By Dezan Shira & Associates
As Russia increasingly looks towards Asia for new markets, increasing numbers of Asian based businesses are looking to Russia to supplies. Russia is an effective market in many ways, not just in certain industry sectors such as IT, auto components, agriculture and energy, but also due to the relative low value of the Rouble and lower overall operating overheads in the country. Chinese, Indian and Singaporean investors among many other Asian nations are all actively looking at Russia as a potential hub for sourcing. This is further impacted by Russia being a member of the Eurasian Economic Union which not only gives access to the Central Asian markets of Kazakhstan and Kyrgyzstan but also includes the Caucasus nation of Armenia and the EU bordering Belarus. These are strategically important nations which can provide cross-border access to the European Union as well as China. In fact, the EAEU is considered so beneficial that China, India and Singapore have already expressed a desire to enter into Free Trade Agreements with the EAEU, while Vietnam already has.
Under the terms of the agreement, Vietnam will remove import tariffs on 59 percent of goods imported from the EAEU, including products such as meat, wheat flour, alcohol, mechanical equipment and steel. Tariffs on the other 30 percent of goods will be gradually reduced to zero in a transitional period.
Looking at the new dynamics of an increasingly eastern facing Russia is relatively simple, with the establishment of the Representative Office (RO) in the country a proven method for assessing the local market and its new dynamics. A RO also avoid any possible entrepreneurial risks, as they are cost centers only and not incorporations. These make them ideal for operating as Sourcing Offices.
Russian RO advantages
Foreign employees of ROs do not need to obtain additional labor permits normally required for foreign workers if they have passed personal accreditation. The only condition is that the number of accredited workers employees has to be agreed with the state authority that accredits RO. Further, ROs provide for the following:
- Simplified method of accounting and tax reporting;
- ROs may claim back VAT and import duties from any assets and purchases that will be used for the purposes of running the RO purposes (such as cars, office machines and equipment);
- ROs can use a simplified, fast tracked banking scheme in Russia for withdrawal of finances for the parent entity.
After setting the goals and objectives for the Russian RO it is important to examine in detail all stages of the opening procedure in order to correctly distribute existing resources and evaluate the level of tax burden.
Applying for RO accreditation
ROs are not subjected to government registration. Instead, they need accreditation from the State Registration Chamber at the Ministry of Justice of the Russian Federation. The documentation requirements and administration procedures are as follows:
- A written petition containing all basic details of the parent company (business license, legal address, list of directors and shareholders, business scope),
- The purpose of setting up an RO in Russia, information on planned or existing collaboration with Russian companies.
The statutory documentation required from the parent company includes:
- A copy from the State Register of Legal Entities from the parent companies (a business license or tax registration certificate will suffice);
- Notarized Board Resolution permitting the establishment of an RO in Russia;
- Bank Reference from the parent company’s bank;
- Power of attorney granted to the person who will submit documents for the company to the State Registration Chamber in Russia, and for the person who will be the Legally Responsible Person (the Legally Responsible Person does not have to be physically based in Russia, and can be either a foreign or Russian national);
- A lease rental document identifying the RO address in Russia (a letter of guarantee from the lessor for the planned office rental);
- Any reference letters from Russian businesses partners or contacts if available.
All documents that are not in Russian need to be translated and notarized as true translations.
Registration and duty payment
After the State Chamber chooses to accredit an RO it will issue an initial accreditation certificate, registering it in the State Register of Accredited Representative Offices of Foreign Companies.
This document is issued no later than 21 working days from the date of application. This certificate is required for the opening of a bank account in Russia for the RO operations.
The applicant party is then provided with the number of bank account for the payment of a duty, currently RUB120,000 (US$2,100).
RO accounting and financial reporting procedures
At this stage, arrangements should be made to transfer funds necessary for the purchase of equipment and services needed to set up the RO operations, including staff salaries and so on.
According to the Russian Accounting Law #402 (art.6), an RO can skip accounting record keeping if they perform accrual accounting. If they don’t perform accrual accounting they are required to complete accounting record-keeping.
In any event, the parent company of the RO will normally require monthly statements and cash balances. This means an accounting system should be implemented at this stage, together with receipts collected as the RO can claim back VAT and related taxes on purchases and any equipment import duties. A procedure to apply for a VAT registration needs to be carried out for this purpose.
ROs are not generally required to file for an annual audit, except in the event of any excess funds being repatriated back to the foreign parent company, and closure. There are exceptions, such as an RO of Foreign Non-For-Profit, where Russia’s “Law of Non-Profit Organizations” dictates that any Russian based foreign non-profit organization has to provide an annual audit report to Justice Department.
Commencement of activity
Upon completing the document filings and duty payments, the local accrediting body is obliged to issue the permission for the RO to commence its activities in Russia. At the same time, the State Register Chamber issues a certificate proving RO registration in the Consolidated State Register of Representative Offices of Foreign Legal Entities. Upon receipt of this, the RO is considered legitimate from the date of receiving its accreditation.
Representative Office accreditation has no expiry time limit and is granted for an indefinite period. There is also no limit on the number of RO a Foreign Company may establish in Russia.
The State Register Chamber will also provide supporting services to RO concerning personnel accreditation, visas for foreign staff, and so on.
Approximate operating costs
These are averages only, but typical for most Russian based ROs in Moscow or St. Petersburg:
- Bi-Lingual Office Manager: RUB 35,000 to 55,000 per month
- Corporate Manager: RUB 60,000 – 105,000 per month
- Grade A Office: RUB 1500 – 3000 per square meter
- Internet Access: RUB 3000 – 15000 per month
- Domestic Telephone Usage: RUB 3000 – 10,000 per month
Establishing a Russian Representative Office for Sourcing purposes is an inexpensive and effective way to staff, research, conduct QC and organize purchasing for Russian goods to be exported overseas. For more information on the subject, please contact us at firstname.lastname@example.org or download our brochure below.
Russia Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, India, Indonesia, the Silk Road & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Eurasian region. We maintain offices in Moscow and St.Petersburg through our Russian partner firm, as well as our own offices in China, South-East Asia and India. For assistance with Russian issues or investments into Russia and Asia, please contact us at email@example.com or visit us at www.dezshira.com
Dezan Shira & Associates´ Russian investment brochure offers an overview of the services provided by the firm – both foreign investment into Russia and Russian investment into Asia. It is Dezan Shira´s mission to guide investors through Russia´s complex regulatory environment and assist with all aspects of establishing, maintaining and growing business operations in the region.