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Investing in Russia
A report on the legal framework for investments in Russia Contents
Meet Dentons 3
Corporate 4
Real Estate 9
Tax 12
Dispute Resolution 16
Banking and Finance 19
Regulatory / Compliance 24
Employment and Migration 27
2 dentons.com Meet Dentons
Dentons is a global law firm driven when necessary. Tap into one of the to provide a competitive edge best and broadest networks in the in an increasingly complex and CIS region, with additional offices interconnected world. A top 20 in Almaty, Astana (Kazakhstan), firm on the Acritas 2014 Global Baku (Azerbaijan), Kyiv (Ukraine) Elite Brand Index, Dentons is and Tashkent (Uzbekistan), plus committed to challenging the status an associate office in Ashgabat quo in delivering consistent and (Turkmenistan). uncompromising quality in new and inventive ways. Dentons’ clients With the broadest range of legal now benefit from 3,000 lawyers services in the country and a deep and professionals in more than 80 understanding of local business locations spanning 50-plus countries. and culture, Dentons is uniquely positioned to support international With a legacy of legal experience investors looking to enter or expand that dates back to 1742 and builds in the Russian market. Our lawyers on the strengths of our foundational will guide you through a wide firms—Salans, Fraser Milner Casgrain spectrum of issues relating to the (FMC), SNR Denton and McKenna investment process: corporate, Long & Aldridge—the Firm serves the tax, competition, banking and local, regional and global needs of finance, real estate, construction, private and public clients. manufacturing, IP, employment and environmental. Dentons – your gateway to Russia If you have any questions regarding Combining the well-established investment projects in Russia, please and recognized practices of Salans do not hesitate to contact our team. and SNR Denton, Dentons fields the largest international law firm team Dentons Moscow in Russia. We provide the legal advice T +7 495 644 0500 you seek in all sectors and service [email protected] areas in which you do business. Dentons St. Petersburg In 2014 Dentons was awarded T +7 812 325 8444 International Law Firm of the Year [email protected] for Russia and Poland at the Chambers Europe Awards.
Working from offices in Moscow and St. Petersburg, with a combined team of over 150 legal practitioners, we can assist you throughout Russia, using local contacts as and
dentons.com 3 Corporate
Types of companies including detailed statutory entity, foreign investors may choose and suitability for foreign procedures for the offering, issue to operate in Russia through investors and placement of shares, corporate branches and representative offices, Local legal entities information disclosure obligations, which are not separate legal entities The two types of companies most and others. These rules make AOs under Russian law and may act commonly used in save for cases of a less commonly used type of only on behalf of the company parent-subsidiary liability or vicarious company than OOOs. AO regulation they are representing. liability of the shareholders in the is also generally relatively rigid and Branches and representative offices event of insolvency. allows less discretion to shareholders in matters relating to corporate of foreign companies are subject An OOO is the most popular type governance and decision-making to special rules summarized below of company due to the relative than an OOO would. and are not subject to company simplicity of its formation and flexible law requirements. rules on corporate governance, In addition to OOOs and AOs, The representative office of a foreign raising capital, and others. OOOs Russian law also recognizes other company represents the interests of are used by the majority of small to forms of commercial legal entities the company in Russia and cannot in medium-sized businesses in Russia (general and limited partnerships, principle undertake any commercial and are well suited for wholly-owned manufacturing cooperatives, etc.) activity, although this rule is not subsidiaries of foreign investors. although in practice these are rarely encountered and are therefore not systematically enforced. The tax Under Russian law, the shares of addressed in detail in this overview. authorities will treat a representative an AO qualify however as securities. office as a branch if it derives income As a result, AOs are subject to rather Branches and representative offices from commercial activities in Russia. cumbersome securities regulation, Instead of setting up a local legal Most commonly, the main purpose of a representative office is marketing
4 dentons.com Investing in Russia - Corporate
research for the Russian market certified by a notary public or sealed sector-specific accreditation bodies. and the promotion of commercial with the corporate seal of the issuing Branches and representative offices relations with Russian partners. entity, if the latter is a company. must also be registered with the Documents executed outside Russia Russian tax authorities, social funds The branch of a foreign company must be apostilled or legalized. and statistics authorities. in Russia may, on the other hand, All official documents in foreign undertake commercial activities. languages must have a certified Corporate governance A branch may choose to keep a Russian translation. Several copies Management structure separate balance sheet and profit- of most documents will be required At the foundation stage, the founders and-loss account and can be for incorporation purposes. Such of a Russian company such as an OOO financed by the head office on copies must also be certified by or an AO determine its management an “as needed” basis. a notary public. structure, describe it in the charter, and appoint the chief executive body Both a branch and a representative The timelines and procedures for the and, if applicable, the members of office are managed by its head incorporation of an OOO or AO are the board of directors. The authority acting on the basis of a power of in principle similar. The incorporation and structure of management bodies attorney issued by the company. of an OOO may take between five follow similar principles to those found The head may sub-delegate his/her to eight weeks (including certain in most jurisdictions across the world. authorities to third parties provided preliminary steps, preparation of that such sub-delegation is permitted the necessary documents, state A typical OOO will have a simple two- by the power of attorney and is registration, and post-registration tier corporate governance structure certified by a notary public. formalities). The incorporation of an consisting of (i) the general meeting AO may take longer as it additionally of shareholders, and (ii) the executive The main internal document of involves the registration of the body (most commonly – the general the branch or the representative share issue. director, but it is also possible to office is its regulations approved create a management board). An by the company. A period of three to four weeks OOO may also have a supervisory typically will be required to complete body, a board of directors, and Incorporation all preparatory steps, i.e. collect, a revision body, the internal Overall, the general principles certify and translate all necessary audit commission. underlying the incorporation of documents for filing. Obtaining a a Russian company are similar to registration certificate requires one AOs have a three-tier management those found in other jurisdictions, week from the date of filing. structure consisting of (i) the especially in relation to general general meeting of shareholders, requirements for number of Companies engaged in certain (ii) the executive body, single or shareholders, the charter, corporate businesses may additionally collegiate (the general director or name, registered address and share need to obtain operational licenses, the management board), and (iii) capital, for example. while incorporation of others the supervisory body: the board may require anti-monopoly or of directors. Nonetheless, the paperwork foreign investment clearance (see necessary for the incorporation Investment regulation below). General meeting of shareholders of a Russian company is often As in most jurisdictions, the general seen as cumbersome, since the Branches and representative offices meeting of shareholders is the incorporation documents are subject of foreign companies must be highest management body and to rather strict formal requirements. accredited with the Russian State certain of its core competencies If prepared in Russia, they must be Registration Chamber or other (such as amendments to the charter,
dentons.com 5 Investing in Russia - Corporate
approval of the annual financial have the authority to represent the to decide on strategic issues, while statements and balance sheets AO legally, make binding decisions or the day to day management of the and decisions on re-organization execute documents on behalf of the company is entrusted to one or two and liquidation) are exclusive to it AO. Such powers are conferred only directors. Usually, such a collegiate and cannot be delegated to other upon the AO’s chief executive body. body is chaired by the general management bodies. Otherwise, the director and its competence is allocation of responsibility in an OOO The main role of the board of determined in the OOO’s charter. is much more flexible than in an AO directors is to determine the and can be fully determined by the general strategy of the company, An AO may have either (i) a single charter of the company. to supervise and control its chief executive officer (i.e., general executive bodies. director); or (ii) a collegiate executive Rules on the conduct of annual and body and a general director presiding extraordinary general meetings, Executive bodies over the collegiate executive body. quorums, majorities for decisions Most Russian OOOs have a single Unlike OOOs, AOs and especially those and voting procedures are mostly chief executive officer referred to operating large businesses sometimes set by statute, with more exceptions as the “general director”. Although have collegiate executive bodies. available in an OOO than an AO. other titles (e.g., “president”) are also The executive bodies are appointed possible, they are not commonly and dismissed either by the board of Board of directors used. The general director is directors or sometimes by the general The shareholders of an OOO vested with extensive powers, meeting, depending on the provisions may elect to establish a board of encompassing all matters other than of the charter. Due to the cumbersome directors to supervise the activity those reserved by law or the charter procedure for convening the general of the company. There is however for the competence of the general meeting, it is usually advisable to no obligation to do so. The board meeting, the board of directors, or provide for appointment and dismissal of directors may be called upon the collegiate executive body (if any). of the executive bodies by the board to decide on strategic issues and of directors. supervise the actions of the general An OOO may, if so permitted by director. The powers of the board the charter, have several directors Similarly to other jurisdictions, of directors are set out in the (who may be entitled to act jointly directors and officers may be OOO’s charter. or separately) or delegate the held liable for their actions executive functions of the under civil and employment The board of directors is a general director to a third party: law, or under administrative and supervisory body which is mandatory a management company. Such criminal provisions. Such liability in an AO with 50 shareholders or outsourcing may entail certain may be mitigated by delegating more. In smaller AOs the board of practical difficulties, in particular responsibility or increasingly by directors is optional. In the absence if the OOO is incorporated taking out director and officer of a board of directors its functions in smaller towns where the (“D&O”) insurance. are delegated to the general meeting registration authorities have of shareholders. In some AOs, no experience in dealing with Specific corporate approvals the board of directors may also management companies. As a general rule, the general director be referred to as the “supervisory is entitled to represent the company board”, although such terminology Although rare in practice, an and enter into any transactions on is rarely used. Unlike in many other optional collegiate executive body its behalf, subject to the matters jurisdictions, neither the board of (the “management board”, the reserved by law or the charter for the directors, nor its individual members “directorate”, etc.) may be created competence of the general meeting,
6 dentons.com Investing in Russia - Corporate
