By Dezan Shira & Associates Russia Desk
Branch Offices in Russia differ from Representative Office (RO) establishments as they can perform direct commercial activities and generate local income. For this reason, they are often the preferred vehicle of choice for foreign investors looking to commence trade and import-export functions in Russia. However, like ROs, foreign investors local Russia risk is minimized as they are not categorized as Russian legal entities.
Definition of Branch Office legal status
The legal status of a Branch Office (BO) is not separated from the foreign parent company’s legal status, meaning the limits of legal liability are determined by the parent company itself. This means that all inventory and assets provided to the BO by the parent company remain either property of the company or belong to it on another legal basis as per the parent company direction.
This means the parent company holds full responsibility for BO activities. BO can initiate legal proceedings in Russia on behalf of their parent company. Third parties filing lawsuits for BO activities have to take legal actions against the parent company overseas, rather than the BO directly, making the local operation safer and keeping risk at cross-border arms length.
The legal authority of the BO is determined by a power of attorney naming a specific individual, who may be either a Russian or foreign national based either in Russia, or externally, provided by the parent company.
Applying for BO accreditation
BO’s are not subject to government registration. Instead, they need accreditation from the State Registration Chamber at the Ministry of Justice.
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 a BO 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 company (a business license or tax registration certificate will suffice);
- Notarized Board Resolution permitting the establishment of a BO in Russia;
- Bank Reference from the parent company bankers;
- 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 BO 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.
Bookkeeping and tax accounting requirements for BOs in Russia
As the BO is a trading entity and both receives and expends finances, it is obliged to maintain bookkeeping (article two of Federal Accounting Law number 402). BO needs to set its accounting policy at the beginning of every financial year.
Bookkeeping reporting has to be performed in accordance with Russian law. General requirements to tax records maintenance is determined by chapter 25 of The Russian Tax Code. It is important to set up a proper accounting and bookkeeping facility for the BO.
What taxes are applicable to BOs in Russia?
BOs in Russia are subject to Russia’s General Taxation System. The Simplified Taxation System applicable to Representative Offices is not applicable to BO (article 346, chapter 12 Russian Tax Law) something to bear in mind if the foreign entity is changing its activities from Representative to Branch Office status.
Should the foreign company have several BO in Russia, each separate BO is liable for both reporting and payment of applicable taxes to the regional tax authorities assigned to its location.
Income tax (basic rate 20 percent)
Foreign companies pay income tax on income gained through the BO, less business expenses (article 247 of the Russian Tax Code). Income tax is calculated and paid by the BO. Both the Foreign Company’s income tax return as of the end of the financial period as well as an annual report are presented by the Foreign Company through its BO according to the format approved by Russian Ministry of Finance, and must be presented in Russian.
VAT (basic rates of 18 percent, 15.25 percent, 10 percent and zero percent)
The BO has to file to the local tax authority a VAT declaration not later that 25th day of the month following the tax period that has ended (article 174 of Russian Tax Code).
Property Tax (basic rate up to 2.2 percent)
Property includes chattels and real estate as well as objects acquired by concessionary agreement.
Individual income tax and insurance contributions
The BO is responsible for reporting personal income details as well as accrued and withheld taxes to the local tax authority, and must be filed no later than April 1 of the following year. The applicable form is 2-NDFL – Personal Income Tax, as approved by the order of Federal Tax Service of Russia from November 17, 2010.
All additional taxes and duties have to be paid as required: excise duties, state and customs duties, transport tax, land tax, mineral extraction tax and so on, according to the BO specific trading activities.
Foreign trade with Russia: import-export registration and licensing requirements
Licensing is needed in the following cases:
- Temporary limitations on import-export of particular goods are imposed (quota limits);
- Goods that can negatively impact on homeland security or be harmful for human and animal life and health, personal, corporation, state or municipal property environment;
- The company is granted exclusive rights for import/export of particular type of goods;
- Imported goods as included in the Register of Licensed Goods.
It is prudent to request examination of the Russian Register of Licensed Goods to ascertain the levels of duty which may or may not be applicable to any products or goods intended to be traded. Services are exempt.
Participants in foreign trade activities may apply for relevant licenses from the Regional Divisions of the Ministry of Economic Development and Trade. Minimal state duties are paid for application processing, license issuing and re-issuing documents once these are issued.
The original license and its notarized copy are then submitted to the Customs authorities.
Sales contracts may not be made between a foreign parent company and its BO since the transaction of goods is performed within the frame of one legal entity and no change of owner takes place. However, the parent company can execute a transfer of goods to its BO. The parent company can issue transportation agreements or acts of delivery and acceptance with the description and price of goods that is necessary for the customs declaration.
A parent company, through its BO, can also act as a customs declarant if it has right to dispose goods on customs territory of Russia, but not in the case of foreign trade transactions, when one party is a Russian company. As a consequence, foreign companies via their Russian BO can declare goods on condition that at the moment of customs clearance, these goods are not subjected to foreign trade activity that includes a Russian party.
In cases where there is a transaction between the foreign parent, or any other foreign company, and a Russian party, then the Russian party must be declared as consignee. Customs clearance can be assigned to a customs clearance agent.
Customs clearance is always accompanied with duty payments. It is not obligatory to make advance payments or bonds to Russian Customs. Nevertheless, Customs promotes advance payments by not accruing interest and recognizing money on its account as being the property of the payer until the declaration is submitted. This adds a level of security and administration speed in clearance.
This scheme of Advance Customs Payments are popular among companies with a frequent flow of goods, often preferring to make advance payments for several transactions.
Smaller companies or companies with occasional goods deliveries may prefer to pay the exact sum due after submitting their declaration in order to avoid changes that may occur, such as changes to the tax codes, currency exchange rate and so on. This prevents extra procedures of adding money to the Customs account or extracting excess payment back from Customs account. However, the option of which procedure to follow is up to the Branch Office or parent company decision.
Useful trading entities
BOs are useful trading entities to utilize in Russia as they permit the flow of both goods via customs and import-export capabilities, as well as the flow of cash in order to fund the operation. Profits or extra money accrued by the BO may then be repatriated to the foreign parent. Accordingly, they may be used to facilitate regular import-export trade, or be used to finance the on-going operations of other research and commercial activities in Russia.
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