Establishing a business in the Russian Federation
A Q&A guide to establishing a business in the Russian Federation.
This Q&A gives an overview of the key issues in establishing a business in the Russian Federation, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.
To compare answers across multiple jurisdictions, visit the Establishing a business in... Country Q&A Tool.
This article is part of the global guide to establishing a business worldwide. For a full list of contents, please visit www.practicallaw.com/ebi-mjg.
Russia is a civil law jurisdiction based on one Civil Code, which sets out the foundation of civil law, as well as business relations. Although constitutionally Russia is a federal state, civil and business lawmaking falls exclusively to federal law making bodies.
The President and the executive pass secondary legislation such as presidential and governmental decrees and ministerial orders, which are necessary to implement federal laws, each within the limits of their statutory competence.
In accordance with the Constitution of the Russian Federation, Russia abides by the general principles of international law. International treaties signed by the Soviet Union and Russia continue to be an integral part of Russia's legal system. Consequently, where principles of international law conflict with national laws, international law always prevails.
Parties to Russian contracts are free to select whatever jurisdiction they wish to govern their contracts. However, they cannot derogate from the otherwise applicable mandatory rules of Russian law. Therefore, the interpretation of foreign law governed contracts in Russian courts can be affected by Russian mandatory rules.
Lower courts are not bound by the decisions of higher courts, and precedent as such is unrecognised as a source of Russian law. However, lower courts tend to follow the positions established by higher courts. This is especially so when articulated through published opinions on general points of law (commonly referred to as overviews), as opposed to rulings on particular cases.
The Civil Code is currently undergoing major reform, which, when implemented, is likely to impact its application in the Russian courts for years to come (see Question 33).
The two most common forms of business vehicles in Russia are:
Limited liability companies (общество с ограниченной ответственностью) (LLCs).
Joint-stock companies (акционерное общество) (JSCs).
The rules governing the establishment and operation of these business vehicles in Russia are found in the following sources:
Federal Law of the Russian Federation on JSCs.
Federal Law of the Russian Federation on LLCs.
Federal Law of the Russian Federation on State Registration of Legal Entities and Individual Entrepreneurs.
The founding constitutional document of Russian companies is the charter, which is similar to the memorandum and articles of association of common law companies.
LLCs are private companies and therefore the most suitable business vehicle for wholly owned businesses or long-term, true partnership-style joint ventures. The capital of an LLC is held in virtual participatory interests, which have monetary value but are not securities.
The main advantage of a LLC is that it is not subject to Russian securities market rules, making it a more flexible alternative to a JSC. Further advantages are similar to that of private JSCs (see below, JSCs).
The main disadvantage of an LLC is that notarial certification is required to transfer the participatory interests, making them less liquid than shares. Further disadvantages are similar to that of private JSCs (see below, JSCs).
A JSC can be public or private. A JSC is deemed public when its shares or other securities convertible into shares are publicly offered or traded or when its charter and firm name contains a reference to it being a "public" company. It is possible for a private JSC to be converted into a public JSC, if the above criteria are met.
Advantages and disadvantages of public JSCs
One of the main advantages of a public JSC is that it can offer shares to the public. Accordingly, the shares of a public JSC are much more liquid than the shares of a private JSC and the participatory interests of an LLC (see above, LLCs).
The main disadvantages of a public JSC in accordance with mandatory rules of law are:
The securities are subject to the rigid securities markets rules.
Mandatory corporate governance rules.
Higher public reporting requirements than private JSCs.
No possibility to have pre-emptive rights in share transfers.
A rigid management structure required by mandatory rules of law.
Higher charter capital requirements than LLCs and private JSCs (see Question 25).
An inability to expel a member.
Advantages and disadvantages of private JSCs
Like LLCs, the main advantages of private JSCs are:
Membership limitation (transfer restrictions).
Members have rights of pre-emption over share transfers to non-members and further transfer restrictions can be set up in the company charter.
It is optional to have a board of directors.
Flexible corporate governance rules.
It is possible to expel another member.
The minimum capital requirements are RUB10,000 compared to RUB100,000 for public JSCs.
The main disadvantage of private JSCs over LLCs is that they are subject to a degree of transparency and publicity through the use of independent share registrars (professional service providers that are licensed to record share transfers).