the board of directors, or the information on the company, Shareholder agreements collegiate executive body (if any). including information about its One of the main subjects of interest involvement in any litigation or for foreign investors in Russia is the In order to protect the interests of corporate disputes, review its books regulation of shareholder agreements. the company and its shareholders, and other documentation, and however, entering into major receive copies of such documents, Shareholder agreements had transactions (direct or indirect (ii) participate in the general remained a grey area of Russian acquisition or disposal of assets meetings and vote on all matters corporate law (several court valued at 25 percent or more of within its competence, (iii) receive decisions even going as far as to the company’s assets (save for declared dividends, (iv) participate declare them generally invalid), until certain excluded transactions), in the distribution of the company’s they were finally expressly allowed in and interested-party transactions assets during liquidation, or (v) 2009. Under the statutory provisions, requires special approval by the sell, pledge or transfer their shares a shareholder agreement is a private company’s general meeting or its subject always to statutory or charter agreement between shareholders board of directors. In AOs, the rules provisions in relation to pre-emption which determines the manner on approval of interested-party rights, for example, which apply in which shareholders exercise transactions are more complex differently depending on the form their rights with respect to the than those in OOOs. The approval of the company (OOO or AO). A company. In particular, a shareholder procedure depends on the value of certain number of rights will depend agreement may regulate: (i) voting the transaction and the number of on whether the shareholder attains a arrangements (coordination of voting shareholders in the company. precise threshold as a percentage of at the shareholder meetings), (ii) issued shares, especially in an AO. share transfers at certain pre-agreed In addition, the law and/or the terms, (iii) restrictions on share charter of a company may require In terms of general obligations, a transfers, (iv) sanctions for breach of that transactions affecting the shareholder’s principal obligations obligations under the shareholder corporate structure or charter of the towards the company are, for agreement and remedies available in company (e.g., the issuance of new example, to pay for its shares or case of such breach (e.g., penalties); shares, share buy-backs, etc.) be make other financial contributions as and (v) other matters concerning the approved by the general meeting required by the charter or to disclose company’s foundation, governance, or the board of directors. its interest in any transactions re-organization and liquidation. which it or its affiliates are intending Rights and obligations of shareholders to enter into with the company. Although the statutory provisions Shareholders in Russian companies Additionally, in an AO, shareholders introduced in 2009 were a welcome will be bound by the same are subject to certain disclosure and progressive change, they obligations and enjoy similar rights obligations under securities continue to raise certain questions as most shareholders in any typical legislation: to disclose changes in in relation to their interpretation by jurisdiction. There are many nuances shareholding when crossing certain the Russian courts. For example, between an OOO and an AO, but thresholds, for example. there is still considerable uncertainty in terms of rights, all shareholders as to the way in which put and call will enjoy the usual rights granted Special rights and obligations may arrangements should be structured to shareholders irrespective of the be created by the charter in relation and how to enforce them in the number of shares held (such rights to certain shareholders only (solely absence of cooperation from the most often cannot be excluded or in an OOO) or by issuing privileged other party. It is also not clear varied by the charter or otherwise), shares in an AO (creating a liquidation whether participants’ agreements including rights to: (i) access preference, for example). may be governed by non-Russian
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industries approval procedure also applies to the acquisition by Shareholders in Russian companies will be foreign states (including sovereign funds), international organizations bound by the same obligations and enjoy and companies controlled by similar rights as most shareholders in any them of more than 25 in any Russian commercial company typical jurisdiction. (i.e., even outside the scope of strategic industries). law. As a result many investments which makes determining the As in many other jurisdictions, continue to be implemented via a scope of the restricted activities investments by foreign investors in foreign holding structure in order to not a straightforward exercise. In areas such as insurance, banking put in place a foreign law governed addition, the restrictions apply even and financial services, media and shareholder agreement. if the activity deemed as strategic certain specific industries (aviation constitutes only a fraction of the sector, including construction and Investment regulation activities of the company. This repair of aircraft and carriage by air, Foreign investments in can make the foreign investment water distribution in large cities, or certain key sectors, including regulations surprisingly far-reaching. alcohol production) are subject to strategic industries, natural For example, the food industry uses restrictions and special regulations resources, banking, insurance, certain biological agents within their as well. telecommunications and media, laboratories for testing products. This are subject to certain restrictions. is deemed a strategic activity and Finally, a wide range of corporate thus a company may unexpectedly transactions may be subject to In April 2008, a federal law was be subject to restrictive investment Russian anti-monopoly (anti-trust) enacted to regulate foreign regulations. It is therefore advisable regulations, whereby depending on investment in companies with to examine very diligently all aspects various parameters (the asset values “strategic value for national defense of the activities of a company prior of a purchaser, a target company and and national security” (“Strategic to any investment operation. a group, group revenues, whether Companies”). The “strategic value” the parties to a transaction are designation applies to any Russian The law requires that prior dominant in certain commodities commercial company engaged authorization be obtained from markets) a transaction may be subject in any of the 42 activities listed in a special Russian Government either (i) to the prior approval of the law, including nuclear waste Commission, chaired by the Prime the Russian Federal Antimonopoly handling, transport and disposal, Minister, for the acquisition of Service (FAS) or (ii) to a subsequent geology, extraction and exploration control over Strategic Companies notification to the FAS. of certain mineral resources or arms by foreign investors. and military technology research and development, design and Moreover, as part of the strategic manufacturing, for example. industries law package, an amendment was introduced to The definition of certain the foreign investments law, activities is not always clear, pursuant to which the strategic
8 dentons.com Real Estate
In Russian law, ownership consists institutions and residences of former Acquisition of real estate of the unlimited rights of the owner RF presidents which have historical by foreigners to possess, use and dispose of heritage status. The right of lifetime Generally, foreigners may directly property. However, there are other inheritable possession of land plots acquire real estate in Russia, with the forms of title, such as the right of was formerly provided by the state to exception of agricultural land and so-called “full economic jurisdiction” individuals and can now be acquired land plots together with property (khoziaystvennoe vedenie) and the only by inheritance of the respective located on them in border areas right of operational management rights. An easement is a form of title and specially designated areas. (operativnoe upravlenie), which are to a land plot owned by another available only to state and municipal person, consisting of the right to Registration systems enterprises. These rights extend to use the land for a specific limited To have legal effect, all rights to real the use, possession and disposal purpose. Russian law does not allow estate and transactions giving rise of the assets only within the scope for a trust in its Western meaning, i.e., to such rights (except leases with of the business activity designated a split between legal and beneficial a fixed term of less than one year by the owner (the state) in the ownership. Mortgage and fiduciary or an indefinite term) must be company’s founding documents management (trust management) registered in the RF Consolidated and subject to mandatory provisions rights to a property are not treated State Register (Register). The of law. For land, the primary forms as rights in rem in Russia. Title to Register contains information of commercial land use are land the mortgaged property does not regarding the owner of the property leases and land ownership (freehold). automatically pass to the mortgagee and encumbrances on it (registered Other forms of land use rights, in the event of default, and a trustee leases, mortgages, trust management such as the right of perpetual use is not recognized as the legal owner agreements, etc.). Before registration, of a land plot are available only of the property. all land plots, buildings, structures, to state enterprises, state-funded premises and unfinished buildings
dentons.com 9 Investing in Russia - Real Estate
must undergo cadastral registration of shares in a Russian company Privatization claims in the State Cadastre of Real Estate that owns property is exempt from A claim arising out of a transfer of (Cadastre). The Cadastre contains VAT. Both the sale of property or assets during privatization would cadastral and other information shares in a company owning the qualify as a claim for a declaration detailing the specific characteristics property may incur capital gains of the transaction as being null and of the property. The Register and tax (20 percent) for a non-resident void, being contrary to the law then the Cadastre are maintained by a seller (unless such gain is exempt in effect. The statute of limitations specialized government agency, the from taxation under an applicable for a null and void transaction Federal Service for State Registration, double tax treaty). As of 1 January is three years, starting from the Cadastre and Cartography. Upon 2014, for a number of properties the commencement of the execution written request and for a fee, any tax base for calculating property tax of the relevant transaction or, if the party may obtain extracts from the must be based on the confirmed claim is brought by a third party, from Register and from the Cadastre for cadastral value of the real property the date on which the third party a certain property containing basic (as opposed to the balance sheet learned or should have learned of information about its cadastral or assessed (inventory) value). The the commencement of performance. registration, respective right thereto new rules set the maximum property In addition, the statute of repose – and its encumbrances, if any. tax rate for real properties for which 10 years – applies to claims of third the tax base is determined based parties (i.e., not a party to the void The procedure for State registration on cadastral value. For Russian transaction) and runs from the date of immovable property rights, and Federation constituent territories on which performance of the void cadastral registration of properties, (with the exception of Moscow). The transaction began. has been revised, in particular: maximum tax rate must not exceed: 1 percent in 2014, 1.5 percent in 2015, Notaries and notarial fees • The general processing period and 2 percent in 2016 and beyond. Generally, notarial certification for state registration is 10 of real estate transactions is not business days. Leases required. Notarial certification is Leases are freely negotiable. Most • The Register and the Cadastre mandatory only (i) when required provisions of law pertaining to can be maintained electronically. by law (for example, transfer of lease agreements are optional and shares in a Russian LLC, annuity may be varied by the parties, but • The document submission contracts, spousal consents to certain mandatory provisions must procedure for registration has the transfer of jointly owned real be adhered to. The most important been simplified – documents estate), or (ii) if the parties agree on restriction concerns the mandatory may be submitted online (subject the necessity of such certification registration requirement for leases to use of a specially qualified even if it is not required by law. The of property for a fixed term of more electronic signature). notarial fees for certification of real than one year. The introduction in estate contracts may be a fixed Transfer taxes this rule states that state registration amount or a certain percentage VAT (18 percent) is payable on is required as confirmation for third of a contract’s value. For example, property acquisitions (other than parties, while for the parties the notarial certification of transactions land plots and in certain cases agreement is valid as of its execution. with a subject requiring appraisal, if apartments). The buyer can generally In order to be effective under notarization is required by law (such credit this VAT against the VAT Russian law, a lease agreement as an annuity contract) costs 0.5 liability on its own sales (refunds must contain a definitive description percent of the contract value (but are provided for by law, but may be of the leased property and the not more than 20,000 rubles), while problematic in practice). The transfer amount of rent payments or a notarial certification of contracts on formula for their calculation.
