What Do Service Contracts, Occupational Licenses And Cosigners All Share In Common?

05.09.2019

A guide to opening an LLC in Russia

Before focusing on the ways for foreign founders to establish a legal presence in Russia, it would be helpful to say a few words about common forms of local business structures for non-resident investors.

Distributorship contract

This form of business does not require opening a company in Russia. Distributorship contract is an economically feasible options for foreign small businesses. At an early stage, when there are no regular employees and no reliable distribution channels, a foreign legal entity (FLE) may allow the Russian companies to sell the FLEs' goods in Russia.

Cooperation between the manufacturer and the official distributor may take several forms. A FLE may grant a Russian distributor exclusive rights to import goods and sell them in Russia. A FLE may choose several distributors for various groups of goods or impose territorial restrictions requiring the customers to purchase products only from a certain distributor. Most commonly a distributor grants smaller dealers the rights to work with clients and focuses on product promotion and partner network expansion.

Representative office or branch. A branch and representative office (RO) of a FLE are stand-alone subsidiaries governed by a parent company and performing all or some of its functions. In practice, branches and representative offices are the most common forms of business for medium and large FLEs. They may open and close accounts in the Russian and foreign banks, make transactions and sign contracts. Branches and representative offices are managed by an appointed head/director.

FLEs' branches or representative offices registered in Russia pay taxes in line with the Russian tax legislation and international agreements. Double taxation treaties between Russia and FLE's countries of origin are meant to prevent double taxation. To work in Russia, branches and representative offices are subject to accreditation, which takes about thirty days and requires a 120,000 roubles fee.

Joint venture. There is no such thing as a joint venture (JV) in Russian law. Essentially, it is an unofficial name for an organization established by local and foreign businessmen in Russia. JV is registered as an ordinary company, a joint stock company (JSC) or a limited liability company (LLC).

To form a joint venture a foreign investor may establish a new company or buy a stake in an existing Russian-owned enterprise by acquiring a participatory interest in the company's charter capital or by becoming a participant through an increase in the charter capital.

The advantages of this type of business in Russia include the ability to tap several markets and strong economic growth. What is more, the Russian partners are fully aware of the market climate, well versed in legal matters and have the required expertise and contacts.

A company with a foreign founder.

The most popular forms of company registration in Russia are joint stock companies and limited liability companies. Such legal entities operate under their own charter and in line with the Russian laws. The incorporation procedures for a JSC and an LLC are very similar, the difference is that after JSC incorporation, it is necessary to additionally register the shares issue and delegated the powers of keeping the register of shareholders to a professional registrar. The liability of the participants for the company's debts is limited to the payment of their shares in the charter capital. LLC may opt for a simplified tax system (STS), a preferential tax regime offered by the state, which is beneficial to small and medium businesses.

This article will focus on registration of an LLC with non-resident founders, as the most familiar and easy-to-use business form for foreigner investors.

Before going into details, it is necessary to outline the existing terms for establishing an LLC with foreign participation in Russia.

Is it possible to open an LLC with foreign participants (foreign national or a FLE) in Russia? Under par. 4 of art. 66 of the Russian Civil Code the participants in the economic companies and the investors in the limited (commandite) partnerships may be the citizens and the legal entities. The law may prohibit or restrict the participation of the individual categories of citizens in the economic partnerships and companies, with the exception of the public joint-stock companies. The similar rule is set out in par. 1 of art. 7 of the Federal law "On Limited Liability Companies" (On LLC) dated 08.02.1998 N14-FZ.

Registration of LLC with foreign participation
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On the basis of par. 7 of art. 11 of the Law N 14-FZ registration procedure for LLC with foreign participation is determined by the federal law.

Under art. 6 of the Federal Law of 09.07.1999 N 160-FZ "On Foreign Investment in the Russian Federation" (hereinafter – Law N 160-FZ) the foreign investor is entitled to implement investment on the territory of the Russian Federation in any forms not prohibited by the legislation of the Russian Federation.

When registering an LLC, foreign individuals and foreign legal entities may act as founders (participants). However, Russia's Federal Law "On Limited Liability Companies" No. 14-FZ dated 08.02.1998 (art. 7 par. 2, sec. 3) sets out the following restriction with respect to LLC incorporation: A company may not have another economic company consisting of one person as the only participant.