Establishing a presence from abroad
Establishing a business presence
The most common options for foreign companies to establish a business presence in Russia are:
Representative office. This is an extension of a foreign company without a separate legal personality. A representative office is prohibited by law from engaging in profit making commercial activities. The typical role of a representative office is to arrange marketing and advertising for the foreign company and to promote commercial relations with counterparties.
Branch office (see Question 4).
Wholly owned subsidiary (see Questions 8 to 18).
Joint venture (see Question 6).
Appointing a local agent, distributor or franchisee
A further option is for foreign companies to appoint a distributor or a franchisee in Russia. Both are widely used in practice where the company's purpose is better served through these structures as opposed to creating a corporate presence. Licensing and franchise agreements involving the use of intellectual property rights must be registered with the Federal Service of Intellectual Property (Rospatent), which takes approximately two months to take effect.
The Civil Code does not formally recognise distribution agreements as a type of contract. However, it is possible to structure the appointment of a distributor through other types of contracts, such as sales and licensing contracts. Both the foreign company and the distributor or franchisee will be responsible for complying with the local laws.
It is rare for foreign companies to use agency arrangements for establishing a business presence in Russia. Agency arrangements are mostly used as an interim measure or alongside more permanent options.
An overseas company can trade directly in Russia through a branch or indirectly through distribution and franchise agreements (see Question 3).
A branch is an office of a company set up to carry out its business at a different location. It performs the functions of a representative office (see Question 3, Establishing a business presence) and can also engage in profit-making commercial activity. One of the main disadvantages of a branch is that the overseas parent company is fully liable for the wrongdoings or debts of the branch.
A branch operating in Russia is governed by Russian law and therefore requires a permit (an accreditation) to operate. The permit is issued by the Federal Tax Service for an indefinite term. Industries such as banking and insurance are subject to more stringent rules and may be precluded from obtaining such permits.
There are three types of partnership:
Partnerships are taxed in the same way as other businesses (see Questions 26 to 28).
General partnerships exist under the Civil Code. However they are rarely used for business purposes in Russia, by either Russian or foreign businesses.
A general partnership is a legal entity that is created by entering into and registering a foundation agreement signed by all the partners. The partners are jointly and severally liable of the debts of the partnerships. The foundation agreement will usually set out how the assets of the partnership are owned and that the partners will be personally liable for any losses if the partnership's own assets are insufficient.
Unless agreed otherwise, the foundation agreement will also state that:
All partners have equal decision-making rights.
All decisions require consent of all partners.
All profits are distributed pro rata to contributions.
Limited (or commandite) partnerships are also governed by the Civil Code.
Limited partnerships are formed in the same way as general partnerships, but they must have at least one general partner with unlimited liability and full management rights. The risk of the remaining partners is limited to the value of their contributions.
Limited liability partnership
Limited liability partnerships (economic partnerships) are a relatively new feature of Russian corporate law and are rarely seen in practice. They are governed by the Civil Code and a separate Federal Law adopted in 2011.
Limited liability partnerships are formed in the same way as other partnerships, but they cannot advertise their business or become members of other companies. Therefore, it is unlikely that they would prove a convenient business vehicle for foreign investors. The original legislative intent behind introducing this corporate form into Russian corporate law in 2011 was to facilitate joint ventures and start-ups.
Limited liability partnerships are flexible in terms of capital contributions and corporate governance. They are also private, as little information is required to be disclosed to the registration authorities.
International joint ventures (JVs) are common in Russia as foreign companies entering the market for the first time can take advantage of the expertise of an established participant.
Merger clearance notification may be required if certain thresholds are met. These thresholds usually include the size of the equity capital purchased, the asset value or turnover of the target and the asset value of the purchaser/investor groups. Lower thresholds and/or governmental permit requirements apply to strategic industries (see Question 20).
Foreign law governed joint venture agreements with respect to Russian companies are deemed illegal in Russia, and will not be enforced by Russian courts.
The most common JV structure involves holding a Russian operating vehicle. The operating vehicle is either an existing company or a newly incorporated special purpose vehicle, through an offshore holding company. Historically, off-shore holding companies were typically located in Cyprus or The Netherlands, although the use of them has been increasingly discouraged by the Russian Government. The written agreement between the members of the holding company establishes the governing principles for the operation and management of the JV. The corresponding shareholders' agreements and/or JV agreements are usually governed by English law.
The two principal forms of Russian operating vehicles are limited liability companies (LLCs) and private joint-stock companies (JSCs) (see Question 2). There is no proven record of using partnerships or co-operatives for JV purposes.