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Mortgage and foreclosure Any mortgage of real property is The Register and the Cadastre are subject to state registration in the maintained by a specialized government Register. According to the current legislation, in order to foreclose on agency, the Federal Service for State a mortgaged property out of court through a notary’s writ of execution, Registration, Cadastre and Cartography. the mortgage agreement must be notarized. The mortgagee may take possession of the property (or sell it the alienation of real estate costs with respect to public-law disputes, to a third party) at a price equal to 3,000 rubles plus 0.2 percent of the such as for example challenging the the market value of such property, contract value (but not more than records in the relevant state registry, which is determined in accordance 50,000 rubles) when the contract is challenging the cadastral value of with the RF laws on valuation activity, concluded with children, spouses, the property, etc. Such dispute shall without having to foreclose via a parents, or siblings, and 0.1 percent be exclusively heard and resolved public auction. There are still certain of the contract value and higher by a Russian state commercial exceptions in which out-of-court (depending on the contract value) (arbitrazh) court at the location of foreclosure is prohibited by law when the contract is concluded such property. Meanwhile, civil law (for example, where the collateral with other persons. disputes arising from contracts is a cultural landmark, residential related to real estate property premises owned by individuals, Language can be resolved in an arbitration or agricultural land). For the purposes of state registration institution (whether international and/or notarization, real estate or domestic). The registration of According to the general rule, a transactions must be executed title to Russian real estate on the mortgage will always automatically in Russian. In practice, English basis of an arbitration award should extend to all buildings, structures is often used as a second and be possible provided that the and other objects located on a controlling language. arbitration award is recognized in mortgaged land plot. Russia. Russia is a party to the 1958 Arbitration New York Arbitration Convention, Typically, when a land plot and/ Any transaction involving Russian which means that generally foreign or a building on it is purchased, real estate property must be arbitration awards should be constructed or is being constructed governed exclusively by Russian enforceable in Russia. The case law using financing from a bank or a law. With regard to the forum for on this issue remains unstable but special-purpose loan, the land plot dispute resolution, previously it the tendency is definitely towards itself, together with all the buildings was in fact limited to Russian state liberalization. This is however not and structures on the said land plot, commercial (arbitrazh) courts with applicable to jurisdiction clauses: are considered to be mortgaged jurisdiction over the location of referring disputes related to Russian together. Such a mortgage arises such property. However, in 2011 the real estate property to any courts by operation of law and is registered RF Constitutional Court liberalized (whether foreign or domestic) other simultaneously with the registration the approach to legal provisions than a Russian state commercial of title to the respective real property. restricting the parties’ ability to (arbitrazh) court possessing refer a dispute related to real estate jurisdiction over its location remains property to an arbitration institution. directly forbidden by the Russian Basically, now it is not possible only procedural law.
dentons.com 11 Tax
The Russian system of taxation is In addition, there exist so-called other income, less economically divided into three levels: federal, special economic zones in a number justifiable expenses. regional and local taxes. All taxes, of regions for companies whose however, are administered by the business lies, in particular, in the The standard rate is 20 percent. The Federal Tax Service and its local fields of mass production, R&D, said rate includes, in fact, two rates: departments and inspectorates. IT or tourism. Companies which one of which represents the part of Companies are also obligated to have obtained residential status in tax flowing into a regional budget (18 pay state insurance contributions to such a zone enjoy a favorable tax percent), while the other represents the state non-budgetary funds (in fact, regime, involving exemption from part of tax which goes into the federal payroll tax) which are administered property and land taxes, lower rates budget (2 percent). Regional authorities by the management of these funds of corporate income tax and social may lower their rate at their own – the Pension Fund of Russia and the security contributions. discretion, but not below 13.5 percent. Federal Fund of Medical Insurance. Please find below a brief outline of The rate of 13 percent is applicable Regional authorities are empowered general taxes imposed on business to dividends received by Russian to regulate certain elements of and their key elements, such as the companies. Such dividends regional and local taxes, namely type of income or property subject may be fully exempt from tax to vary tax rates within a certain to tax, tax base, tax rate and, in certain conditions. range and provide tax reliefs. Many also, some specific regulations regions have adopted tax incentives concerning intra-group financial Interest, royalties and dividends payable for investors, such as a lower rate operations and transfer of assets. by Russian companies to foreign of corporate income tax and full companies are subject to withholding exemption from property tax on all Corporate income tax tax unless the respective double tax assets relating to investment projects The tax is imposed on taxable profit treaty provides otherwise. The rate is 20 approved by regional authorities. calculated as sales revenue and percent for interest and royalties, and
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15 percent for dividends (30 percent Value Added Tax (VAT) and of raw materials, also chargeable in some cases with nominal holders excise duties with excise duties, are deductible of shares where a beneficial owner is The Russian system of VAT is in from tax liability. deemed to be unknown). many respects very similar to that of the European Union (the Sixth Property tax Active income of foreign companies VAT Directive of 1977 to a greater Real property of Russian companies is taxable only if a company carries extent than the Recast VAT Directive and all fixed assets of foreign on its business through a permanent of 2006). companies are subject to tax. establishment in Russia. The concept of a permanent establishment is The taxable operations are The general tax base is the net book close to the OECD standard. supplies of goods and services and value of taxable assets. However, construction work for a taxpayer’s with regard to some commercial Strict thin capitalization rules are own needs. Financial and similar buildings (office buildings, shopping in effect. According to current operations (insurance, loans, malls, etc.) listed by the regional court practice double tax treaties circulation of commercial papers, authorities as well as for real estate do not serve as a remedy against etc.) are exempt from VAT. There are belonging to foreign companies these rules. The rules are essentially some other notable exemptions, without a permanent establishment built on a debt-to-equity strict for example, transfer of IP rights for in Russia the base is the cadastral ratio which is 3 to 1 (12 to 1 for patents, software and trade secrets. value (usually equal to or even higher banks and companies engaged than the market value). in financial leasing). Excessive The standard tax rate is 18 percent, interest (i) is not deductible, and (ii) the lowered rate set for certain The range of annual rates is up to treated as dividends for taxation goods (mostly food) is 10 percent. 2.2 percent. The exact rates are purposes. The rules are applicable The export rate is 0 percent. set within this limit by regional to loans taken by borrowers that authorities, as the tax is regional. are Russian companies from (i) a The tax base is the value of the Buildings, the tax base of which is foreign company owning directly goods and services supplied determined as their cadastral value, or indirectly more than 20 percent according to a contract. Input VAT are taxed at slightly lower rates (up to of the share capital of the borrower, is fully recoverable provided the 2 percent as from 2016). or (ii) Russian companies affiliated acquired goods and services are with such a foreign company, or (iii) intended for taxable operations. Transport tax any other lenders if a loan is secured If acquired goods ands services The tax is levied on motor vehicles by such a foreign company/Russian are used for both taxable and non- (cars) in a taxpayer’s ownership and affiliate company. taxable operations, input VAT is other technical means of transport partially recoverable. (boats, bikes, planes, etc.). This said, equity financing made in cash by a direct parent company, Goods subject to excise duties are The rates are set by regional including a foreign one, into a mainly alcohol, tobacco, cars and authorities. For cars the maximum Russian company in the form of (i) fuel, and the taxable operation is rate is RUB 150 per 1 horsepower a contribution to the share capital, generally their first sale. The base (save for luxury cars included on a or (ii) a contribution with a view is either a quantity or a value of special list by the Ministry of Industry to increasing the net assets of the goods produced (reworked, refined) and Trade). subsidiary, i.e., financial aid, are depending on the kind of goods. A completely tax free for both parties different rate is set for every kind of The tax base is engine capacity to the transaction. goods. As a general rule, excise in horsepower for cars and other duties paid by a taxpayer to suppliers ground vehicles.
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on companies involved in the usage of water or mining activities. Mining tax is most significant for the oil & gas sector.
Special tax regimes are provided for small businesses (restaurants, food stores, etc.), but they are inapplicable to subsidiaries of other companies.
