Company formation in Russia
The most popular types of commercial companies in Russia are:
- limited liability company, LLC (abbreviated in Russian OOO) and
- joint stock company, JSC (abbreviated in Russian AO).
LLCs and JSCs may be founded in Russia by companies and/or individuals irrespective to nationality. A company may be established by one single founder. A solely owned company may not itself be the sole founder of another company.
Company’s director may be of any nationality.
Company name. A commercial legal entity must have its company name, which is to be indicated in its constitutional documents and entered into the Unified State Register of Legal Entities in the time of state registration. Besides the name itself, a company name must include the designation of its legal form (e.g., OOO).
A legal entity must have one full and can have one brief company name in Russian. A legal entity can also have one full and (or) one brief company name in any language of nations of Russia and (or) in foreign language.
A company name cannot include official names of foreign states; federal, regional or local governmental authorities; names of non-governmental organizations; words that are contrary to public interests or to the principles of humanity and ethics. Company names that include the official name “Russian Federation” or “Russia”, as well as the words derived from this name, may be used upon a permission issued in accordance with the procedure established by the Government.
Legal address. An address of a legal entity must be indicated in the Unified State Register of Legal Entities. Such address is to be declared in an application for state registration of a company. It may be an address of location (owned or rented non-living premises) of an executive body of the company or an address of a person entitled to act on behalf of the company without power of attorney. A company bears risk of non-receipt of legally relevant information delivered to its legal address, as well as risk of absence of its body or representative at this address.
Limited Liability Company (OOO)
- Russian LLC (OOO) has its equivalent in many European countries (e.g. GmbH in Germany, SARL in France, s.r.o. in Czech Republic, etc.).
- LLC is regulated by the Russian Civil Code and by the Federal Law “On limited liability companies” No. 14-FZ dated 8 February 1998.
- Members of LLC are not liable for the company’s debts. If the LLC’s bankruptcy is caused by the fault of its members, they may be imposed a secondary liability in case of inconsistency of the LLC’s property.
- LLC is not liable for its members’ obligations.
- The number of members of LLC may range between 1 and 50.
- The company’s authorized capital must be at least RUB 10,000. The maximum amount of an authorized capital is unlimited.
- The authorized capital must be paid within the term defined in the Memorandum of Association or in resolution of establishment of a company (in case of a single founder). This term cannot exceed four months after the state registration of the LLC.
- A member who wishes to sell its membership interest to the third party has to offer it to other members before such selling.
- Disposal of membership interest is subject to notarization. Agreement regarding the sale of membership interest becomes valid only upon its certification by a Russian notary.
- Members of LLC are entitled to receive dividends and part of liquidation proceeds in case of liquidation of the company.
- LLCs must keep accounting records and submit financial statements. LLCs are generally not subject to mandatory external audit (exceptions apply to certain companies such as banks, finance and insurance companies). Audit may be held by decision of general meeting or at request of the LLC’s member.
- The management bodies of LLC are general meeting of members, board of directors (or supervisory board) and the executive body (either a sole director, or rarely a director and a management board). The board of directors is not mandatory. Most LLCs have only the meeting of members and director as management bodies.
- The director’s powers may be granted to a management company (either Russian or foreign).
Joint Stock Company (AO)
- JSC is a company with a capital divided into shares; the members of JSC (shareholders) are not liable for the company’s obligations and bear the risk of losses related to the JSC’s activities within the cost of the shares they possess.
- JSCs are regulated by the Russian Civil Code and by the Federal Law “On joint stock companies” No. 208-FZ dated 28 December 1995. At the present time the provisions of this Law related to “open” joint stock companies are applied to public joint stock companies insofar as they does not conflict with the provisions of the Civil Code.
- According to the amendments 2014 to the Civil Code of Russian Federation, joint stock company is considered public if its shares are publicly distributed (by way of public subscription) or are publicly traded on conditions set forth by the securities law. The other joint stock companies (and limited liability companies) are considered to be non-public.
- JSC can be established under its founders’ agreement, which defines the order of establishment of the company, its share capital, types of shares, share allotment and other conditions.