It is becoming increasingly popular for parties to opt for a Russian JV vehicle directly. LLCs and private JSCs are used. However, JSCs are marginally preferable due to the ease of share transfers. In this case, both the company's charter and a Russian law governed shareholders' agreement must contain provisions relevant to the operation and management of the joint business.
Unincorporated JVs can exist in the form of "simple partnerships". Simple partnerships are agreements to carry out a joint business in or outside of Russia. No new business entity is formed; it is a purely contractual arrangement. Joint property is earmarked and accounted for separately by one of the partners. The liability of partners for claims arising out of joint commercial activity is always joint and several, and partners are liable to the full extent of their assets. This type of commercial arrangement is not widely used.
Trusts are not recognised under Russian law.
Trust management contracts exist under Russian law. However, they are distinct from common law trusts as they do not create a split title. A trust management contract creates a management service with enhanced fiduciary responsibilities of the manager to the owner and third parties.
Forming a private company
The formation of limited liability companies in Russia are governed by the following:
Federal Law on Limited Liability Companies.
Federal Law on State Registration of Legal Entities and Individual Entrepreneurs.
There are no regional rules, local rules or best practice recommendations. Sector legislation sets out additional and different requirements for the formation of banks, insurance companies and some financial institutions.
When a Russian company is formed, key corporate information (such as its official name and legal form, registered office, members, any key operating permits or licences and the name of the general director/CEO) is recorded in the Unified State Register of Legal Entities (Register).
The Federal Tax Service is the principal regulatory authority responsible for the primary state registration of legal entities, registration of branches and representative offices and maintenance of the Register. It is also responsible for the management of various secondary registrations, such as the issue of taxpayer identification numbers, mandatory statistical codes, and pension and social security funds registrations. While the company is in existence, it must notify the Federal Tax Service of any changes to the Register.
The Register is open to the public and the current status of any Russian company can be confirmed by an entry in the Register.
When the capital of a newly formed entity is made up of in-kind contributions rather than cash, prior anti-monopoly clearance may be required where the thresholds established by the Federal Law on Protection of Competition are exceeded.
See box: The regulatory authorities.
Tailor-made or shelf company
Shelf companies do not exist in Russia as even if the company is dormant, minimum capital, staffing and reporting rules still apply.
Foreign companies tend to use tailor-made companies, for several reasons:
The formation of a limited liability company (LLC) is a relatively quick and easy process. The documents needed from a foreign company for formation of a new LLC and notarial purchase of an existing are similar.
Foreign investors in Russia are sensitive to historical risks and perform thorough due diligence of all pre-existing companies to rule them out. This takes a certain amount of time and effort, especially as the target company must maintain minimum capital, staff and file returns.
Foreign investors will opt for the purchase of an existing company when it holds valuable licences, permits or contracts. However, in this case the target is usually not a shelf company, even if it is operating at the minimum level (see above).
A Russian LLC is formed on the day it is recorded in the Register (see above, Regulatory framework). The following documents must be submitted to the local office of the Federal Tax Service:
Registration application (a form downloaded from the official website completed by the applicant, usually the company's General Director).
Foundation agreement (detailing the steps preceding formation and relations between the founders).
State registration duty receipt (RUR4,000 paid by bank draft, payment details available online).
Constitutional document of the foreign founder (apostilled, notarised and translated into Russian).
The registration documents can be posted to the local office of the Federal Tax Service in hard copy by registered post. The registration application must be notarised. Notaries can also electronically submit the scanned and encrypted registration documents on behalf of the applicant. Notarial certification of the application costs RUR200.
The registration documents can also be submitted electronically by the applicant either through the website of the local office of the Federal Tax Service or the website of the Common State Services Portal. The documents must be scanned and encrypted using government-approved software downloadable from the same websites and must have a digital signature.
The applicant can also bring the hard copies in person, either directly to the local office of the Federal Tax Service, or to the nearest multi-functional centre of state services. Notarisation is not required if the applicant submits the documents in hard copy himself and not by post.
If the application is submitted correctly the Federal Tax Service will usually register the company within five business days of the submission date. The certificate confirming the same and the registered copy of the charter will be e-mailed to the applicant or posted back to the registered address, unless the applicant has made arrangements to pick them up in person. This is common as the Russian postal service can be slow. It is advisable to hold hard copies of all these documents.