Transfer pricing rules Cross-border transactions within the same group of companies should be at arm’s length under the threat of transfer pricing adjustment. As a general rule, intra-group operations between two Russian companies are regarded as controlled transactions subject to transfer pricing rules if the sum total of all sales revenues reported under these transactions by State insurance (social Also, companies must compute both parties exceeds 1 billion rubles. security) contributions and and withhold personal income tax personal income tax from wages and salaries paid to The Russian transfer pricing model The base for social security employees and other individuals. For is mainly based on the OECD contributions is payroll, i.e., payments most kinds of income the rates are 13 guidelines. For example, the rules to employees and other individuals. percent for Russian tax residents and establish practically the same 30 percent for non-residents (save principles of functional analysis and The standard combined rate is 30 for highly qualified foreign specialists the same set of pricing methods to percent. However, after payments who in certain conditions are eligible determine an arm’s length price or made to an employee within a year for the 13 percent rate as well as margin for controlled transactions exceed a certain limit the payments Russian tax residents). (CUP, RPM, CPM, TNMM, PSM). in excess of this limit are taxed at the rate of 15.1 percent. Land tax CFC rules in Russia The taxable asset is land in a Russian CFC Rules went into effect as In addition, a contribution for on-the-job taxpayer’s ownership. The tax base from 1 January 2015 (Chapter 3.4. of accident (workmen’s compensation) is the cadastral value of the land plot. the RF Tax Code). insurance is collected at the rate in the range from 0.2 to 8.5 percent The annual rates vary within the As a general rule, a Russian tax depending on the type of job and the limit of 1.5 percent depending on the resident is deemed to control a level of danger attributed to it. type of land. The rates are set foreign company if the resident by local authorities. (i) owns more than a 25 percent Lower (preferential) rates are interest in the company (50 percent applicable for some companies, for Other taxes in 2015 as a transitional period) or (ii) instance, IT companies complying Water tax and mining tax which, as 10 percent interest in the company with certain requirements. follows from their names, are levied provided that more than 50 percent
14 dentons.com Investing in Russia - Tax
• The fine for late filing of (failure to file) a tax return is 5 percent of The rate of 13 percent is applicable to the tax overdue per each month of delay, if any, but in any case dividends received by Russian companies. no less than RUB 1,000 (approx. US$25) and no more than 30 percent of the tax overdue (Art. interest is owned by Russian tax within the audited period and for 119 of the RF Tax Code). residents (in 2016 and afterwards) this purpose may make use of quite and (iii) by other means determines vast powers, such as the search of a • There is a fine for failure to pay (exerts significant influence on) or taxpayer’s office and other premises tax (or for incomplete payment of may determine (exert significant or compulsory seizure of documents tax). This fine is charged if the tax influence on) corporate decisions of and other material evidence. liability is understated, or the tax this company concerning distribution amount is calculated incorrectly. of income among its equity holders. Additionally, there is a separate The fine is 20 percent of the There are some exemptions (Art. 25.3 form of tax audit which relates overdue tax (40 percent in the of the RF Tax Code). A controlling purely to control of prices applied event of tax evasion) (Art. 122 of individual/entity must pay tax at the by interdependent companies in the RF Tax Code). rate of 20 percent on income earned their transactions (based on transfer by a CFC in proportion to his/her/ pricing regulations). A special body The Administrative Code also its share in this company if the CFC that is authorized to perform such provides for fines for some tax fails to totally pay out its net income audit checks the correctness of violations; however, the amounts of as dividends to equity holders by the tax liability calculation with respect these fines are very modest. end of a calendar year following the to intercompany transactions (the calendar year in which a fiscal period prices of which could considerably It also must be noted that company comes to an end. differ from the fair market value). officers may facecriminal liability for corporate tax evasion. Tax Tax control The most notable types of liability evasion is defined as the failure to Tax supervision in Russia is carried for committing a tax offense and/or file a tax return properly or the filing out mainly in the form of desk or field failure to duly pay tax for corporate of a tax return containing knowingly tax audits. The subject matter of a taxpayers usually invoked by tax false information on the amount of desk tax audit is the correctness of a authorities are as follows: tax liability if such action (failure to specific tax return filed by a taxpayer. act) leads to a failure to pay a certain Late payment interest at the rate A desk tax audit may be performed amount of tax (as a general rule, of 1/300 of the refinancing rate of within three months from the date of more than RUB 6 million). The most the Central Bank of Russia (currently filing the tax return. severe punishment for tax evasion 8.25 percent) is charged on overdue is imprisonment for a term of up to A field tax audit may encompass amounts of tax liability per each day six years. up to three calendar years previous of delay (Art. 75 of the RF Tax Code). to the year in which the audit is However, if a taxpayer pays in full The Tax Code also provides for scheduled. During the field tax the tax concealed by means of liability (fines) for different types of audit a tax authority may check tax evasion, and its officers under violations of tax legislation, including, the correctness of computation prosecution are first-time offenders among others: and proper payment of all taxes of this type of crime, they must be exempted from criminal liability.
dentons.com 15 Dispute Resolution
Legal system Russia belongs to a family of so choice in many major cross-border Justice in the Russian Federation is called ‘civil law’ countries. Russian business transactions, in particular administered by two branches of law is contained in statutes adopted in mergers and acquisitions, joint courts: courts of general jurisdiction by the parliament and approved ventures and banking transactions. (including so-called justices of the by the president. In addition, there That said, if a foreign-law governed peace) and commercial courts. exists a large body of secondary transaction involves Russian assets In addition, there are the Russian or subordinate legislation, or parties, certain mandatory Constitutional Court and regional including decrees, regulations requirements of Russian law may constitutional (charter) courts. and orders by the president, the apply to them. Russian law must government, ministries and other also be applied to certain corporate The commercial courts in Russia executive authorities. governance matters concerning are called arbitrazh courts; these Russian companies. are State courts which, despite The Russian courts do not create their name, have nothing to do with precedents in the same way Court instances / legal the resolution of disputes by way as common law countries do. remedies of arbitration. Such courts hear However, the Supreme Court issues Russia has a multi-level system for business-related disputes, as well as interpretations of legal issues and appealing judicial acts. corporate conflicts and bankruptcy reviews of court practice, which have cases. Most of the remaining obligatory force and are followed by After being examined in the court of civil, administrative, criminal and all Russian courts. first instance, civil and commercial employment cases are dealt with by cases may be appealed to an Transactions between Russian legal the courts of general jurisdiction. appellate court. The judicial act entities or individuals are normally The justices of the peace as a enters into legal force once that governed by Russian law. However, general rule handle minor civil, court has examined the case. if a transaction involves a foreign administrative and criminal cases. element, the parties may choose However, even a judicial act that Arbitration is also recognized to have it governed by foreign law has entered into legal force may and used in Russia as a means (subject to a few exceptions where be further appealed to the third, of dispute resolution through the application of Russian law is cassation instance. Then the judicial an independent forum. mandatory). English law is the law of act may be appealed again in cassation proceedings, to the RF Supreme Court.
16 dentons.com Investing in Russia - Dispute Resolution
Finally, the last instance in Russia is limits for the examination of cases It may take much longer (up to the Presidium of the RF Supreme at each instance. several years) to examine individual Court, which examines cases in cases, which may be caused by so-called supervisory review. For example, an arbitrazh court the higher courts reversing judicial generally has to examine a case in acts, expert examinations being At the same time, in practice the the first instance within not more conducted in the case, involving a number of cases that are reviewed than three months from when large number of third parties and by the Supreme Court in cassation the arbitrazh court receives the the complexity of the case. or supervisory proceedings is application, including the time for extremely low. preparing the case for hearing and Rights and duties of rendering a decision on the case. participants Combination of courts Participants in litigation in Russia Before 2014 Russia had two In the courts of general jurisdiction, have all of the rights and bear the high courts (in addition to the this time is generally shorter: as procedural duties that exist in RF Constitutional Court): the RF a general rule civil cases must be the legal systems of developed Supreme Court headed the courts examined and resolved by the court countries. For example, participants of general jurisdiction, while the RF before the end of two months from in civil cases have the right to Supreme Arbitrazh (Commercial) the date the court received the access the case file, to make Court headed the arbitrazh courts. application, while for justices of extracts from the case file and to the peace the time frame is just make copies; to make recusals, to The RF Supreme Arbitrazh Court one month. present evidence and to access the was dissolved in 2014. Thus, the evidence presented by other persons The situation is similar with appealing updated Supreme Court of Russia participating in the case prior to the judicial acts. For example, one month has become the common court for start of the judicial proceedings; is provided for appeal in both the examining almost all court disputes. to participate in the examination arbitrazh courts and in the courts of of evidence; to pose questions to The updated Court envisions the general jurisdiction. The appellate other participants of commercial creation of seven judicial panels, court must examine the appeal proceedings, to file motions, to make including panels for economic within two months. statements, to give explanations disputes, civil disputes, criminal to the commercial court, to state cases and administrative cases. Although the stated time limits their arguments with regard to all aren’t always observed (and the law matters arising in the course of the Several amendments have been itself provides for certain situations examination of the case; to access made to the procedural legislation where the time for examining a case motions filed by other persons, to to further develop this court reform. can be extended), on the whole object to motions and arguments The amendments are primarily litigation in Russia goes quite quickly. of other persons participating in intended to unify the system of For example, on average, it takes the case; to obtain information on appealing judicial acts in the about six months from the time the complaints made by other persons courts of general jurisdiction court receives the claim and until participating in the case, on judicial and arbitrazh courts. a writ of execution is issued in a acts delivered in respect of the given case, including appeal of the case. case and to obtain copies of judicial Length of court proceedings Most court cases can go through acts issued in the form of separate In comparison to many other practically all of the appeal stages documents; to access a judge’s countries’ legal systems, civil cases within one year. are not examined for very long in the separate opinion on the case; to courts. The law sets maximum time appeal against judicial acts, etc.
