Joint ventures in Russian Federation: overview

A Q&A guide to joint ventures law in the Russian Federation.

The Q&A gives a high level overview of joint ventures law, including regulation of joint ventures, types of joint ventures permitted in the jurisdiction, whether corporate joint ventures are subject to the corporate law, formalities for formation and registration of joint ventures, statutory limits on duration, anti-trust rules, termination, rules relating to joint ventures with foreign members, and incentives.

This Q&A is part of the Joint Ventures Law Global Guide.

Contents

Domestic company joint ventures (JVs)

Regulation

1. Are JVs expressly regulated?

The law does not currently expressly regulate JVs. Neither legislation nor court practice provides rules specifically designed for JVs.

Types

 
2. Which types of JV are allowed?

Both corporate and contractual JVs can be established under the law. For corporate JVs, the JV partners:

  • Acquire shares in a legal entity.

  • Enter into a JV agreement regulating their rights and obligations in relation to the JV.

For contractual JVs, the rights and obligations of the JV partners are regulated by the JV agreement only.

The vast majority of JVs are corporate. Contractual JVs can be found in practice only in exceptional cases, the main reasons for this being:

  • The limitations and restrictions of the civil law, since most provisions of the Civil Code are mandatory (see Question 19).

  • Uncertainties regarding the enforceability of contractual rights under the law.

  • A general hesitation in practice to structure legal relationships outside a statutorily predetermined framework.

 
3. Are corporate JVs subject to the corporate law?

Corporate JVs are subject to corporate law, in particular to the provisions of the Law on Limited Liability Companies.

Until recently, the two commonly used corporate forms for the JV's legal entity were the limited liability company (obchestvo s ogranichenoy otvetstvenostyu) (OOO) and the closed joint stock company (zakrytoe aktsionernoye obchestvo) (ZAO).

Both were comparable in terms of establishment procedures and corporate governance. However, there were certain differences in relation to:

  • The registration of share issues and share transfers.

  • The decision-making process.

  • The protection of minority shareholders.

  • Property contributions by the shareholders.

  • Exit regulations.

Following a radical revision of the Civil Code, the corporate form of the closed joint stock company has been abolished and replaced by the non-public joint stock company from 1 September 2014. The Law on Joint Stock Companies has yet to be brought in line with this revision to the Civil Code. The current provisions of the Law on Joint Stock Companies only apply to the extent that they do not contradict the Civil Code, leading to uncertainties as to the scope of their applicability. It is currently unpredictable whether, following the introduction of the required amendments to the Law on Joint Stock Companies, the non-public joint stock company will be a suitable form for corporate JVs. Therefore, the only suitable form for a corporate JV is currently the limited liability company.

Formation and registration

 
4. Is the use of foreign language in a JV's founding documents (both corporate and contractual) restricted?

It is not entirely clear whether a contractual JV agreement between Russian parties can be drawn up solely in a foreign language and if there is a bilingual version, if this must stipulate that the foreign language prevails. The reasons for these uncertainties are some (dubious) interpretations in practice on the scope of the application of the Law on the State Language.

Corporate JVs result in the establishment of a legal entity under the law. The founding documents of each legal entity, in particular the charter and the foundation resolution or agreement, must be drawn up in Russian. Bilingual versions of the founding documents can be prepared, provided that the Russian language version prevails, where there are discrepancies. Again, it is not entirely clear whether the JV agreement can be drawn up solely in a foreign language and if it must stipulate a foreign language as the prevailing one.

 
5. Are public officers (for example, public notaries) involved in a JV's formation procedure?

Since a JV agreement is neither subject to notarisation nor to state registration under the law, the formation of a contractual JV does not involve public officers.

For a corporate JV, the establishment of a legal entity requires its state registration in the Unified State Register of Legal Entities, which is currently maintained by the tax authorities at the entity's registered address. If the legal entity is a non-public joint stock company, the shares issued by the entity must also be state registered with the Central Bank of the Russian Federation, which assumes the relevant competences of the abolished Federal Service for Financial Markets.

 
6. Are JVs registered with any local registries? Are public sector bodies' authorisations required for a JV's establishment?

Local registries

JVs are not subject to registration with any local registries. Only the establishment of a legal entity requires certain state registrations (see Question 5).

Public sector bodies

Authorisations from public sector bodies are not required for the formation of a JV.