The company can commence operations immediately upon formation. When the company is formed as a legal entity, the following secondary registrations are required:
Social security fund.
There is no need to make separate filings. The Federal Tax Service is obligated to contact the other competent authorities immediately upon state registration.
A Russian LLC must have a trade name in Russian, and may have a trade name in another language. The following restrictions apply:
"Russia", "Russian Federation" or their derivatives can only be used with permission of the Ministry of Justice.
Official names of foreign countries and their derivatives.
Official names of Russian federal, regional and local authorities.
Official names of public associations.
Words that are contrary to public interest and the principles of humanity and morals.
The only constitutional document required for a LLC is its charter. Charters are public documents and any person can obtain an official copy from the Register. In accordance with the Civil Code and the LLC Law it must contain the following:
Official trade name.
Composition and powers of corporate governance bodies, decision-making rules.
Rights and obligations of members.
Share transfer restrictions.
Expulsion rules (if any).
Rules for keeping books and records.
The charter may also contain other provisions, providing that they do not contradict the law. Any amendments to the charter must be recorded in the Register, and are effective for third parties upon registration. The company itself, however, is bound by the amended charter from the moment it is adopted. In addition to the charter, the company can adopt internal regulations and bye-laws provided that these are consistent with the charter.
Members' agreements are optional and need not be disclosed to the third parties or filed in the Register. The only exception is for members' agreements that create disproportionate voting powers for the members.
A Russian limited liability company (LLC) must put the words "limited liability company" or "llc" before or after its official name.
A company is under no obligation to have a corporate seal bearing its company's name and registration number. There are no other mandatory trading disclosure rules concerning stationery, invoices and so on. In addition, it is also unnecessary to have any sign or signage at the company's place of business.
LLCs are not required to have websites disclosing their corporate information, unless they fall under the securities market rules on disclosure by virtue of having issued bonds or other securities. In this case, the company will also have to make public the information on its net assets size in the Unified Federal Register on Activity Facts of Legal Entities, which is available online. LLCs must also disclose in this register, any pledges on their movable property.
Deeds are not recognised under Russian law.
Contracts between legal entities must be executed in simple written form, usually as one document signed by all parties. Signing in counterpart is not normally used. It is also customary to affix a corporate seal. However, as of 1 July 2015, seals are no longer mandatory.
The general director (CEO) of a Russian company does not need any special authority to sign contracts on behalf of the company. All other parties require a formal power of attorney issued by the general director.
Transfers of participatory interests in limited liability companies (see Question 2), or charges over them, must be signed in front of a notary and only become valid when certified by the officiating notary. It is possible to notarise any contract even when the law does not require it.
Sole member corporations and, accordingly, wholly owned subsidiaries, are allowed in any corporate form. The only exception to this is that corporations with a sole member cannot be the sole member of other corporations.
The maximum number of members for a limited liability company is 50. Beyond that figure the company must change to a joint stock company. JSCs have no restriction on the number of members (see Question 25).
Minimum capital requirements
The minimum charter capital of a limited liability company or a private joint stock company is RUR10,000. However, charter capital requirements for banks, insurance companies and other regulated financial institutions are much higher. This information can be found in the specific federal laws governing these activities.
For public companies, see Question 25.
Limited liability companies (LLCs) in Russia have participatory interests instead of shares (see Question 2).
Unless otherwise stated in the company's charter, members and often the company itself will have pre-emption rights over transfers of participatory interests to third parties. Members with pre-emption rights are entitled to purchase the interest offered for sale, for the amount offered pro rata to their stake. There are no special statutory rules for family or intra-group transfers. However, it is possible to make provision for them in the company charter or shareholders' agreement.
It is possible for the company's charter to require all transfers of participatory interests to be subject to the consent of all other members and if such consent is refused, then the company must purchase the interest.
It is also possible for a member to give up its interest in the limited liability company in return for a share in the assets, but only if this option is provided for in the company's charter.
Shareholders and voting rights
The common protections for minority shareholders in limited liability companies (LLCs) include:
Voting thresholds allowing minority members to block certain corporate decisions.
Interested party transaction approval rules prohibiting interested members from voting.
Major transaction approval rules allowing minority members to block transactions of certain type or magnitude.
Election of the governance bodies by cumulative (weighted) voting (if provided in the charter).
The option to limit the size of participatory interest belonging to one member.