The provisions of this Federal Law shall extend to companies with one participant inasmuch as this Federal Law does not stipulate otherwise and inasmuch as this does not contradict the substance of appropriate relations.

Challenges and difficulties of establishing an LLC with 100% foreign participation by a foreign company consisting of one person in Russia.

Features of registration of an LLC with a foreign founder. Registration of LLC with foreign participation is a rather popular service in the Moscow legal services market.

Requirements for the preparation and submission to the registering body of an application for registration of an LLC with foreign capital. Applicant.

Until recently, it was rather easy to establish an LLC with foreign investments. Opening an LLC by foreign nationals was even easier, if the newly established company consisted of both foreign individuals or companies on the one hand and Russian founders on the other hand.

If a founder of an LLC was a foreign individual or a legal entity and for some reasons could not come to Russia, a Russian national used to become the founder of an LLC. This was the easiest and most frequently used option, the point being that both nationals (foreign and Russian) used to become the founders of the LLC.

The share of a Russian national in the charter capital could have been 001%, 1%, or of any other insignificant size. In line with the minutes of the meeting of founders, the Russian national was ordered to register the company. It was this national who could have acted as an applicant responsible for filing the documents for state registration of the company.

The procedure allowed to avoid many problems with the signature's certification by a consul or translation of applications and their certification by foreign notaries. After registration of an LLC with foreign participation, the share owned by a Russian national could have been sold to a foreign national, or the Russian national could have left the LLC, upon application, and his share was subject to distribution or buyback by a foreign participant.

But the Order of the Federal Tax Service of Russia No. MMV-7-6-/25@ "On Approval of Forms and Requirements for the Execution of Documents to be Filed with the Registering Body for State Registration of Legal Entities, Self-Employed Individuals and Peasant (Farm) Holdings" dated 25.01.2012 has significantly complicated registration of LLC with foreign participation.

In line with the new forms for legal entities registration, all founders of the company were charged with responsibility to act as applicants for company incorporation, i.e., it was no longer possible for one of them to take on powers delegated by other applicants. (Previously, one applicant for registration of an LLC with few founders was enough.) Therefore, if the future legal entity is founded by two or more persons, the application for the LLC registration in column 2.20. List N of the application "Information about the Applicant" is be filled with information about all founders (including foreign ones). The application's list "Information about the applicant" is signed by the specified person and notarized.

Therefore, foreign individuals, as well as heads of foreign entities who are willing to register an LLC in Russia, have to come to Russia and certify their signatures in the application for the company registration. If there are 3 or 5 or more participants, all of them have to apply to Russia's notary offices and notarize their signatures in the application.

Fortunately, when registering an LLC, foreign founders don't have to come to a notary all at once, it is possible one by one, and come to different notaries, however, the new requirements have significantly complicated the registration of an LLC with foreign participation.

Do I need to come to the Russia to register an LLC with foreign founders?
When registering an LLC with foreign investments in Russia, there are a number of difficulties associated with the impossibility of a foreign national - founder or head of a foreign legal entity – to come to Russia for registration.

However, the founders are effectively required to come to Russia. As was mentioned earlier, during registration of an LLC in Russia, the application on the state registration of a legal entity when incorporated (form P11001) is filed with the registering body, and the application should be signed by all founders of the legal entity, and their signature should be certified by a notary.

According to par. 1 of art. 9 of the Federal Law dated August 8, 2001, No. 129-FZ "On State Registration of Legal Entities and Individual Entrepreneurs" the following individuals may act as applicants during registration of a legal entity when incorporated:

founder (founders) of a legal entity at the time of its establishment;
head of a legal entity acting as a founder of a legal entity being registered;

Russia's legislation therefore does not allow signing an application for state registration of a legal entity when incorporated by a person acting under power of attorney. A founder of a company or the head of a FLE that is the founder of an LLC has to personally come to a notary.

As for signing the decision on establishing an LLC, this decision may be signed by a person acting on the basis of a verified power of attorney. The application on state registration of a legal entity can be submitted to the registering body under the power of attorney, the certificate of state registration of a legal entity and the company's articles of association can also be received by a representative under the power of attorney.

What if a foreign national cannot come to Russia to certify the signature by a notary? There are several options.

Certification of an application for state registration in a consular office. According to art. 1 of the Russian law on notaries public, notarial acts on behalf of Russia in the territory of other states are performed by the authorized officials of Russia's consular offices.