 
7. What other formal requirements must be complied with to validly constitute a JV?

General

Although merger clearance provisions do not specifically regulate the formation of JVs, this process is subject to the general provisions of the Competition Law. Under these provisions, merger clearance with the Federal Anti-monopoly Service can be required for:

  • The establishment of a legal entity.

  • The execution of a JV agreement in relation to the legal entity.

Establishment of Russian legal entity

The establishment of a legal entity can be subject to merger clearance with the Federal Anti-monopoly Service if its charter capital is paid by shares or assets and the legal entity therefore acquires:

  • More than a third of the shares in a Russian limited liability company.

  • More than 25% of the shares in a Russian joint stock company.

  • Fixed assets located in Russia (except for land plots and non-industrial constructions) or the intangible assets of a Russian economic organisation with a book value exceeding 20% of the total book value of the fixed assets and intangible assets of the economic organisation.

Such an acquisition of shares or assets by the legal entity requires the prior approval of the Federal Anti-monopoly Service if:

  • The aggregate book value of the assets of the following exceeds RUB7 billion:

    • the groups of companies of the founders; and

    • the group of companies of the organisation the shares or assets of which are contributed to the charter capital of the legal entity.

  • The aggregate turnover within the previous calendar year of the following exceeds RUB10 billion:

    • the groups of companies of the founders; and

    • the group of companies of the organisation the shares or assets of which were contributed to the charter capital of the legal entity.

  • The organisation, the shares or assets of which are contributed to the charter capital of the legal entity, is included in the Russian register of dominant undertakings (where the register generally includes companies with market shares above 35%, where the safe harbour is below 8%).

Special rules, including different monetary thresholds, also apply if the establishment of the legal entity results in the acquisition of shares or assets of a Russian financial organisation.

JV agreement with respect to Russian legal entity

The execution of the JV agreement may be subject to merger clearance with the Federal Anti-monopoly Service if one of the JV partners acquires under this agreement rights allowing it to:

  • Determine the commercial activity of the legal entity (it is unclear to what extent pure veto rights on certain decisions of the corporate bodies of the legal entity qualify as rights allowing the determination of the commercial activity).

  • Perform the functions of the sole executive body (the chief executive officer) of the legal entity.

Such an acquisition of rights must first be approved by the Federal Anti-monopoly Service if:

  • The aggregate book value of the assets of the groups of companies:

    • of the acquiring JV partner and the legal entity exceeds RUB7 billion; and

    • of the legal entity exceeds RUB250 million.

  • The aggregate turnover of the groups of companies of the acquiring JV partner and the legal entity exceeded RUB10 billion within the previous calendar year. The aggregate book value of the assets of the group of companies of the legal entity must also exceed RUB250 million.

  • Any organisation from the groups of companies of the acquiring JV partner or the legal entity is included in the Russian register of dominant undertakings (the register generally includes companies with market shares above 35%, the safe harbour is below 8%).

The State Duma is currently reviewing draft amendments to the Competition Law, which establish the requirement to first obtain the Federal Anti-monopoly Service's approval before the conclusion of any JV agreement, if the aggregate book value of the assets of the parties' groups of companies exceeds RUB7 billion or their aggregate turnover exceeds RUB10 billion.

Post-closing notifications previously applicable to certain transactions have been abolished since the beginning of 2014.

Permitted markets

8. Can the JV instrument be used in every market? Are there any restrictions to be considered and carefully assessed before investing?

In addition to merger clearance under the Competition Law, transactions by foreign investors (including Russian legal entities under foreign control) for strategic entities can be subject to clearance under the Strategic Investment Law (see Question 24). In addition, following recent amendments to the Law on Mass Media, as of 1 January 2016, foreign investors are likely to be prohibited from owning, managing or controlling more than 20% of the shares in mass media organisations.

Purpose

9. Can a JV be established with any purpose?

Both contractual JV and corporate JV can be established with any purpose provided that they do not contradict the general provisions of the law.

Share capital and participation

 
10. What possible forms of participation are there in a JV's share capital? How can a JV member contribute and are there statutory limits on the possibility to make contributions in kind?

Forms of participation

JV partners participate in the corporate JV through their shareholding in the share capital of the legal entity, which is usually incorporated in the form of a limited liability company.

Contributions

The Law on Limited Liability Companies allows shares to be paid for by:

  • Monetary funds.

  • Securities.

  • Other assets.

  • Property rights.

  • Other rights having a monetary value.