An LLC's charter may also allow disproportionate profit distribution and or the raising of quorum and voting thresholds to the point of unanimity. As the corporate governance requirements for LLCs are fairly flexible, additional minority member protections are common.
Minority shareholder claims
A member(s) holding in aggregate over 10% of the participatory interests in a company can file a lawsuit to expel another member who violates his obligations and thereby hinders or hampers the company's business. In this case, the exiting member is entitled to a fair share of the company's assets as remuneration for the interests that he is ordered to give up.
As a general rule, for LLCs and joint-stock companies, the liability of members is limited to the nominal value of the shares or participatory interests issued to them.
However it is possible to extend this liability for some or all of the members in specific circumstances such as:
A company's insolvency.
Transactions entered into by the company following direct instructions from the members.
Circumstances requiring the consent of all members.
Unless otherwise stated in the company charter, the decisions of a limited liability company can be made by a simple majority, by a two-third majority or unanimously. The meeting of members is quorate with more than half of the members present.
It is possible for private companies to increase quorum and voting thresholds or to provide for weighted voting rights on certain matters in the company charter. It is also possible to provide for voting rights disproportionate to shareholdings.
For limited liability companies (LLCs), a two-third voting majority is required by law for the following corporate actions:
Changing the company's charter.
Increasing share capital.
Additional capital contributions.
A unanimous vote is required by law for the following corporate actions:
Liquidation and reorganisation.
Additional rights and obligations on members.
It is possible for companies to increase quorum and voting thresholds or to provide for weighted voting rights on certain matters in the company charter. Mandatory voting majorities cannot be reduced or disapplied.
A large number of industry sectors are subject to specific licensing requirements, such as:
Banking and other financial services.
Alcohol (beverage and substance).
Many more industry sectors are subject to permits from self-regulating organisations, such as:
Construction, operation and management of real estate.
Permits from self-regulating organisations are usually of a technical nature and fairly easy to obtain.
Foreign investment restrictions
The federal law on strategic investments
Under the Federal Law on Strategic Investments, the government's consent is required for the acquisition or control by foreign investors of Russian companies operating in strategic business sectors. Strategic business sectors include:
Certain subsoil fields.
Natural monopolies such as oil and gas pipelines.
Railroads, airports and certain sea ports.
Certain mass media.
The definitions of ''control'' and of ''foreign investors'' used for the purposes of the Federal Law on Strategic Investments are very broad. Some guidance is available. However, it is usually determined on a case-by-case basis.
The Federal Antimonopoly Service
Foreign investors require a prior consent of the Federal Anti-Monopoly Service in order to obtain:
Over 50% of votes in a strategic company.
Over 25% of votes in a strategic subsoil company.
Other equivalent means of corporate control.
Over 25% of such company's production assets.
Foreign governments and institutions cannot obtain more than 25% of equity in a strategic company or 5% of equity in a strategic subsoil company. However, a number of international financial institutions are exempt from this restriction. The Federal Antimonopoly Service will only issue the consent on recommendation of a governmental commission chaired by the Chairman of the Government.
Overall participation of foreign insurance companies in the Russian insurance industry cannot exceed 50% at any one time. Insurance companies with more than 49% foreign participation cannot engage in certain types of insurance, including life assurance, mandatory insurance and public procurement-related insurance.
Permission from the Central Bank of Russia is required to set up a credit institution. The Central Bank may further require that a number of supervisory board members are Russian citizens if the general director is a foreign national.
Foreign participation in the Russian airlines cannot exceed 49%.
Foreign companies and Russian companies with more than 50% foreign ownership also face restrictions in setting up and running radio and television networks and broadcasters. Starting from 2016, direct or indirect foreign control over more than 20% of any mass media will be banned.
There are no restrictions in Russian law on foreign companies relating to currency regulation and control affecting inward or outward investment. However, the regulations still contain a number of restrictions that should be considered in the following circumstances.
Foreign currencies are not considered legal tender in Russia, so payments between Russian residents must be in roubles.
Transactions between residents and non-residents
Foreign currency controls exist in the form of "transaction passports", which are required by Russian businesses making payments in foreign currency abroad. The aim of these transaction passports is to increase transparency and prevent money laundering, so permits are not required. Russian businesses must also repatriate international trade proceeds to their Russian bank accounts, with a few exceptions concerning servicing foreign loans.
Foreign companies cannot own land located in the border territory of Russia. Foreign companies or Russian companies that are more than 50% foreign-owned cannot own agricultural land.