However, practice shows that there are many pitfalls in this process, and it is necessary to ask about the possibility of certification of the founder's signature in each particular consulate.

For example, there are conventions in force, according to which "a consular official has the right to certify signatures of nationals of the represented state", which means that only signatures of Russian nationals are subject to certification.

Moreover, in accordance with par. 12 of Annex 1 to the Order of the Federal Tax Service of Russia of 01.11.2004 N SAE-3-09/16@ "On methodological clarifications for filling the forms of documents used in the state registration of legal entities and individual entrepreneurs" section 12 of an application for state registration of a legal entity when incorporated is filled by a notary in line with article 80 of the Russian law on notaries public.

If section 12 is filled in by a consul rather than a notary, the Federal Tax Service may officially refuse registration of an LLC with foreign participation. In the best-case scenario, there's a notary in a Russian consulate.

Certification of an application for registration of an LLC by a foreign notary, apostilization.

Alternatively, a notary may agree to certify an application in Russian, for example, if one translates an application only to ensure a notary understands the purport of the document without certifying the data specified in the application and certifies the signature of a signee. In this case, a notary verifies the authority and certifies the signature of an applicant on a separate page, and attaches it to the application in Russian, and then the documents are apostilized, translated (apostille + notary's signature sheet), the translation is certified by a notary and then the documents are submitted to the registration body. This is the most popular way of registration of an LLC by a foreigner, with no need to come to Russia.

It should be noted that all foreign documents are accepted only with the marks of consular legalization or apostilized, as well as with a notarized translation of these documents. Other requirements are set for participants from countries that have signed a mutual assistance treaty with Russia, countries that have signed and countries that have not signed the Hague Convention of 1961. Thus, for the countries that signed the treaty "On legal assistance and legal relations" dated October 07, 2002 (Ukraine, Belarus, Czech Republic, Latvia, etc.), documents notarization is enough. Residents of countries that signed the 1961 Hague Convention submit apostilized documents to the Russian registration body. Both the documents themselves and the apostille must be translated into Russian, and a translation must be certified by a notary public. Documents of foreign investors from countries that have not signed the Hague Convention are legalized in Russia's consular offices located in these countries.

Registration of an LLC without participation of a foreign national or a legal entity, followed by incorporation of foreigners into an LLC. An LLC is being registered with the participants who can certify their signatures in the application for registration of the LLC with a Russian notary public. After that, a foreign national or a foreign legal entity is incorporated into a registered LLC on the basis of a sales agreement or by an increase of charter capital of the company through contributions of third parties accepted into the company. Of course, this process takes longer, consists of several stages of registration of an LLC with foreign participation. However, it requires much less money that could have been spent for travelling to Russia, accommodation, etc. Though, as practice shows, foreigners still prefer more "traditional" options, they are not used to looking for loopholes of "uncomfortable" legislation.

Buying a ready-made company, followed by re-registration and incorporation of foreign participants into an LLC.

Less attractive option for foreigners. Still, we have to mention it too.

If a foreign national or a foreign legal entity are planning to be the only participants of the registered LLC and cannot come to Russia to register a company, have no partners in Russia, who could act as founders for the future LLC, it is possible to buy an already registered company. After the purchase of a ready-made company, the head of the legal entity may submit documents to the registration body to change the participants of the LLC and incorporate foreign participants into the LLC. Actually, we're going back to option 4. While changing participants of an LLC a former participant who used to be a founder leaves the company, and his share is bought out or distributed among foreign participants.

Documents required from foreign founders for registration of an LLC with foreign participation.

If a foreign company is the founder, the extract from the register of foreign legal entities of a corresponding country of origin or other equivalent legal proof of the juridical status of the foreign legal entity, as well as a Russian translation of the passport of the head of the investor's company, is submitted for registration of the LLC.

It should be noted that if an application for registration is notarized by a Russian notary, the latter will ask the director of the investor's company to provide a certified translation of the company's charter and a decision to appoint him as the head of the company. A notary will need these documents to confirm the authority of the director, they are not submitted for registration. Moreover, if the director of a foreign company does not speak Russian, a certified translator will be required, as the director must confirm that he or she is conscious of his or her actions and intentions to register the company.

Other documents may include a certificate of state registration, a charter and a decision on the establishment. It is recommended that all available documents be provided. Foreign documents must be translated into Russian, the translation must be notarized, and the documents must be apostilized.