dentons.com 17 Investing in Russia - Dispute Resolution
Depending on the offense, limitation periods for administrative liability Most court cases can go through are from two months to one year; however, for certain types of offense practically all of the appeal stages the period is up to six years. within one year. The limitation period for criminal prosecution depends on the type of crime. It is two years after a minor In addition to these general rights, of the relevant codes; however, crime, six years after a crime of the parties also have such rights since September 2015, administrative moderate severity, ten years after as, for example, to make an audio proceedings in the courts of a serious crime, and fifteen years recording of court proceedings, to general jurisdiction will be after a very serious crime. However, petition to participate in a hearing governed by a separate RF Code some crimes, such as those through a videoconferencing system, of Administrative Procedure. associated with terrorism, have to file practically all procedural no limitation period. documents, including the claim, Criminal proceedings are handled with the arbitrazh courts in electronic only by the courts of general International treaties form via the internet by using a jurisdiction on the basis of the RF International treaties to which Russia special system. This same system Criminal Procedure Code. is a party (ie which the Russian provides public access to all judicial parliament has duly ratified) have acts of arbitrazh courts in digital form Thus, the courts of general precedence over any internal on the internet. jurisdiction act essentially as a universal body for examining most Russian laws. At the same time, parties to the legal issues in court. Russia is recognized as a successor proceedings must exercise all of to the former Soviet Union in their procedural rights and perform Deadlines / time limits international law: it has assumed certain duties in good faith, for The general limitation period for the USSR’s permanent seat on the example, to prove their position civil cases in Russia is three years; UN Security Council, membership (taking into account the principle however, in some instances it may be in other international organizations, of adversarial proceedings). shorter. For example, the limitation rights and obligations under period under a claim to invalidate a international treaties, as well as Civil proceedings, voidable transaction and to apply the the USSR’s property and debts. criminal proceedings and consequences of the transaction’s administrative proceedings invalidity is one year. Russia is a signatory to the 1958 In Russia civil proceedings are Convention on the Recognition However, the mere fact that the handled by the courts of general and Enforcement of Foreign limitation period was missed does jurisdiction on the basis of the RF Arbitral Awards (the New York not affect a party’s right to file with Civil Procedure Code and by the Convention) which provides for the court, which is required to not arbitrazh courts on the basis of the a uniform and relatively only accept but also to examine the special RF Arbitrazh Procedure Code. straightforward procedure for the relevant application. A court may recognition and enforcement of Administrative proceedings are also reject a claim for expiration of the foreign arbitration awards in Russia. handled by the courts of general limitation period only if the other jurisdiction and, in some cases, by party declares it. The court cannot the arbitrazh courts on the basis apply the limitation period at its own discretion.
18 dentons.com Banking and Finance
Financing a company charter capital of RUB 10,000; and net assets. If company’s net assets A Russian company may be financed a public joint-stock company (PAO) become less than the minimum by a subscription for capital and/ must have minimum charter capital charter capital established by law, or loan capital. In either case, the of RUB 100,000. The founders of a it must resolve to enter voluntary financing can be provided by a joint-stock company are not required liquidation. Should the company fail parent company and/or third party to make any capital contributions to take such action, the Russian tax investors and/or lenders. Capital before the company is incorporated: authority may compel the company’s contributions may be made either 50 percent of the shares must be paid liquidation. Profit cannot be in cash or in kind. Loan capital may within three months of incorporation distributed (dividends declared and/ be provided in the form of loans or and the remaining 50 percent within or paid) by a company with negative issuance of bonds. one year upon state registration. No net assets. deferred payment is permitted for The minimum charter capital for subsequent share issues. All shares in an AO or a PAO are limited liability companies (OOO) is issued in non-documentary form; RUB 10,000. The charter capital must In addition, the minimum charter they may be ordinary or preferred be paid within the term specified in capital specified above for both (i.e., non-voting). All share issuances the agreement for establishment of OOO and joint-stock companies must be registered with the Bank of the company, but in any event no must be paid in cash, while other Russia. The registration procedure later than four months from the date contributions (above the minimum can be quite time consuming and of state registration of the OOO. charter capital) may be made in cash involves preparing a large number Each participant in an OOO must or in kind. of documents. In addition to shares, pay no less than the share’s nominal joint-stock companies can issue A company’s net assets must not be value for its share (participatory securities in other forms, which less than its charter capital at the end interest) in the OOO. must also be registered with the of each year (except for the first two Bank of Russia. Joint-stock companies (AO) are financial years after incorporation). divided into two groups: public and If they are, the company must There are certain regulated sectors in non-public joint-stock companies. either increase its net asset value to which special capital rules apply (e.g., A non-public joint-stock company meet the requirement, or reduce its in relation to banks and companies (simply AO) must have a minimum charter capital to the amount of its dealing in securities).
dentons.com 19 Investing in Russia - Banking and Finance
The Russian Law on Foreign In order to open a bank account, security existing under Russian law. Investments sets out the general a company must provide its bank Mortgages can be used as a security framework for foreign investment with copies of its constitutive for the performance of various and establishes the principles of documents and registration obligations by the mortgagor or a non-discrimination, freedom of certificates, notarized signature third party, including those arising investment and fair compensation in specimen cards, and certain other under credit agreements (loans cases of nationalization. Prohibitions documents required by the relevant provided by credit institutions and restrictions for foreign bank. The bank signature specimen are referred to as credits and are investors may only be established card must be notarized and it must distinguished from loans extended in exceptional cases and should be also be apostilled if the signatories by non-credit institutions) and justified by the need to protect the are abroad. Under current Russian loan agreements, but also other foundations of the constitutional banking rules, signature rights types of agreements, such as sale system; the morals, health, rights, in respect of company’s bank and purchase agreements, lease and legal interests of other persons; accounts can be granted only to agreements, works contracts etc. or national security. The Russian Law the employees of that company. on Strategic Companies imposes In some cases, unless the parties certain restrictions on foreign The bank must notify the tax agree otherwise, a mortgage is investments. The Law on Strategic authorities within three days of automatically established by law Companies provides a list of specific opening any bank account. However, (e.g., when the purchase of a land activities that constitute strategic a company must notify the tax plot is financed by a bank, when activities in Russia. The acquisition authorities within one month of a building is constructed on a of a controlling stake (by various opening/closing any foreign bank mortgaged land plot etc.). means) in a Russian company that account; failure to do so may result is involved in any strategic activity in a fine of between RUB 50,000 and As a general rule, if a new mortgage requires the preliminary consent of RUB 1,000,000. Russian companies is established over an asset that is the Russian Government or a post- and individuals must observe a already mortgaged, such mortgage transaction notification. Apart from special procedure for using bank becomes a subsequent (second- that, in most situations the need accounts opened in foreign banks. ranking) mortgage. The parties can for governmental authorizations, change the ranking of the mortgage permits and licenses applies equally Russian companies may open bank or establish pari passu rights on the to Russian and foreign investors. It accounts abroad, although the basis of a relevant agreement. is highly advisable to investigate the use of such accounts (including Mortgages are subject to registration availability of bilateral investment sources of funds to such accounts in the Unified State Register of treaty (BIT) protection in addition and permitted payments from such Immovable Property Rights and to the guarantees given under the accounts) is regulated under Russian Related Transactions. Indeed, Russian Law on Foreign Investments. currency control rules. Also, Russian companies must regularly report to security over a mortgaged asset Opening a bank account Russian authorities on the existence is only effective when registration of the mortgage takes place. Once registration is complete, a and use of such accounts. Needless to say, state registration of Russian company is legally permitted mortgages is an efficient mechanism to operate. As a practical matter it Security for securing mortgagee rights, as it will need to open bank accounts. Mortgages significantly limits the owner’s right Generally, direct cash settlements Mortgages (‘ipoteki‘) over land to dispose of its asset. cannot be used between companies. and other real estate are probably one of the most reliable forms of
20 dentons.com Investing in Russia - Banking and Finance