Therefore, the JV partners can pay for their shares in the legal entity in cash or in kind. Where it is in kind, the monetary value of the contribution in kind must be appraised and determined in accordance with the applicable statutory rules. Currently, there are no restrictions on the percentage of the share capital that can be paid for by contributions in kind. Following the recent amendments to the Civil Code, the minimum share capital of the legal entity (see Question 11) can, however, only be contributed in cash.

The shareholders in a limited liability company also have an additional option for financing since they can make contributions in cash or in kind to the property of the company without increasing its share capital or amending the proportion of their shareholdings.

 
11. Can a corporate JV's share capital be indicated by making reference to a foreign currency?

The statutory minimum share capital of a limited liability company or closed joint stock company is currently RUB10,000. The share capital can be indicated in the foundation documents of the legal entity in Russian rubles only.

Duration and limits on membership

 
12. Are there statutory limits on a JV's duration?

The law does not provide any statutory limits on the duration of contractual or corporate JV. There are also no such limitations on the operation of a legal entity.

 
13. Are there statutory limits on the number of members participating in a JV?

There are no limits on the number of partners under a contractual JV, nor are there any limitations on the number of shareholders of a limited liability company.

Public sector bodies

 
14. Can a public sector body enter into a JV agreement? Subject to what conditions? In particular, do public private partnerships (PPP) laws and regulations apply?

Public sector bodies can enter into JV agreements in accordance with PPP-related laws that have been adopted at both the federal and regional levels (the level of the constituent entities of the Russian Federation). PPP regulations have also been adopted in some municipalities at a local level. However, taking into account the following, the law has yet to develop consistent PPP regulation:

  • The absence of an express regulation of PPP at the federal level.

  • The different approaches to qualifying projects as PPP at the regional level.

  • The different rules applicable to the implementation of PPP projects at the various levels.

In particular, at the federal level different types of PPP projects can be implemented in accordance with, for example:

  • The Law on Concession Agreements.

  • The Law on the Development Bank.

  • The Law on Special Economic Zones in Russia.

  • The Law on Motor Roads.

The Law on Concession Agreements is of particular importance and regulates state concessions for infrastructure facilities such as:

  • Roads.

  • Railways.

  • Pipeline transport.

  • Sea and river ports.

These concessions are granted under a concession agreement entered into between the Russian Government and the (domestic or foreign) investors. However, since concession agreements must strictly comply with the relevant model agreement adopted by the government, the flexibility of the investors under these agreements is very limited.

At the regional level, several laws on PPP have specifically been adopted by many constituent entities of the Russian Federation, including:

  • Saint Petersburg.

  • Chelyabinsk Oblast.

  • The Altai Republic.

  • The Republic of Dagestan.

  • The Republic of Kalmykia.

  • Stavropol Krai.

These laws typically list the different forms of PPP available in the relevant region, often also including forms that are not likely to qualify as PPP following international standards (for example, public procurement contracts or tax benefits for investors). Also, the regional PPP laws usually regulate the implementation of projects and any guarantees granted to the investors. Since there is currently no binding model PPP law at the federal level, the regional PPP laws can significantly vary, depending on the type of project and the relevant region.

Non-competition and anti-trust clauses

 
15. Are there statutory constraints on the use of non-competition or anti-trust clauses in a JV agreement?

During period of effectiveness

Until recently, non-competition clauses in JV agreements were generally not enforceable under the law. However, on 7 August 2013, the Federal Anti-monopoly Service issued the "Clarifications on the Procedure and Methods of Analysis of Joint Venture Agreements". In these clarifications, the Federal Anti-monopoly Service set the conditions for cases where non-competition clauses can be justified. Generally, these conditions (which are currently rather vague) are as follows:

  • The parties combine their resources or make mutual investments to achieve the goals of their joint activity.

  • The parties jointly assume the risks associated with their joint activities.

  • Information about the joint activities or the formation of the JV by the parties is publicly available (which means, according to the clarifications, that the JV agreement has been submitted to the Federal Anti-monopoly Service).

In addition, the non-competition clause must be restricted to the time period required for return of investment (approximately five years) and achievement of necessary profit (approximately two years). Any extension of this term must also be approved by the Federal Anti-monopoly Service.

The Federal Anti-monopoly Service also proposed amendments to the Competition Law according to which the general anti-trust restrictions including the prohibition of non-competition clauses are not applied to JV agreements that have been approved by the Federal Anti-monopoly Service (see Question 7).