If the founder of a company is a foreign individual, a notarized translation of the passport of the foreign founder of the LLC will be required.

Regardless of whether the founder of a company with foreign participation is an individual or a legal entity, a notarized power of attorney for submission and receipt of documents from the registering body is required. Of course, the power of attorney must be translated into Russian and the translation must be notarized. Again, this power of attorney is issued only to submit and receive documents from the registering body, it is impossible to use it to verify an application for registration of an LLC.

Intricacies related to the participation of a foreign investor in the management of a company registered in Russia. Is a work permit required?

The most important thing is that the founder may lack a work permit or residence permit to register a company with foreign participation. Moreover, as mentioned above, the registration can be carried out in the founder's absence, therefore a visa is not required. In other words, a foreign national may be both the founder and the head of the company to be established in Russia.

However, in order for the head of the company to work successfully, it is still recommended that a foreigner apply for a work permit in Russia. Since work permits and visa invitations are issued for top-managers without quota, hiring of highly qualified specialists (HQS) is greatly simplified.

There's no need to apply for a permit to recruit foreign workers, to post a vacancy in the employment centre, to provide a Russian language certificates and medical certificates.

The highly qualified specialists (HQS) according to Russian law include foreign nationals earning over 2 million roubles per year under agreements/contracts. It is assumed that these employees have strong knowledge and experience in their area of specialization. A three-year work permit is granted to them under a simplified procedure compared to other foreign workers.

Importantly, if you hire a foreigner for an executive position when registering a company in Russia and plan to issue a work permit for him/her, it is not recommended that you register him/her as a director at once!

The procedure for obtaining a work permit for HQS from visa countries implies issuing invitations and work visas. Therefore, if you first register a foreigner as a director of the future company, and then apply for a work permit for him, you will face difficulties and will have to make changes to the register of legal entities and lay him/her off. Therefore, one should follow the rule: first work permit, and then registration as a director.

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Restrictions on LLCs with foreign participation

The Russian legislation does not provide for any restrictions on the use of a simplified tax system (STS) by Russian entities formed by foreign founders. These restrictions are listed in art. 346.12 and 346.13 of the Russian Tax Code.

The Russian legislation provides for rather strict regulation of participation of entities with non-resident founders in certain sectors of Russia's economy.

The law imposes restrictions on foreign investors' participation in the charter capital of entities deemed strategic for Russia's defence and security. The following sectors have been defined as strategic: repairing, disposal of weapons and military equipment, using radioactive materials, TV and radio broadcasting with a large coverage, publishing a periodical print publication with the circulation at least 1 m copies for each issue and 39 more industries. Under the Federal Law No. 57-FZ dated April 29, 2008 and the Federal Law No. 58-FZ dated April 29, 2008, a foreign investor seeking control over strategic business entities has to either apply for a prior authorization or notify the authorized body of a planned transaction. The procedure for applying for a prior authorization is explained in art. 12 of the Law.

There are restrictions on foreign investments in insurance and banking sectors. The Law "On Organisation of Insurance Business in the Russian Federation" dated 11.27.1992 N 4015-1, Federal Act "On banks and banking activity" dated 02.12.1990 N 395-1;

Restrictions also apply to foreign ownership and leasing of land plots.

Under par. 2, art.15 of the Russian Land Code, foreign legal entities shall not have title of plots of land located in the border territories recorded in the list established by the President of the Russian Federation in compliance with the federal legislation on the State Border of the Russian Federation and other territories of the Russian Federation specifically indicated under federal laws.

This means that the land plots in the border territories and within the seaport boundaries cannot be in the ownership of foreign citizens or foreign organisations (par. 3. art. 15, Land Code; par. 2. art. 28 of 261-FZ dated 08.11.2007).

Foreign citizens, foreign legal entities, stateless persons, as well as the legal entities in whose authorized (pooled) capital the share of foreign citizens, foreign legal entities and stateless persons exceeds 50%, may only possess land plots pertaining to farm lands on a leasehold basis, except for cases provided for by the 119-FZ dated 05.01.2016 (art. 3 of 101-FZ "On Farm land turnover").

These are certain land plots in certain border territories, within the boundaries of seaports, etc. Russian companies with a foreign participation of more than 50% cannot own agricultural land, foreign investors may only lease agricultural land.

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