How can a foreign company establish its legal presence in Russia?

A foreign company willing to enter the Russian market does not necessarily need to register with local authorities. It may be advisable at first not to be in a hurry to set up own structure. Most preliminary activities and some trading operations can be conducted without a formal legal presence being established.

Trading through a representative, a local agent can also be regarded as a way of doing business in Russia without registration with local authorities.

Foreign legal entities may enter a simple partnership (a joint venture) with a domestic company or a sole entrepreneur and thereby agree to merge their contributions and act along with a domestic entity without the formation of a legal person.

This agreement need not be registered and the partnership may therefore be "silent". The property contributed by the partners, as well as the products of the joint activity are, as a rule, deemed to be collectively shared property. For tax purposes such an arrangement is regarded as a "flow-through" structure and profits arising are taxed directly in the hands of the partners.

A foreign company can register a representative office or a branch in Russia. A representative office is a subdivision of a legal entity which in contrast to a branch only represents its interests. A branch can conduct all its functions.

There are several non-tax considerations that must be kept in mind. First, the legal liability of branches (representative offices) is unlimited so that the assets of the foreign parent company may be at risk if the debts of the branch exceed their assets. Secondly, a branch is a non-resident for currency regulation purposes. Thirdly, most licences cannot be obtained by a foreign corporation operating in Russia through a branch, but can be available to a subsidiary.

A Russian company (a limited liability company or a joint stock company) can be founded by one person, either Russian or foreign, a legal entity or an individual. Setting up a local entity is a relatively straightforward, reasonably easy procedure which takes about five days.

A Russian limited liability company (LLC) has elements of both a partnership and of a corporation. It is the most popular form for business activity. Participants (shareholders) of a limited liability company are, in principle not liable for the debts incurred by the company; in other words they enjoy limited liability. In exceptional circumstances, however, when bankruptcy of the company is caused by shareholders who have the right to give instructions obligatory for the company or otherwise determine its actions, a court can look beyond the company's own existence to make shareholders liable.

The company's founding documents can prohibit alienation of shares to third parties, in inheritance or disposal as a gift. Participants in an LLC have a pre-emptive right to purchase another participant's share. An LLC cannot give public subscription to its shares nor list them on a stock market. Participants have a right to exit from the company at any time and, usually, demand withdrawal of the part of the company's property that is proportional to their share.

The limited liability company is generally a less expensive form of legal undertaking than a joint-stock company, but, unlike a JSC, a limited liability company must register every change in its shareholding in the relevant registration body.

A joint-stock company in which shares can be traded freely and which may have an unlimited number of shareholders is an 'open' joint-stock company (OAO). Such joint-stock companies have the right to organise a public subscription to the shares issued by it and sell them on the open market. A joint-stock company whose shareholders have a pre-emptive right to buy shares sold by other shareholders is a 'closed' joint-stock company. Such a company has no right to hold a public subscription to its shares or for that matter offer them for sale to the general public.

In short, joint stock companies are now used for complex ownership structures, because limited liability companies have most advantages of a closed JSC and, at the same time, LLCs are not subject of regulation by the Federal Service for Financial Markets.



How can a foreign company establish its legal presence in Russia?