Following termination

Following the termination of the JV agreement, non-competition clauses are subject to the general anti-trust restrictions under the Competition Law and are therefore generally not enforceable.

De facto company/partnership

16. Must the contractual JV satisfy any conditions to avoid falling within the definition of de facto company/partnership?

The establishment of a company or partnership requires compliance with strict formal requirements (including, but not limited to, state registration in the Unified State Register of Legal Entities). The risk that a contractual JV can be considered a de facto company or partnership is therefore low.

Limiting member liability

 
17. Can a JV agreement provide that a JV member can participate without incurring any risk, loss or reward?

For a corporate JV, the liability of the shareholders of a limited liability company is generally limited to the value of their shares in the share capital. The shareholders can also be held liable for any obligations of the legal entity where:

  • The relevant obligations were caused by the binding instructions of a dominant company.

  • The insolvency of the legal entity was caused by the binding instructions of the shareholders.

In addition, following the recent amendments to the Civil Code (effective as of 1 September 2014), a parent company must be jointly liable with its subsidiary under transactions entered into by the subsidiary on the parent company's instructions or with the consent of the parent company. Such joint liability can extend to all transactions of the subsidiary requiring the parent company's approval under mandatory law (interested party transactions and large scale transactions may require shareholder's approval) or according to the subsidiary's charter (in particular, the charter of the subsidiary of a foreign company usually contains a list of reserved matters requiring shareholder's approval before any action can be taken by the subsidiary's general director). The JV partners cannot exclude this liability in the JV agreement.

If the JV partners hold shares directly in a limited liability company, they can freely agree on the proportion of the distribution of dividends from the company's net profits in the company's charter.

Further, in both corporate and contractual JVs, the partners can agree in the JV agreement on the allocation of risks, losses and rewards arising from the JV. However, certain restrictions under civil law must be taken into account, such as current uncertainties regarding the concept of indemnification or the general prohibition of donations between legal entities (see Question 19).

Anti-trust

18. Do any anti-trust rules, guidelines or policies apply to a JV agreement?

The most important document is the Clarifications on the Procedure and Methods of Analysis of Joint Venture Agreements. Currently, the State Duma is reviewing proposed amendments to the Competition Law providing for general approval requirements for JV agreements relating to a company (see Questions 7 and 15).

Governance and limits on directors

19. Can the parties to a JV freely regulate the JV or are they subject to certain restrictions?

Contractual JV

Currently, contractual JVs are subject to certain restrictions and limitations under the Civil Code. For example, any subjective condition in the JV agreement (for example, in the form of a condition precedent or as an element of a put or call option) can be considered void as the Civil Code provides that the only valid conditions are those that are outside the influence of any of the parties.

The waiver of rights is generally considered invalid. Donations between Russian commercial organisations are generally prohibited. In addition, until recently, the Civil Code did not recognise the concepts of indemnification or representations and warranties granted for the benefit of one of the parties.

From 1 June 2015, further amendments to the Civil Code have entered into force, which are intended to remove these restrictions of civil law, at least partly. In particular, the amendments for the first time clearly recognise the concepts of:

  • Option agreements.

  • Indemnifications.

  • Representations and warranties.

Whether these legislative changes will actually reduce the level of restrictions and limitations imposed on contractual JVs by the civil law depends on the application of the relevant provisions in practice.

Corporate JV

For corporate JVs in the form of a limited liability company, the whole corporate relationship between the JV partners is regulated by corporate law, which is the Law on Limited Liability Companies.

The Law on Limited Liability Companies contains detailed regulations on, among other things:

  • The appointment and competences of the company's executive bodies (the chief executive officer (CEO) and the management board).

  • The election and decision-making process of the company's board of directors (supervisory board).

  • The decision-making process of the company's general meeting of shareholders.

  • The transfer of shares in the company by its shareholders.

  • The approval of major transactions (that is, company transactions exceeding a certain percentage of the company's balance sheet value) or interested-party transactions (company transactions with related persons).

  • Exit options for the shareholders.

Until recently, a company could only have one CEO representing the company in relation to third parties. Following recent changes to the Civil Code (effective from 1 September 2014), a company can now appoint several general directors that can represent the company jointly. However, it is not currently clear whether a provision in the charter stating that the several directors can only represent the company jointly would be enforceable. The corresponding amendments to the Law on Limited Liability Companies have not been adopted yet. However, the registration authorities have already started registering several general directors with the relevant state register.

