles for non-public and public companies.

The founder of the LLC pays up his/her stake in the authorized capital in time stated in the agreement on establishment (decision of the sole founder), but not later than four months from the date of the state registration.

Shares of the company, distributed at its establishment, should be paid up in full within one year from the date of state registration. At this, not less than 50 percent of the company shares must be paid up within 3 months from the date of the state registration.

Social Insurance
После регистрации компании данные о ней передаются налоговой инспекцией
On registration, the tax inspectorate transmit the information on the company to territorial subdivisions of the state non-budgetary funds – the Pension Fund of Russia (PFR), the Social Insurance Fund (SIF) and the Compulsory Health Insurance Fund (HIF), as well as the territorial body of statistics (Rosstat). On registration in the funds, they issue a notice of registration. These registration numbers are required for the payment of insurance premiums and rendering of accounts.

Sole Proprietors need to register in the SIF and the PFR as employers in case they hire people.

The size of insurance premiums which companies and SPs transfer to non-budgetary funds is established by the federal law. The value of the total (basic) insurance rate in 2015 equals 30%.

Permits for Foreign Citizens
A foreign national heading a Russian company should obtain a work permit or a patent (for visa-free foreigners, mainly from the CIS).

These documents are not necessary if a foreign citizen has a permanent residence permit or a temporary residence permit in the Russian Federation.

A company, in turn, should obtain a permit to hire expatriates. In some cases, such permit is not required, e.g., if a company hires a highly-qualified expatriate.

These permissions and patents are issued by a territorial body of the Federal Migration Service of Russia (FMS).

Opening of Branches and Representative Offices of Foreign Companies
As an alternative to opening of an LLC or registering as a Sole Proprietor, one can open a branch or a representative office of a foreign company. These types of companies have an advantage – in some cases, branches and representative offices of foreign companies are exempted from payment of customs duties or have tax reliefs.

To open a branch or a representative office, a company must undergo a mandatory accreditation procedure in Interregional Inspectorate of the Federal Tax Service №47 in Moscow, even if the branch will conduct business in Vladivostok or any other city. To do this, one needs to submit a package of documents, which includes an application, foundation documents of the foreign company, the decision to establish a branch or a representative office, regulations of the branch or the representative office, and other documents. The Inspectorate shall issue the accreditation no later than in 25 days after submission of the documents. The fee for the accreditation of branches and representative offices is 120 000 rubles.
Taxation
Russia has a three-level tax system comprising federal, state and local taxes. In particular, federal taxes include a Personal Income Tax on (PIT), a Corporate Income Tax and a Value Added Tax (VAT). Regional taxes include a corporate property tax, a tax on gambling and a transport tax, and local taxes – a land tax, a personal property tax and sales tax.

Personal income tax is paid by tax residents of the Russian Federation (people actually staying in Russia for at least 183 calendar days within 12 consecutive months), and non-residents, if they gain income in the country.
Tax Residents

They pay 13% of their income in the form of a Personal Income Tax.
Foreign Citizens – SPs

Those who are not tax residents of the Russian Federation pay a personal income tax at the rate of 30%, according to the general rule
Foreigners-Residents

Pay 13% of the income.
Non-residents

Pay a personal income tax at the rate of 15% if they receive dividends from Russian organizations.
When hiring employees, one must remember that Russian companies, sole proprietors and subdivisions of foreign organizations act as tax agents, and therefore should withhold taxes from the taxpayer and transfer them to the budget system of the Russian Federation.

Foreign companies that do business in Russia via a permanent representative office and (or) receive income from sources in the Russian Federation, pay corporate income tax.

The basic tax rate on the corporate income tax is 20%. Dividend income received by a foreign company on shares of Russian companies, as well as dividends from the equity participation in any other form, are taxed at 15%.

Value added tax is an indirect tax, which is calculated by the seller at the sale of goods (work, services, property rights) to the customer. VAT payers are organizations and SPs. Organization and entrepreneurs applying special taxation schemes do not have to pay tax on transactions of sale (except in case of importing goods into the territory of Russia).

STS (simplified tax system) may be used only by foreign citizens registered as SPs. STS is one of taxation schemes, which involves a special procedure for the payment of taxes and aims at small and medium-sized businesses. Entrepreneurs who use the simplified tax system are exempt from the personal income tax in respect of income from business activities, property tax and VAT, except in certain cases required by law. For STS, tax rates depend the object of taxation chosen by the entrepreneur. For the "income" object of taxation, the rate is 6%. If the object of taxation is "income minus expenses", the rate is 15%.

The basic tax rate on VAT is 18%. For branches and representative offices of foreign companies VAT reliefs are provided regarding the lease of premises under conditions that similar privileges are stated in an international agreement.

Property Tax
A foreign company, which conducts business in Russia through a permanent representative office, pays the tax on chattels and real property related to fixed assets and property received under the concession agreement.

If a foreign company does not conduct business in Russia through a permanent representative office, the objects of taxation is real property located on the territory of the Russian Federation and foreign-owned real estate of the company, both in its ownership and received under the concession agreement.

Tax rates are established by the laws of the Russian Federation and may not exceed 2.2 percent.
It is difficult to name specific spheres in which foreign citizens would easily find their niche, because the larger and more complex the business is, the more laws regulate it.

Naturally, we would recommend to seek assistance from qualified consultants. Experts will help foreign investors navigate the nuances of legislation that must be considered when opening a business in Russia, as well as avoid errors and waste of time and money.
In conclusion, we note that Russian legislation is being constantly improved. In particular, since December 29, 2015 one has to wait for 3 days (instead of 5, as it used to be) for the registration of a legal entity or an SP. Within the framework of the ongoing large-scale reform of the Civil Code of the Russian Federation, changes have been made to ease doing business in Russia.

The changes enact the law enforcement practice worked out by the courts, introduce new legal instruments, including those borrowed from foreign jurisdictions (assurances about the circumstances, conditional transactions, options, etc.). All these and other measures create optimal environment for doing business in the Russian market.

Information is accurate at the time of publication – October 16, 2015
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"Castren and Snelman" is the oldest and one of the leading Finnish law firms with offices in Helsinki (since 1888), Moscow (since 2007) and St. Petersburg (since 1994), with over 200 employees. In Russia, we provide legal services in all aspects of business law, including such areas as legal support for projects, consulting on corporate, commercial, labor, intellectual rights and rights in real estate.

We also provide services in the field of project financing and settlement of disputes. Our Russian practice gained recognition from the international rating agencies – Chambers Europe, Legal500 and IFRL1000. Our customers appreciate that we offer solutions adequate to real life. As a member of the largest international legal associations, "Castren and Snelman" is able to organize legal support to its customers all over the world.

For more information about our company, projects, services, operating principles and values visit www.castren.ru.