There are no other restrictions on leasing of land or land ownership. There are no restrictions on ownership or leasing of buildings or any other types of real estate.
A limited liability company must have a general director (CEO), unless this function is outsourced to a management company. There are no other statutory requirements or restrictions on the appointment of directors or other governance bodies.
All public and private companies can introduce restrictions or requirements on the appointment of directors in its corporate governance code.
A private company's board is an optional body and its election, composition and proceedings are almost entirely at the company's discretion. Members of the board of directors are elected by an annual members' meeting and serve as directors until the next annual members' meeting.
A public joint-stock company (JSC) must have a board of directors/supervisory board, and may have also a collective management board (collegial executive body). The same applies to private JSCs, unless the charter provides otherwise.
For both private and public companies, the role of chairperson and general director/CEO cannot be held by the same person.
There is no legal requirement to create board committees or to appoint a company secretary. However, a company's corporate governance code may impose such rules.
Number of directors or members
There is no maximum or minimum number of board members for private companies.
Public JSCs must have a board of directors composed of at least five members.
There is no statutory requirement for employee board representation for any companies.
Reregistering as a public company
A limited liability company can become a public joint stock company (JSC) by changing its name and corporate form, changing the charter and updating the Unified State Register of Legal Entities. As changing corporate form is involved, it will be considered a full-scale corporate reorganisation, so the company will have to follow a certain process and notify its creditors.
A private JSC can re-register as a public JSC by changing its name in the charter and the Unified State Register of Legal Entities. As it was already a JSC, no corporate reorganisation rules will be triggered.
There is no minimum number of members required for a private company to re-register as a public JSC.
When a private company's number of members exceeds 50, it is required to re-register as a public company.
Minimum charter capital for a public JSC is RUR100,000, half of which must be paid within three months following the company's formation and the remainder must be paid within one year. Charter capital increases must be paid for in full prior to share allotment.
A JSC must maintain a positive net asset value starting from the end of the second year of its existence. If it cannot do so, it must decrease its charter capital accordingly. Where it becomes impossible to decrease the charter capital further because the statutory minimum is reached, the company must either wind up, or face the risk of being compulsorily liquidated by the regulatory authority.
There are no requirements for the minimum number of shares held by the public. Net asset requirements are similar to other JSCs (see Question 13).
All Russian taxes, other than customs duties and payroll-related levies, are listed in the Tax Code. Most taxes are levied at federal level, at uniform general rates and according to uniform filing and payment rules. Some taxes are levied regionally or locally, pursuant to relevant regional or local laws. Corporate profits tax has federal and regional charges. Regional charges can be reduced at the discretion of the regional authorities.
The principal business-related federal taxes are
Corporate profits tax: general rate 20%, filing monthly or quarterly and normally payable monthly in advance.
VAT: general rate 18%, filing quarterly, payable on the earlier of the supply or transfer date and payment date for supply or transfer in the future; filing and payment rules on import VAT differ.
Payroll-related levies, including social charges and personal income tax: general rate 13% for residents and 30% for non-residents, filing and payment monthly.
The principal business-related regional and local taxes are:
Corporate property tax.
The filing and payment formalities in respect of the above vary greatly.
There are also excise duties levied on certain products, state duties and taxes specific to natural resources and their export. There is no special tax or stamp duty on share issues or transfers.
Certain types of income are subject to reduced rates. For instance, in order to qualify for a "participation exemption", a Russian company must have held at least a 50% stake continuously for at least one year. If the subsidiary is foreign, its country of incorporation should not be black-listed by the Russian government.
Russian tax residents are taxed on their worldwide income. Russian tax residents are:
Companies incorporated in Russia.
Companies incorporated outside of Russia that have the place of management and control in Russia.
A non-tax resident becomes liable to pay taxes in Russia on income earned in Russia when it:
Has a permanent establishment in Russia (or the income and assets attributable to permanent establishment).
Has no permanent establishment but derives income from sources in Russia (withholding tax applies).
The Russian definition of permanent establishment is generally consistent with the Organisation for Economic Co-operation and Development guidance and the nature of the business is usually the defining factor.
Russian branches of foreign companies are tax transparent. Russian subsidiaries in any corporate form are not tax transparent. Non-tax residents with no permanent establishment (such as foreign parent entities) are taxed on Russian income such as interest, dividends, royalties and so on at the source at 15%, unless otherwise provided by double tax treaties.