It is currently unclear to what extent the JV partners can deviate from these provisions in the JV agreement as a type of shareholders' agreement. Until recently, the mere valid existence of shareholders' agreements was questionable under the law. Since a legal reform of corporate legislation in 2009, the concept of a shareholders' agreement is generally recognised. Further, additional provisions regulating the enforcement of certain clauses of shareholders' agreements have been introduced in the Civil Code from 1 September 2014. However, due to the absence of an established or consistent court practice on the interrelation between the provisions of the Law on Limited Liability Companies (in particular, the extent of their mandatory application), on the one hand, and the content of shareholders' agreements, on the other hand, uncertainties on the enforceability of shareholders' agreements remain.

Additional uncertainties regarding the enforceability of JV agreements result from the general restrictions under the civil law.

Due to these restrictions of corporate and civil law, certain legal concepts and mechanisms that are customary in international JVs may currently not be enforceable under Russian law, for example:

  • Voting obligations.

  • Put and call options.

  • Drag along and tag along rights.

  • Indemnification provisions.

 
20. Are there limits or restrictions on the eligibility of an individual as a member of the board of directors/statutory auditor?

The law does not contain any restrictions on the eligibility (including nationality restrictions) of an individual to act as one of the following:

  • Sole executive body (CEO).

  • Member of the collective executive body (management board).

  • Member of the board of directors (supervisory board) of a legal entity.

However, foreign nationals performing the functions of the CEO or acting as members of the management board must obtain a work permit before starting their employment. In addition, a statutory audit of a legal entity must be performed by an auditor licensed in Russia.

Termination

 
21. What legal regime applies to a JV's termination? Can a JV be terminated for just cause on request of one party?

For contractual JVs, the termination grounds (including unilateral termination rights) can be freely agreed on by the JV partners in the JV agreement.

Since in a corporate JV, all JV partners hold shares in the legal entity, options for terminating the JV are subject to corporate law.

Most provisions of corporate law are mandatory and the enforceability of voting obligations or put and call options is uncertain (see Question 19). Therefore, termination options customarily used in international JVs (for example, the mandatory transfer of shares or other deadlock resolution mechanisms) are not available under Russian law.

JV partners can only terminate the JV within the tight framework of corporate law. Therefore, the terminating JV partner is usually restricted to one of the following options:

  • Sale of its shares to another JV partner.

  • Sale of its shares to a third party (usually subject to a veto right or pre-emptive right of the other JV partners).

  • Transfer of its shares to the legal entity (subject to certain conditions in a limited liability company).

  • Agreement with the other JV partners on the liquidation of the legal entity.

 
22. Is the termination of a JV agreement subject to any public sector body's approval?

The termination of JV agreements is generally not subject to the approval of any public sector body.

Choice of law and jurisdiction

23. Are there constraints on the choice of the law and the jurisdiction applicable to a JV?

If all JV partners are Russian, the corporate JV can practically be subject to the jurisdiction of Russia only. If one of the JV partners is non-Russian, the corporate JV can be subject to either:

  • The jurisdiction of Russia.

  • The jurisdiction of a foreign holding company (see Question 25).

The JV agreement under both corporate and contractual JV must be governed by Russian law if all parties to the JV agreement are Russian. If one of the parties to the agreement is non-Russian, the JV agreement can also be governed by a more flexible foreign law (see Question 25).

 

JVs with foreign members

Validity and authorisation

24. What are the rules relating to validity and authorisation of JVs with foreign parties?

Validity

The law does not prohibit the participation of foreign parties in JVs.

Limits

There are no requirements on the minimum or maximum number of parties that must be Russian.

Authorisation

Clearance under Strategic Investment Law. Transactions by foreign investors in strategic entities may be subject to clearance under the Strategic Investment Law. A strategic entity is a legal entity that performs at least one activity of strategic importance listed in the Strategic Investment Law. These strategic activities can be divided into the following broad categories:

  • Natural resources, such as:

    • geological studies;

    • exploration and development of subsoil areas of federal significance (as determined by the government).

  • Defence, such as:

    • weapons;

    • military equipment;

    • technology.

  • Nuclear power, such as the nuclear industry and nuclear safety.

  • Aviation, such as the aircraft and space industries.

  • Media, such as:

    • television and radio broadcasting;

    • printing;

    • publishing.

  • Telecommunications, such as telephony (excluding the internet).