Mortgage agreements should be security created automatically by certain other agreed events. In such drafted carefully as imprecision operation of law). Goods purchased case, the buyer’s rights to dispose in certain terms (e.g., imprecise on credit (‘prodazha tovara v kredit’) of such goods are limited and in the description of the secured are pledged to the seller until paid in event of non-payment the seller obligations) may lead to the full by the buyer, unless the parties has the right to demand the goods mortgage agreement being agree otherwise. be returned. declared void by a court. Amendments to the Russian Civil Liens (‘uderzhanie veshi’) can There is a certain amount of flexibility Code in 2014 significantly revised be created where the creditor in relation to the enforcement of a the regulation of pledges. This possesses an asset which that should mortgage. The parties may agree included the introduction of a be handed over to the obligor, or a on an out-of-court enforcement new type of pledge (previously person designated by such obligor. procedure (except for certain cases unrecognized by Russian law) – the The creditor is allowed to retain specifically carved out by Russia pledge of rights under bank account such asset until all payments related law) and/or procedure for judicial agreements. Also, pledges in relation to such asset (including its price, enforcement in their mortgage to rights of participants in legal expenses and losses connected agreement. This enables the parties entities (shareholders and holders with such asset) have been made in to better anticipate the likely of participatory interests) are now full. In cases where both parties are outcomes of enforcement of the expressly regulated by the Civil merchants, retention of an asset is mortgage, if and when it takes place. Code. This gives the lender much also permitted in connection with greater flexibility in terms of types performance of obligations not Pledges of collateral over which it can related to such asset. The creditor Pledges (‘zalogi’), like mortgages, take security. can retain the asset even when the can secure performance of title to it has passed to a third party. various obligations of the pledgor As in the case of mortgages, pledges As a last resort, the creditor’s claims or a third party. The following can be enforced either in court can be satisfied under a procedure pledges are subject to mandatory or out of court (if the pledgor is a similar to enforcement of pledges. state registration: (i) pledge of merchant). The pledged collateral Obviously, the parties are free to rights subject to mandatory can be realized by assumption of eliminate the possibility of a lien state registration; (ii) pledge of title to the pledged collateral or being exercised by agreement. participatory interest (in an OOO). direct sale to a third party. However, Pledges of non-documentary it should be noted that enforcement Suretyship securities are subject to mandatory of pledges over certain assets can be Suretyship (‘poruchitelstvo’) is a registration in the relevant register. more burdensome than over others. form of security commonly used in Pledges of other types of assets corporate finance. A lender providing should be registered in the register Retention of title/Lien a loan to a holding company would of notifications of pledges of While not a security per se, retention typically ask for a suretyship (from movable property maintained by of title is often used to protect and either the company’s shareholder(s) notaries of the Russian Federation. secure the rights of the seller to or other companies in the group). Such registration does not affect receive payment in the future. For Suretyships provide necessary validity of the pledge, but establishes this purpose, the parties may agree assurance and support in case of its priority for third parties. that the seller will retain title to the default by the borrower. goods sold (‘sokhraneniye prava Russian law acknowledges the sobstvennosti za prodavtsom’) until Under a contract of suretyship, concept of statutory pledge (i.e. paid in full or until the occurrence of one party (surety) undertakes to
dentons.com 21 Investing in Russia - Banking and Finance
another party (creditor) to fulfil the Under an independent guarantee be given by banks or other obligations of a third party (the one party (guarantor) undertakes commercial entities, whereas principal debtor). Suretyships are at the request of another party suretyships can also be given by void unless made in writing. (principal) to pay a third party individuals. Notably, an independent (beneficiary) a certain amount of guarantee cannot be changed or At a first glance, Russian-law money in accordance with the revoked (unless otherwise is suretyships may seem similar to obligation given by the guarantor, provided for in the guarantee). English-law guarantees. However, irrespective of the secured a Russian-law suretyship has one obligation. An independent Security deposit distinguishing feature: it is generally guarantee must be in writing and Another form of security that is considered a secondary obligation, must contain such terms as the not common in financial transactions meaning that it will not survive the date of its issuance, the name of but is typically found in large termination (or in certain cases, the principal, beneficiary, and the M&A and real estate deals, is modification) of the secured guarantor, the obligation secured by the security deposit. obligation. For example, a suretyship the guarantee, the amount payable may terminate if the creditor in the by the guarantor (or the manner Until recently, although security underlying obligation has been in which it may be determined), deposits were used in practice there changed (as a result, for example, the term of the guarantee, and the were not expressly provided for in of a debt sale), unless the surety has circumstances upon which the sum law. However, recent changes to consented to the change. On the of guarantee becomes payable to the Russian Civil Code have made other hand, an English-law guarantee the beneficiary. it possible to use and enforce this is independent of the secured security instrument with fewer obligation. This is one reason why Independent guarantees replace legal risks. Russian-law suretyships are not bank guarantees (‘bankovskaya widely used in finance deals involving garantiya’) in Russian Civil law, A security deposit is literally a certain Russian companies. Another which had been considered to be amount of money that is paid by deficiency of Russian-law suretyships one of the most reliable security the debtor to the creditor upfront. (although we should note that it instruments, although also, Security deposits are conditional can be argued that independent probably, the most expensive one upon certain terms and conditions guarantees are similarly affected) for the debtor. There is now greater and usually serve to encourage the is the corporate benefit issue, flexibility in security arrangements, debtor to perform its obligations which is particularly relevant for the the creditor can insist on an under a contract. For example, upstream/downstream suretyships. independent guarantee issued by a a security deposit may secure bank, or can rely on an independent obligations of the buyer or the Independent guarantees guarantee provided by the debtor’s seller under a preliminary share Recently introduced changes to parent company or affiliate (or an sale purchase agreement. the Russian Civil code allow the independent third party, as the use of an independent guarantee case may be). Credit transactions (‘nezavisimaya garantiya’), which Major transactions with Russian is similar to an English-law An independent guarantee is similar borrowers have traditionally been guarantee. Although the practice to a suretyship agreement, but governed by foreign (e.g., English) of independent guarantees remains unlike the latter, a guarantee survives law. While recent attempts by Russian untested, this type of security may termination and/or change of the lawmakers have begun recognizing find great support in Russian secured obligation. Additionally, an various concepts commonly used finance transactions. independent guarantee can only by foreign institutional lenders (such
22 dentons.com Investing in Russia - Banking and Finance
Transaction passport Russian residents (companies and Another form of security that is not individual entrepreneurs) that enter common in financial transactions but into certain types of agreement (including in relation to the sale and is typically found in large M&A and real purchase of goods, provision of services, and licensing or alienation estate deals, is the security deposit. of intellectual property rights, as well as taking out or extending a loan) in which total payments will exceed as lenders’ agent, security agent, legislation) can only use Russian US$ 50,000 are required to prepare subordination of debts etc.), these rubles when settling payments to a transaction passport (‘pasport have yet to be properly tested in other Russian residents (with very sdelki’) with their bank. the courts and foreign institutional few exceptions). Where payments lenders still show no inclination to are made from a Russian resident to A transaction passport is a standard use Russian law. a non-resident (very broadly defined document containing certain – foreign entities and individuals) information in relation to the Points that require particular foreign currencies can be used as parties to a deal and the contact attention when lending to a Russian well as Russian rubles. entered into between them. A borrower are: arrangements in transaction passport should usually relation to security (especially Russian residents must have a be issued before the first payments where upstream and downstream written document in place in order under a foreign trade (or lending) guarantees/suretyships are involved), to be able to make payments to arrangement take place or before conducting at least a high level and from foreign persons. Russian the first delivery of goods or review of the borrower’s solvency banks are currency control agents, provision of services under a foreign (both on a cash flow and balance and hence must ensure that Russian contract, depending on the contract sheet basis), dispute resolution currency legislation is observed in type and terms. arrangements (many foreign court their clients’ dealings with foreigners. rulings cannot be enforced in Therefore, a Russian bank will almost Following the issuance of a Russia, hence arbitration is often certainly reject a payment if no transaction passport, Russian the preferred form), and performing documents relating to such payment residents must provide their bank at least a high-level check that the are provided or if the documents do (which issued the transaction requisite corporate (e.g., approval not justify the payment. passport) in the course of performing of major transactions) and other the contract with various documents Russian resident companies are procedures (e.g., transaction (such as customs declarations, obliged to use their bank accounts passports) have been observed by invoices etc.) accompanied by for the vast majority of transactions the Russian borrower. certain other standard form with non-residents (i.e. cash documents (such as currency Transfer of funds payments are banned for the vast transaction certificates, certificates majority of transactions). Although There are currency control confirming documents etc.). regulations in place in Russia. Russian companies can freely open Russian residents (note that currency bank accounts with foreign banks, legislation sets forth a definition the use of such accounts (especially of ‘residency’ which is completely permitted sources for funding these different to residency under tax accounts) is regulated by Russian currency regulation.