- The minimal amount of authorized capital set forth in the previous legislation is RUB 10,000 for closed JSC (ZAO) and RUB 100,000 for open JSC (OAO). NOTICE: Further to amendments introduced in Civil Code in 2014 the rules concerning minimal amount of authorized capital may be changed.
- All JSCs are required to maintain a register of shareholders reflecting the current number of shareholders and the distribution of shares by number and category. A register of shareholders of a public JSC should be maintained by an independent licensed organization.
- Public JSCs are obliged to disclose the information prescribed by the law.
- JSCs are obliged to keep accounting records and submit financial statements. Annual audit is mandatory.
- The management bodies of JSC are general meeting of shareholders, board of directors (or supervisory board) and the executive body (either a sole director or director and a management board).
- The director’s powers may be granted to a commercial organization (management company) or individual entrepreneur (manager) (whether Russian or foreign).
Representative office of a foreign company
- A representative office is an office of a foreign company in Russia established to perform support functions for that foreign company.
- It is not a legal entity but a sub-division of the foreign company that established it.
- Representative offices of foreign companies (except for banks) must be accredited by the Federal Tax Service of the Russian Federation.
- Representative offices are not expected to engage in commercial activities or generate profit. They may engage in activities that involve cooperation between Russian and foreign entities as, for example, marketing and promotion, etc.
- Representative offices may employ local and foreign staff, rent office space, open Russian bank accounts.
Branch of a foreign company
- A branch office is not a legal entity but a sub-division of the foreign company that established it.
- Branches of foreign companies must be accredited by the Federal Tax Service of the Russian Federation.
- A branch office may fulfil all or part of the functions of its founder. These functions include contracting with Russian entities, carrying out sales and other business activities.
- Branch offices that carry out commercial activities form a Russian permanent establishment of the foreign company and is subject to Russian profit tax assessed on Russia related proceeds.
Non-commercial (non-profit) organizations
Non-commercial organizations are legal persons, which do not pursue generation of profit as a main objective of their activity and do not distribute the received profit between their members. The non-commercial organization may be registered in the following legal forms:
- consumers’ cooperatives;
- social (civic) organizations;
- associations (alliances), including non-commercial partnerships, self-regulatory organizations, chambers of commerce, unions of employers and others;
- immovable property owners’ associations, including condominiums;
- foundations, including social and charitable foundations;
- institutes (state, municipal, private);
- autonomous non-commercial organizations;
- religious organizations;
- public-law companies.
Corporate Profit Tax
- Taxable profit is a total income (income from sale of goods, works, services and property rights plus non-sales income) less expenses.
- Profits earned by organizations are taxed at a rate 20%.
- Foreign entities are subject to Russian tax on profits from activities conducted through their permanent establishments in the Russian Federation and on income from sources in Russia.
- Russian companies are taxed on their worldwide income.
- Certain tax exemptions can be applied under double taxation treaties (DTT). Russia has 80 double taxation treaties (including Canada, China, Cyprus, Czech Republic, Denmark, Finland, France, Germany, Ireland, Italy, Japan, Latvia, Netherlands, New Zealand, Singapore, Spain, Switzerland, Sweden, United Kingdom, USA and others).
- Passive income (such as dividends, interest, royalties), income from sale of immovable property and other types of income listed in the Tax Code (section 309) are subject to withholding tax at source, provided that profits are not earned through a permanent establishment of a foreign company.
- Domestic withholding tax rate for dividends is 15%, unless a lower rate is provided in a double taxation treaty.
- Interest, royalties, rentals, gains on the sales of immovable property and other types of income earned by a foreign company from sources in the territory of the Russian Federation are taxed at 20%, unless a lower rate is provided in a double taxation treaty.
- To enjoy double taxation treaty benefits a foreign company must provide a Russian tax agent (a Russian company paying income) with a tax residency certificate from tax or other competent authority.
Value Added Tax
- VAT applies to the value added by each element in the chain of production from producer to customer.
- The standard rate is 18% (with a lower rates of 10% applying to certain basic foodstuffs, children’s clothing, drugs and medical goods, and printed publications, and 0% for a list of exempt goods and services).