  • Natural monopolies, such as transportation and energy supply.

  • Traffic safety.

Generally, a foreign investor's acquisition of control over a strategic entity requires prior approval of an intergovernmental committee headed by the prime minister. The foreign investor is deemed to exercise control over the strategic entity if it, directly or indirectly:

  • Holds more than 50% of the voting shares in the strategic entity.

  • Can appoint the sole executive body (chief executive officer (CEO)) or more than 50% of the collective executive body (management board) of the strategic entity.

  • Can appoint more than 50% of the board of directors (supervisory board) of the strategic entity.

  • Can determine the commercial activity of the strategic entity or perform the functions of its CEO. In addition, the foreign investor must notify the Federal Anti-monopoly Service of any acquisition of more than 5% of the shares in a strategic entity within 45 calendar days following the completion of the acquisition.

Additional clearance requirements. Stricter clearance requirements than those referred to above can apply to transactions with subsoil strategic entities (Strategic Investment Law and Subsoil Law) and transactions by foreign governments, international organisations or any of their subsidiaries with strategic or non-strategic entities (Strategic Investment Law and Foreign Investment Law).

Effect of foreign membership

25. Are any of the rules relating to domestic company JVs (see Questions 1 to 23) different for JVs with members incorporated under, or governed by, the laws of a foreign country?

Structure of corporate JVs

Two structures of corporate JVs with foreign participation are widespread in practice:

  • The single-tier structure.

  • The two-tier structure.

Under a single-tier structure, the JV partners acquire shares in a legal entity incorporated under the law and enter into a JV agreement governed by a foreign law. The JV under a two-tier structure entails:

  • A holding company as a JV vehicle outside of Russia.

  • A legal entity that is wholly owned by the foreign holding company.

In this case, the JV partners acquire shares in the foreign holding company and the business of the JV in Russia is operated by the legal entity.

A single-tier structure is usually easier to agree on with Russian JV partners, as they prefer the application of Russian corporate law. However, the disadvantages of this structure are the uncertainties on the enforceability of legal concepts and mechanisms that are customary in international JVs. This applies particularly to the enforceability of provisions of JV agreements such as (see Questions 19 and 21):

  • Voting obligations of the JV partners in the corporate bodies of the legal entity.

  • Put and call options in relation to the shares in the legal entity.

  • Deadlock resolution mechanisms.

  • Indemnification provisions.

However, under a two-tier structure, the relationship between the JV partners can be governed by the flexible law of the jurisdiction of the foreign holding company. The JV partners benefit from the fact that the foreign jurisdiction clearly recognises the legal concepts and mechanisms required for the due protection of their interests. However, the administrative burden and costs associated with the establishment and operation of a JV under a two-tier structure are higher than for a single-tier structure. Currently, the most frequently used jurisdictions for the establishment of a foreign holding company are Cyprus, the Netherlands and Luxembourg, due to favourable double tax treaties entered into between these countries and Russian Federation.

Relevance of Russian corporate law

Under both the single-tier and two-tier structures, corporate JV are partly or fully subject to Russian corporate law. Under a two-tier structure, the relevance of Russian corporate law is rather limited, since generally only the formal requirements must be complied with. As the legal entity has only one shareholder (the foreign holding company), all decisions falling within the competence of the shareholders' meeting are taken at the level of the foreign holding company according to the agreement between the JV partners. Decisions at the level of the foreign holding company are then implemented by the management of the foreign holding company (in their capacity as representatives of the sole shareholder of the legal entity) and the management of the legal entity in accordance with the formal requirements of Russian corporate law.

In addition, under a two-tier structure, the charter of the legal entity usually provides additional reserved matters for the meeting of shareholders (for example, regarding certain important transactions of the legal entity) to control the activity of the Russian management (chief executive officer and management board). These reserved matters can be approved by the JV partners at the level of the foreign holding company.

Choice of foreign law

Taking into account the restrictions of corporate and civil law (see Question 19), foreign JV partners usually prefer the application of foreign law as the law governing the JV agreement for both contractual and corporate JVs (for example, English or Dutch law). For a corporate JV, foreign law is chosen as the governing law of the JV agreement, not only under two-tier structures (where the JV partners hold shares in the foreign holding company), but also for single-tier structures (where the JV partners hold shares directly in the legal entity).