dentons.com 23 Regulatory / Compliance
Filings with the companies The Russian Criminal Code register contains the following corruption- All Russian companies must be related offenses: registered with the Consolidated • Giving a bribe (including bribing a Register of Legal Entities (the foreign official or a representative Companies Register, often known of an international organization) by its Russian acronym EGRUL). The Companies Register contains • Receiving a bribe copies of the company’s charter, information on its standing (e.g., • Acting on behalf of a giver of whether liquidation or bankruptcy a bribe or of its recipient or proceedings have been initiated), otherwise assisting either of registered address, chief executive them to reach an agreement with officers, branches, and other respect to a bribe information. All such information is public. Companies must notify the • Abuse by an officer of his authority Companies Register of changes to or position contrary to the interests their charters or other information of the relevant organization contained at the Companies Register motivated by pecuniary or other using special forms. personal interest funds and companies with annual Accounts and audit revenues or assets exceeding certain • Issuing or amending official Every company must prepare statutory thresholds. documents, which include its financial statements monthly, incorrect information motivated quarterly and annually. Annual and If a limited liability company (OOO) by pecuniary or other personal quarterly financial statements must has more than 15 members, an interest. be filed with the tax authorities. annual audit of its accounts must be carried out by an internal audit A bribe may be in the form of Banks and financial institutions committee or an independent money, valuables, property or (credit organizations) are also external auditor. Otherwise, the audit services of a monetary nature required to submit special monthly is optional for OOOs. or other proprietary rights. (and sometimes even weekly and daily) statements to the Russian Bribery and corruption The offenses apply to state and Central Bank. The Russian government recognizes municipal officials, as well as to corruption as one of the most serious persons performing managerial Only companies whose shares are problems facing the country and functions in private companies, traded on a stock exchange must has taken various steps to fight it, foreign officials and representatives make their accounts available to the including increasing sanctions and of international organizations. general public. bringing the legislation in line with international standards. Despite Sanctions for bribery offenses vary Not all Russian companies are this, corruption remains widespread depending on the amount of the required to have their financial particularly in such areas as bribe and other circumstances and statements audited. An external customs, law enforcement, various can include fines, imprisonment and/ audit is mandatory for joint-stock licensing and registering authorities, or prohibition from holding certain companies, banking, insurance and public procurement and tenders, positions. The fines have been investment companies, investment universities and others. significantly increased recently and
24 dentons.com Investing in Russia - Regulatory / Compliance
can now reach up to 100 times the for the acquisition of more than a Acquisition of shares (above amount of the bribe. 50 percent stake in a foreign target specified thresholds) in Russian which supplied goods to Russia companies engaged in the strategic Only individuals (and not companies) with a value in excess of one billion industries requires prior authorization can be subject to criminal liability in rubles during the year preceding the from a special government foreign Russia. However, if an act of bribery transaction. investment commission. The is carried out on behalf of or in the respective application is filed interest of a company, such company The rules are quite complex, but very with FAS as well. may be subject to additional broadly speaking, the transactions administrative liability and large fines require prior FAS clearance if the Financial services regulation (of no less than RUB one million). combined value of the assets of the As in many other jurisdictions, acquirer and the target and their financial services are highly regulated Merger control and strategic respective groups (excluding the in Russia and before providing such investments seller’s group) exceeds seven billion services, a company may need to The main source of merger control rubles or their aggregate turnover obtain a license or otherwise register regulation in Russia is the Federal exceeded ten billion rubles last year. with the relevant regulator. Law No. 135-FZ on Protection of Competition (the Competition Law). Special merger control and On 1 September 2013, the Central The authority dealing with merger competition rules apply to banks and Bank became the single “mega” control and other competition certain other financial organizations. regulator for the entire Russian issues is the Federal Antimonopoly financial market. Its functions are Service (FAS). Failure to obtain FAS clearance may very broad and include supervising result in fines for the acquirer and commercial banks and non-banking The following types of transactions its officials. Transactions which are financial institutions (such as related to Russian companies may not duly authorized by FAS may insurance companies, pension and require FAS clearance: also be declared invalid. If FAS investment funds, brokers, etc.), clearance was required for setting up regulation of foreign exchange, • Merger or accession transactions a company and it was not obtained, issuance of and trading in securities the company may, in certain cases, and many others. The functions • Setting up companies (in case the be liquidated or reorganized. previously carried out by the Federal charter capital is paid by shares/ Financial Markets Service (FSFR) assets of another company) In 2008, new legislation was passed have now been transferred to the to regulate foreign investment in Central Bank. • Takeovers and acquisitions of companies with “strategic value shares or participatory interests for national defense and national Data protection in Russian companies, as well as security”. The new law contains The main sources of data protection acquisitions of certain assets or a list of strategic industries, regulation in Russia are the law rights to control the business of including nuclear waste handling, on Data Protection and the law Russian companies. geology and exploration of on Information, Information certain mineral resources, arms Technologies and Information Importantly, transactions taking and military technology research place outside Russia and not directly Protection. Various provisions on and development, fishing and data protection may also be found involving Russian companies may development of the continental in certain circumstances be subject in the Russian Labor Code and shelf, aerospace, aviation, media and subordinate legislation. to Russian merger control rules. In publishing and subsoil use in respect particular, FAS clearance is required of specified subsoil land plots.
dentons.com 25 Investing in Russia - Regulatory / Compliance
As a general rule, any processing (except where the processing (updating, alteration), and extraction of personal data requires the is permitted without the data of personal data of citizens of explicit consent of the natural subject’s consent). the Russian Federation is done person whose data is processed using databases located on the (data subject). However, there are In order to start personal data territory of the Russian Federation”. various exceptions to this rule. For processing in Russia, the data The wording of the above rule is example, the data subject’s consent processor must send a notification uncertain and even politicians hold is not required if processing of to the Russian Federal Service for different positions on what it means. his personal data is necessary to Supervision of Communications, In particular, there is no clear answer perform a contract between the Information Technologies and Mass to the question about the possibility data subject and the data processor. Media (Roscomnadzor). This rule also of creating a “duplicate” database A company is also allowed to process has some exceptions. In particular, of Russian citizens’ personal data personal data without the data employers processing their outside of Russia after the law subject’s consent if it is necessary employees’ personal data without becomes effective. Thus, it must be to perform such company’s transferring it to third parties are admitted that actual interpretation of statutory obligations. exempt from this requirement. the new rules will be determined by Roscomnadzor, which continues to Processing of certain categories of Data processors must take be silent on its official position as to personal data (such as data relating appropriate technical and the actual meaning of the regulation. to an individual’s health, private life, organizational measures against nationality, race, political or religious unauthorized or unlawful processing, Failure to comply with the data views) is subject to stricter rules and accidental loss, disclosure of or protection legislation may result in in most cases can be carried out only damage to personal data. Various administrative fines, suspension of with the explicit and written consent technical requirements specifying the data processor’s business or, of the data subject. such measures are set out in in the most serious cases, criminal subordinate legislation. prosecution and even imprisonment. Any natural person has the rights to: Moreover, from the time when It is worth noting that on 1 Federal Law No. 242-FZ takes effect • Access personal data related September 2015 Federal Law No. personal data subjects will be to them 242-FZ On Amending Certain Legal entitled to request of Roscomnadzor Acts of the Russian Federation to that it take measures to restrict • Require the processor to delete Clarify the Procedure for Processing access to information processed in such data if its processing Personal Data in Information and violation of Russian personal data is illegal or if the data is not Telecommunication Networks dated legislation (in other words, personal necessary for the purposes for 21 July 2014 will come into force. data subjects will be given the ability which it is processed At that point, a number of new to initiate the blocking of access provisions will be added to Russian to those web sites on which their • Require that their data be legislation, the most significant corrected or updated personal data is being processed in of which is the following: “When violation of Russian law). However, collecting personal data, including • Revoke their previously given a court ruling confirming violation over the Internet information and consent to personal data of the data subjects’ rights will be telecommunications network, processing, in which case, necessary to enforce the power the operator must ensure that the processor must promptly under consideration. the recording, systematization, comply with such request compilation, storage, modification
26 dentons.com Employment and Migration
Governing legislation Article 5 of the Labor Code exhaustive list of grounds directly Employment issues are governed establishes the precedence of the stipulated in Article 59 of the Labor primarily by the RF Labor Code (the Code over all other federal laws Code. The list is extensive; however, “Code” or “Labor Code”). Pursuant containing labor law provisions. many of its items are (industry) to Article 5 of the Labor Code, Another basic principle established specific and rarely referred to. regulatory provisions on employment by Article 5 is that newly adopted The legal ground for signing a fixed- relations may also be adopted by (i) federal laws contradicting the term employment contract (with other federal laws, (ii) decrees of the Code will apply only after relevant reference to the specific provision of RF president, (iii) resolutions of the amendments are made to the Code. the Labor Code) should be indicated RF government, (iv) regulatory acts in the employment contract and of federal executive authorities, (v) Types of employment supported by documents. regulatory acts of the constituent contracts members of the Russian Federation, The Labor Code distinguishes The main grounds for signing a fixed- (vi) acts of local authorities and, (vii) between two types of employment term employment contract that are corporate bylaws. Article 423 of contract: (i) unlimited-term contracts, used in practice are the following: the Code confirms that aspects of and (ii) fixed-term contracts for up to five years, unless a longer term former USSR legislation continue to • For the period of performance of is established by the Code or other apply in the Russian Federation to the duties of an absent employee extent not in conflict with the Russian federal laws (Art. 58 of the Code). There is a strong legal preference Constitution or the Code. Thus, • For the performance of work for unlimited-term employment legislative gaps may be filled, as outside the normal business of contracts, and this preference has necessary, by USSR acts on certain the employer (refurbishments, been confirmed by Russian courts. labor law issues (e.g., compensation installation and adjustment, other for work in Far North regions, certain Fixed-term employment work), and work relating to an social security allowances, etc.), contracts inherently temporary (up to one in respect of which new Russian year) expansion of production Fixed-term employment contracts legislation has not yet been adopted or services (or has not yet entered into force). may be concluded for five years maximum and only under an
dentons.com 27 Investing in Russia - Employment and Migration