- Exports may be taxed at a zero rate.
- Filing of quarterly VAT returns is mandatory.
- Fixed assets (both movable and immovable property) owned by Russian legal entities and foreign legal entities acting through their permanent establishment are subject to property tax charged on book value of the assets.
- Tax rates are established on the regional level and may not exceed 2,2%. The rates may vary depending on types of taxpayers and/or property.
Simplified Taxation System
- The simplified taxation system (STS) is a special voluntary tax regime extended to small and medium size enterprises. The STS can only be used by companies (and individual entrepreneurs), which meet the qualifying criteria set in the Tax Code.
- A company may apply for STS if during 9 months of a calendar year (preceding the year of entering into the system) its net sales revenue does not exceed 45 million rubles.
- A newly registered company has the right to apply the STS regime from registration.
- The taxpayers who use STS are exempt from standard corporate profit tax, corporate property tax and do not charge VAT (except for VAT charged at customs on imported goods).
- The taxpayer has a choice between two alternative tax bases and rates for them, these are:
a) Taxation of gross revenue at 6% or;
b) Taxation of profit (i.e. gains less losses) at 15%. The regions of Russia are granted authority to lower this rate in the range of 5 to 15% for various categories of businesses. For example, in Saint-Petersburg this rate is 7% (effective from the 1 of January 2015).
- Individuals actually staying in Russian Federation at least 183 days within the following 12 months are considered to be tax residents of Russia.
- The flat personal income tax rate is 13% for all types of income received by residents (with certain exceptions, to which 35% rate applies).
- Income received by non-resident individuals is taxed at a rate 30%.
- Dividends received by residents are taxed at 13%.
- Dividends received by non-residents are taxed at 15%.
- The minimum monthly wage in Russia is defined by law. Since the 1st of January 2015 the minimum wage is 5965 roubles a month.
- Every employer must pay the mandatory insurance contributions to the state extra-budgetary funds - the Pension Fund of Russian Federation (22%), the Federal Fund of Compulsory Medical Insurance (5,1%) and the Fund of Social Insurance (2,9%).
- Insurance contributions are calculated on the basis of remuneration and other income paid by an employer in favor of employees, as well as remuneration paid under civil law contracts. The amount payable is calculated in respect of each individual.
- Insurance contributions are not deemed taxes and they are administered separately.
- Russian employers have the right to attract and use foreign employees if such employers have a permit to hire foreign employees.
- A foreign citizen has the right to work in Russia if he achieved the age of eighteen and has a work permit or a patent (in the terms of migration law). The list of exemptions from these requirements can be found in the Federal Law “On legal status of foreign citizens in the Russian Federation”.
- A foreign citizen temporarily staying in the Russian Federation has no right to work outside the sub-federal region in which he has been granted a work permit or a patent. He also has no right to work in a specialty (profession, position) which is not designated in his work permit.
- A foreign citizen who is temporarily resident in the Russian Federation has no right to work outside the sub-federal region in which he is permitted to reside.
Jurisdiction facts, legal and regulatory issues
- Russian Federation (Russia) is the largest country in the world by total area, situated in the northern Eurasia.
- Russia is a federal presidential-parliamentary republic. It consists of 85 sub-federal regions.
- Official language - Russian.
- National currency - russian rouble.
- The legal system of Russia belongs to civil (continental) law. The current Constitution of Russian Federation was adopted in 1993. The most branches of law are codified.
- Russia is a member state of the UN, WTO, WIPO, IMF, FATF, G20, Council of Europe, OSCE, Commonwealth of Independent States, the Customs Union, Shanghai Cooperation Organization and other international organizations.
- Foreign investors are generally subject to the same treatment as Russian investors. Foreign investors are guaranteed property rights to their investments and to profits earned in Russia. Russia is taking steps to further improvement of its investment and business environment.
- The Russian tax legislation contains transfer pricing, thin capitalization and controlled foreign companies rules.
- Most of the cross-border banking transactions are subject to currency control.
- Russia has implemented anti-money laundering legislation. Financial institutions must record and report suspicious transactions to the relevant authority.