Private international law does not prohibit a choice of foreign law for a JV agreement, provided that the circumstances of the case are not connected to Russian Federation only. This is the case where one of the parties to the JV agreement is foreign. Notably, recent amendments to the Civil Code expressly provide that shareholders' agreements in relation to Russian legal entities can also be governed by a foreign law if they do not contradict mandatory Russian law.

Merger clearance under competition law

As well as the merger clearance requirements (see Question 7), under a two-tier structure, the acquisition of shares in a foreign holding company can also require merger clearance with the Federal Anti-monopoly Service. In particular, the acquisition of more than 50% of the shares in a foreign holding company by one of the JV partners is subject to merger clearance if the foreign holding company already holds more than 50% of the shares in the legal entity.

Such an acquisition of shares in the foreign holding company requires the prior approval of the Federal Anti-monopoly Service if the monetary thresholds (see Question 7) are exceeded. Notifications after completion of the transaction were abolished at the start of 2014.

Non-compete clauses

The Clarifications on the Procedure and Methods of Analysis of Joint Venture Agreements (see Question 15) also apply to non-compete clauses in two-tier structures (that is, where the JV partners hold shares in the foreign holding company and enter into a JV agreement governed by foreign law). Therefore, non-competition clauses generally require clearance with the Federal Anti-monopoly Service in order to be enforceable in Russian Federation.

International arbitration

To further mitigate the risks arising from the restrictions of Russian law, foreign JV partners usually also agree that disputes under the JV agreement are to be resolved through international arbitration (for example, under the rules of the International Chamber of Commerce (ICC) or London Court of International Arbitration (LCIA)) at a place outside of Russian Federation (such as Vienna, Zurich or London). Since Russian Federation is a signatory to the New York Convention of Enforcement of Foreign Arbitral Awards 1958 (New York Convention), foreign arbitral awards can be recognised and enforced in Russian Federation.

However, according to the Law on International Commercial Arbitration, the recognition or enforcement of foreign arbitral awards can be refused if this contradicts public policy. Due to the variety of the few court decisions that are publicly available (partly of a political character), it is almost impossible to identify a uniform approach to the interpretation of the term "public policy" by the courts. Legislation has yet to remove this uncertainty on the meaning of public policy.

There is a risk that disputes arising from a shareholders' agreement can be considered as non-arbitrable by a state court that is requested to recognise the foreign or Russian arbitral award. In this case, the arbitral award would not be enforceable in Russian Federation and new proceedings before a Russian state court may need to be initiated. This risk is based on a rather dubious interpretation of the procedural rules under which corporate disputes relating to Russian companies cannot generally be arbitrated.

Termination of corporate JVs

The termination of a single-tier structure corporate JV is subject to the restrictions of Russian corporate law (see Question 21). For two-tier structure corporate JVs, the legal regime applicable to the termination of the JV can be agreed on by the JV partners under the flexible law of the jurisdiction of the foreign holding company, according to standards customary in international JVs.

Economic or financial incentives

26. Are there economic or financial incentives for foreign direct investments in a JV?

The Foreign Investment Law provides certain guarantees for foreign investments, including direct investments (that is the acquisition of more than 10% of the shares in a commercial organisation or the leasing of equipment in Russian Federation with a value of more than RUB1 million). In particular, foreign investors are protected by:

  • A general non-discrimination rule.

  • A legal protection guarantee.

  • A guarantee to freely transfer profits abroad.

  • Certain other guarantees with respect to their investments.

Various additional incentives applicable to foreign direct investments, in particular tax incentives, are provided under PPP-related legislation at the federal, regional and local levels (see Question 14).

Minimum investments/contributions

27. Are there mandatory minimum equity investments or contributions in kind thresholds for a foreign JV member?

Russian law does not generally provide any minimum equity investments or in kind contributions by the foreign JV partner. However, these minimum investments or contributions can be required to enjoy tax benefits under a double tax treaty entered into between Russian Federation and the relevant foreign country.

 

The regulatory authorities

Federal Tax Service of the Russian Federation

Main activities.

  • Control and supervision of compliance with tax legislation.

  • Control and supervision over foreign exchange operations of residents and non-residents, other than credit institutions.

  • State registration of legal entities and natural persons as individual entrepreneurs.

  • Accreditation of branches and representative offices of foreign legal entities (except for representative offices of foreign credit institutions).

  • Keeping records of taxpayers.

  • Maintaining the Unified State Register of Legal Entities (EGRUL) and the State Register of Individual Entrepreneurs.