• With persons hired to perform dismiss the employee according to occasionally be required to work specific work in cases where the simplified procedure, namely overtime and the above-described completion cannot be with three days’ written notice rules on additional pay and determined as a specific date indicating the reasons for their consultation/consent will not apply dissatisfaction. During the probation to such overtime work. However, • With old-age pensioners period the employee may also such employees are entitled to resign according to the simplified a t least three additional days of • With directors (sole executive procedure, by serving the employer annual holiday. body), deputy directors, and three days’ written notice. chief accountants Vacation Working hours The standard paid annual holiday • With persons in secondary The normal working hours in is 28 calendar days. An employee employment (i.e., for whom Russia are 40 hours per week. Most becomes eligible for the main annual the job is not the main one). employees work five days per week, paid vacation after having worked six Probation period eight hours per day with a one- months continuously. hour lunch break. Some categories If the employment contract so of employees must work reduced Maternity leaves provides, an employee may be hours (e.g., those working in specific Statutory maternity leave is engaged on a trial basis for up to harmful or hazardous conditions, (generally) 140 days compensated three months (except persons hired minors aged under 18 years, etc.). at capped rates from state funds. in the capacity of general director Thereafter, a mother may choose to (individual executive body), deputy Under a general rule, during the stay at home until the child is three general director, chief accountant, working day the employer must years of age and to receive reduced deputy chief accountant, heads of provide the employee with a break maternity pay. The employer must branches or representative offices for meals and rest lasting from 30 keep the employee’s position open or of other separate structural minutes up to two hours, which is not during her leave and reinstate her in divisions of the company, for whom included in the working time. her position upon expiry of the three- a longer probation period of up to six year period or earlier, if the employee months is allowed). This probation An employee may be required to wishes to return to work. period must be envisaged by the work overtime only if they have employment contract. Probation consented to it in writing (except for Equal treatment periods cannot be applied, in cases specified by law, which mostly The Labor Code prohibits any direct particular, to (i) pregnant women, concern emergency situations). A or indirect discrimination in the work (ii) employees under the age of 18, consultation with the trade union place on the grounds of gender, (iii) newly qualified graduates of (if any) is also generally required for nationality, origin, marital status, age, institutions of higher, secondary and overtime work. Overtime work is not religious and political beliefs or other primary education who are hired permitted for employees who are grounds that do not relate to the for the first time after graduation in pregnant, for minors, and in some employee’s professional qualities. a position corresponding to their other instances envisaged by the professional qualification for one law. Overtime work must be paid at An individual who has been refused a year from graduation, (iv) in cases of increased rates. job has the right to request a written transfers from another employer, etc. explanation of the reasons for such (Art. 70 of the Code). If an employee’s working hours are refusal, and the company must defined in the employment contract comply with this request. If the result of the probation period as “unrestricted” (nenormirovanniy is unsatisfactory, the employer may rabochiy den), such employee may
28 dentons.com Investing in Russia - Employment and Migration
A company must not refuse to employ • Presenting false documents to the the minimum monthly salary a woman on the grounds of her employer when being hired is RUB 15,000). pregnancy or having children under the age of three, or dismiss a woman • Certain other circumstances. Immigration control on these grounds; such refusal or Rules on immigration and dismissal is a criminal offense. In cases of unlawful dismissal, the employment of persons subject to employer may be forced to pay immigration control can be found in The Labor Code does not contain employees their average salary over various Russian statutes, including any express provisions prohibiting the period of unemployment until the laws on the Status of Foreign sexual or other forms of harassment they are reinstated in their former Citizens in Russia, on entry to and at work. However, some forms position by a court. exit from the Russian Federation of harassment may constitute and on Migration Records for Employees cannot waive their a criminal offense. Foreign Citizens and Persons statutory rights, including the right without Citizenship. Termination of employment to file a claim against the employer The employer can dismiss its for wrongful dismissal or other Visa requirements employees in the following breach of their employment rights. Many foreigners require a visa circumstances: Any kind of agreement to this effect to enter Russia. Visas are issued will be unenforceable. by the Russian consulate of the • Winding-up of the employer country in which the applicant Employees dismissed in a resides. Consulates should be able • Redundancy redundancy situation are entitled to give further guidance on visa to compensation of between a requirements. Business travelers • Professional incompetence of the base salary for three months and normally need a business visa, which employee an average salary for five months. is issued usually on the basis of an When selecting employees for invitation from a Russian organization • Repeated failure by the employee redundancy, the employer must accredited with the Ministry of to carry out their duties try to retain certain categories of Foreign or Internal Affairs. For employees (including those with citizens of the European Union and • Single gross misconduct (e.g., two or more dependents). unjustified absence from work the US, the invitation can be issued for more than four consecutive When the employer wishes to part by any Russian host company, and hours, being drunk at the with the employee it commonly no accreditation is required. Most work place) offers a settlement agreement, which business visas give the opportunity as a rule implies payment of some to stay in Russia only for 90 days • Disclosure of the employer’s compensation to the employee for within each period of 180 days. sensitive commercial information leaving the company. or personal data of other Some Russian cities and towns have employees Pay restricted entry regulations. As a result, foreigners have to undergo A minimum monthly salary is set by • Theft, destruction of or damage stricter than usual passport controls. the Federal Law on the Minimum to the company’s property (if Wage No. 82-FZ of 19 June 2000 confirmed by a court or other Registration (as amended); it is equal to RUB competent state authority) Upon arrival, foreign visitors 5,965 (higher rates may be set for normally need to register with the constituent territories of the Russian local migration service if they are Federation, for example, in Moscow staying in Russia for more than seven
dentons.com 29 Investing in Russia - Employment and Migration
(i) a so-called “quota” (a permit to Citizens of Kazakhstan, Belarus and hire a certain number of foreign Armenia do not require any permits workers); (ii) then a permit to employ or patents to work in Russia. foreign citizens; (iii) and separately a work permit for a particular foreign Foreign citizens whose gross salary employee. Obtaining a quota can under a local employment contract is take up to one year. Certain positions at least RUB 167,000 per month can are exempt and do not fall within use a special simplified procedure for the quota (mostly actors, musicians, obtaining a work permit prescribed high-level managers, engineers, for highly qualified specialists. producers, etc.). Even if a position is Obtaining the work permit exempt from the quota requirement, under such procedure has the it can still take 90-120 calendar days following advantages: to obtain a permit to employ foreign citizens and a work permit. Hiring • No “quota” is required for permits and work permits are valid the employer for one year. • A work permit can be issued for Citizens of Ukraine, Moldova, any position and for the term of Azerbaijan, Kyrgyzstan, Uzbekistan the employment of the employee, and Tajikistan are required to obtain but not for more than three only a patent to work in Russia. years (renewable using the same Obtaining such patent takes simplified procedure) 2-3 weeks. • The period for obtaining such working days (or one month, in case work permit is 3-4 weeks of citizens of Kazakhstan, Belarus and Obtaining a work permit or a patent requires foreign citizens to provide Armenia). Hotels normally handle • No medical certificates, certificate the migration authorities with certain registration formalities; however, confirming his/her knowledge of documents, including: if one is staying with a friend or Russian, Russian history and basic in a company flat, the host or the • Medical certificates confirming Russian Federation law or diploma landlord will need to take care of are required the registration. Highly qualified absence of the following infectious diseases (HIV infection, specialists (see the ‘Working in • The salary (remuneration) of a leprosy (Hansen’s disease), Russia’ section below) and highly qualified specialist is always tuberculosis, syphilis, clamidious their family members have 90 subject to Russian personal income lymphogranuloma (venereal) calendar days from the date of tax at the lowest rate of 13 percent; chancroid) and drug addiction their arrival to register with the and some other advantages local migration service. • A certificate confirming his/her The formalities necessary for knowledge of Russian, Russian Working in Russia obtaining a work permit may only history and basic Russian To work in Russia foreign citizens be commenced after the company Federation law (unless they hold a permanent has been incorporated. As a result, or a temporary residency permit • A diploma or other document a company cannot appoint a foreign in Russia) need a work permit. confirming higher (professional) chief executive officer or employ Obtaining one is not straightforward: education – duly legalized copy. foreign citizens immediately upon first, the employer needs to obtain: its incorporation. If a foreign general
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• Staff leasing agencies must be accredited (the accreditation The standard paid annual holiday procedure is not yet regulated). is 28 calendar days. An employee • The federal law regulating staff leasing from an affiliated company becomes eligible for the main annual has yet to be adopted. paid vacation after having worked • Staff leases must be temporary (maximum three years for staff six months continuously. leased from affiliated companies as per the draft law; the lease period from a staff agency is director is required for a Russian Visas for “technical services” are unclear, in some cases it is company, its founder(s) usually first issued for engineers and other nine months). appoint(s) a Russian national on a foreign employees holding blue- provisional basis until the necessary collar positions. • Additional documentation permits are obtained. is envisaged for leased staff Secondment (annexes to employment A foreign national may be a general It should be noted that Russian contracts, entries in labor director or a member of a collegiate law does not at present regulate books, etc.). executive body in any Russian staff leasing (also referred to • Employees leased from company, provided that they have a as outstaffing, outsourcing, or staff agencies cannot be valid work permit or a permanent or secondment) – although in practice used in specific harmful/ temporary residency permit. staff leasing is widely used in Russia. hazardous environments, or In recent years there have been in jobs that require licenses The members of the board of ongoing attempts to introduce or other special permits for directors of a Russian company statutory regulation of staff leasing, the receiving company. are normally not employed by with fierce debate over whether such company. Accordingly, there should be a full ban, or use foreign citizens do not need a • The law establishes that the should be permitted subject to receiving party has subsidiary work permit to be on the board certain limitations. of a Russian company. (additional) liability for the obligations of the employer A federal law regulating staff leasing arising from its employment Performing installation works / was finally adopted last year and relations with the supplied maintenance and service works will enter into force on January 1, staff, including the obligation in relation to technical equipment 2016. Starting from January 1, 2016 to pay salary. produced abroad does not require staff leasing will be permissible only obtaining work permits and work subject to certain conditions: visas for employees of a foreign supplier or manufacturer of • Staff can be leased from a staffing such technical equipment. Such agency or an affiliated company, employees of the foreign supplier or from a company party to a or manufacturer receive so-called shareholders’ agreement with/ visas for “technical services”. with regard to the receiving party.
dentons.com 31 Contacts
Dentons Moscow Dentons St. Petersburg BC White Gardens BC Northern Capital Lesnaya Street, 7 Moika Embankment, 36 125047 Moscow 191186 St. Petersburg Russian Federation Russian Federation D +7 495 644 0500 D +7 812 325 8444 F +7 495 644 0599 F +7 812 325 8454 [email protected] [email protected]
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CSCS28166-Investing in Russia_Final_5 — 24/07/2015