Over 80 double tax treaties address the issue of potential double taxation of common Russian- sourced income. Their provisions override Russian national law, and often provide for lower or zero tax rates. In order to benefit from them, the recipient must be able to prove its tax residency and compliance with other treaty requirements, especially tests looking at who beneficially owns the company.
Thin-capitalisation rules restrict the deductibility of interest on loans between related parties. The rules apply when a Russian borrower:
Borrows from a foreign company that has a direct or indirect stake in the borrower of over 20%.
Borrows from a Russian subsidiary of a foreign company that has a direct or indirect stake in the borrower of over 20%.
Has loans guaranteed or otherwise secured in any form by a foreign company or its Russian subsidiary as above.
In these cases, thin capitalisation rules will generally apply if the Russian company's debt to equity ratio exceeds three to one. Interest attributable to the portion of the debt exceeding the ratio is not deductible and is taxed as dividend. The portion of the interest not taxed as dividend is deductible up to the threshold set out in the Tax Code.
Thin-capitalisation rules generally do not apply to Russian branches of foreign companies.
All international and some domestic related-party transactions are controlled transactions under transfer pricing rules, except for transactions between members of a Russian consolidated group of taxpayers. Russian transfer pricing rules are generally in line with Organisation for Economic Co-operation and Development guidelines and allow for obtaining an advance pricing agreement.
Grants and tax incentives
Under the federal law, some tax incentives are provided for on major investment projects.
Regional authorities have a general right to provide incentives to certain categories of taxpayers by reducing the corporate tax rate to 15.5%, as well as reducing regional taxes.
Further profits tax incentives are available to specific categories of taxpayers listed in the Tax Code, for instance, to residents of special economic zones. There are numerous special economic zones in various industry sectors all across the country. Regional authorities often create business parks or technological hubs whose residents also enjoy reduced tax rates, or incentivise small business.
Individual incentives are prohibited.
The main law governing employment relationships is the Labour Code, applying to Russians and foreign nationals working in Russia. Its rules are extensive and mandatory, so almost all aspects of employment contracts in Russia must be governed by Russian law.
The employment and status of foreign workers in Russia is also governed by the Federal Law on the Legal Status of Foreign Citizens that specifies various types of residency and work permits for foreign workers (see Question 32).
Russian labour laws do not apply to Russians working abroad.
Both the Russian employer and the foreign employee must obtain permits from the migration authorities. Representative offices and branches of foreign companies are not exempt from this requirement.
The employer must obtain a general authorisation to employ foreign nationals and a quota of foreigners it can employ. Employment permits and quotas are unnecessary for employing highly qualified employees earning over RUR2 million per year. Permission to employ employees earning over RUR2 million per year is granted routinely. Each foreign employee must obtain an extendable work permit valid for up to two years.
Proposals for reform
The Russian Civil Code is in the process of thorough reform, with two sets of major changes coming into force in the summer of 2015 concerning mostly the law of general obligations and contracts. Property law reform is expected to follow shortly.
Significant changes to the Federal Laws on Limited Liability Companies and Joint Stock Companies are pending to reflect recent changes to the corporate law provisions of the Civil Code already in force.
The regulatory authorities
Federal Tax Service
Main activities. Corporate registrations, accreditations of branches and representative offices, tax administration, maintenance of the Unified Register of Legal Entities.
Central Bank of Russia
Main activities. Financial services market regulator; securities market regulator; registration of securities issues.
Federal Anti-Monopoly Service
Main activities. Merger control; strategic investment control antitrust control (horizontal and vertical concentration and so on); public procurement monitoring.
Federal Migration Service
Main activities. Issues employment permits; work permits and working visas; monitors compliance.
Federal Labour Inspection
Main activities.Monitors compliance with labou r legislation and labour conditions.
Description. Official website where Russian legislative texts are published upon promulgation (Russian only).
Description. Private comprehensive database with Russian legislation translated into English.
Description. Official website with a searchable database of Russian commercial court decisions and pending cases (Russian only).
Margarita Slavina, Senior Associate
Herbert Smith CIS LLP
Professional qualifications. Solicitor, Russia, 2000
Areas of practice. Corporate; Real estate.
Non-professional qualifications. International Law, Moscow State Institute for International Relations, 1998
Languages. Russian, English
Professional associations/memberships. Staff lecturer, Moscow State Institute for International Relations.