  • Keeping the State Register of Accredited Branches and Representative Offices of Foreign Legal Entities.

  • Auditing legal entities and individual entrepreneurs.

W www.nalog.ru

Federal Antimonopoly Service of the Russian Federation (FAS)

Main activities.

  • State regulation of compliance of economic entities with competition legislation.

  • Control over public procurement activities.

  • Control over natural monopolies' activities (excluding tariff regulation).

  • Control over foreign investments in strategic industries.

  • Control over unfair competition.

  • Control over economic concentration.

  • Control over compliance with trade legislation.

W www.fas.gov.ru

The Central Bank of the Russian Federation (Bank of Russia)

Main activities.

  • Issue of cash funds and organisation of cash circulation.

  • Organisation of credit institution refinancing system.

  • Regulation, control and supervision over corporate governance of joint stock companies.

  • Registration of securities issues and prospectuses and reports on the results of securities issues.

  • Regulation of banking operations.

  • Supervision and oversight over national payment system.

  • State registration of credit institutions as well as issue of bank licences to credit institutions.

  • State registration of non-governmental pension funds.

  • Foreign exchange regulation and foreign exchange control.

  • Setting and publishing official exchange rates of foreign currencies against the ruble.

W www.cbr.ru



Online resources

State legal information internet portal

W www.pravo.gov.ru/

Description. This website is the official state internet portal of legal information, which publishes federal constitutional laws, federal laws, international treaties acceded by the Russian Federation, acts of the Federal Assembly, decrees and orders of the President of the Russian Federation and decisions of the Constitutional Court of the Russian Federation.

Rossiyskaya Gazeta

W www.rg.ru/dok/

Description. Rossiyskaya Gazeta is the official source of publication of federal constitutional laws, federal laws, decrees of the President of the Russian Federation, decisions and orders of the Russian Government, as well as regulations of ministries and agencies.

Official Gazette of the Russian Federation

W www.szrf.ru/

Description. The Official Gazette of the Russian Federation publishes federal constitutional laws, federal laws, acts of the Federal Assembly, decrees and orders of the President of the Russian Federation, decisions and orders of the Government of the Russian Federation and decisions of the Constitutional Court of the Russian Federation.

Parliamentary Newspaper

W www.pnp.ru/newspaper/archive/

Description. Parliamentary Newspaper is the official periodical of the Federal Assembly of the Russian Federation. Federal constitutional laws and federal laws must be published in the Parliamentary Newspaper.

Garant

W http://english.garant.ru/

Description. Garant is a private service provider distributing information on Russian legislation including English translations (for guidance only).



Contributor profile

Hannes Lubitzsch, Local Partner

Noerr

T +7 495 799 56 96
F +7 495 799 56 97
E hannes.lubitzsch@noerr.com
W www.noerr.com

Professional qualifications. Germany, Rechtsanwalt (lawyer)

Areas of practice. Joint ventures; mergers and acquisitions; compliance.

Non-professional qualifications. LLM, University of Aberdeen.

Recent transactions

  • Advising an international automobile manufacturer on two joint ventures with a Russian truck producer for the manufacturing of trucks in the Russian Federation.

  • Advising a large European internet company on the acquisition of the market leading Russian online food delivery service.

  • Advising a global healthcare company on a joint venture with a Russian developer for the establishment of a manufacturing plant for high-tech medical equipment in the Moscow region.

Languages. English, German, Russian

Publications

  • Joint Ventures, Jurisdictional Comparisons, chapter Russian Federation, European Lawyer Reference, 1st edition 2012.

  • The Mergers and Acquisitions Review, chapter Russian Federation, 7th edition 2013 (with Ekaterina Ponka).

  • Changes to Corporate Legislation Amend Protection of Creditors' Rights, ILO, Company and Commercial - Russia, January 2012.


{ "siteName" : "PLC", "objType" : "PLC_Doc_C", "objID" : "1248198362469", "objName" : "Joint ventures in Russian Federation overview", "userID" : "2", "objUrl" : "http://us.practicallaw.com/cs/Satellite/us/resource/4-617-2677?null", "pageType" : "Resource", "academicUserID" : "", "contentAccessed" : "true", "analyticsPermCookie" : "25e8a493e:15b003b9323:-459e", "analyticsSessionCookie" : "25e8a493e:15b003b9323:-459d", "statisticSensorPath" : "http://analytics.practicallaw.com/sensor/statistic" }