By Dezan Shira & Associates Russia Desk
Establishing and operating a Limited Liability Company (LLC, in Russian: OOO) is the best route for foreign investors entering Russia to buy and/or sell products or services. These are legal entities and can be formed by either just one individual, or several individuals or legal entities.
Comparing a Russian LLC to a Russian Representative Office or Branch Office
- The LLC is legally independent (it can be party to a legal relationship, suitor, and defendant before the court), and can possess its own property and assets;
- LLCs are not liable for Parent Company debt;
- LLCs can use international tax planning techniques such as those associated with the reallocation of funds (payments of loan interests, dividends, license payments etc.) for reducing tax obligations and increasing profitability;
- LLCs can function in the Russian market through subsidiaries using Partnership Intermediary Agreements (a subsidiary can import goods and act as the declarant on Russian Customs);
- An LLC can apply for use of Russia’s simplified tax system.
Establishment of an LLC in Russia
To set up an LLC in Russia, a person/company has to complete several stages of official registration and obtain permission to perform commercial activities. There are no special requirements for either the Service Industry or Manufacturing – all companies follow the same registration procedures.
If a foreign national or foreign company registers the LLC or the LLC has foreign shareholders, the company is considered to be an LLC with foreign investment. This means that it may be able to utilize tax treaties that its domicile country may have entered into with either Russia, the CIS, or EAEU.
- Name and identity
Russian law provides that the legal entity at the time of registration must state its full name with its legal business structure (directors, shareholders etc.). In addition, the LLC can state any abbreviated name, commercial name, names as applicable to different official languages of Russia, and the name in a foreign language. These are then protected from use by any other enterprise in Russia via trademark safeguards.
- Registered business address
The legal and actual addresses of the company have to be the same and correspond with the company charter. A Letter of Guarantee from the owner of the office building is needed. A shareholder who is at the same time an executive officer of the company may be able to register a company at their home address, depending upon rulings of the specific tax authority and region of registration.
- Passport details of shareholders
For foreign nationals, a copy of their passport with a Russian translation has to be provided. The translation has to get notarized in Russia.
- Authorized capital
This must be a minimum of 10,000 RUB, together with the capital distribution ratios amongst shareholders.
- Type of economic activities
The scope of business should be associated with corresponding codes from the Russian National Classification of Economic Activities. The first declared code will be considered as the main activity of the company. The LLC can list an unlimited number of codes but this is not the usual practice: more than 20 codes can lead to system failure and registration refusal. In the event of changing or expanding the scope of activities, an application can be submitted to amend these.
- Chief Executive Officer
The CEO must be named and identified. This can be a different individual than the shareholders.
- Choice of taxation system
An LLC may choose which type of tax system they wish to adopt. The two most common systems used by LLCs are:
- General Taxation System (GTS)
This is mostly used by large businesses and companies that need to be value added tax (VAT) payers, and companies with more than 25 percent of foreign funding in the authorized capital. The applicable tax rates are as follows:
- Income tax (basic rate is 20 percent)
- VAT (basic rates are 18 percent, 15 percent, 25 percent, 10 percent, and 0 percent)
- Property tax (basic rate is up to 2.2 percent)
- Personal income tax and insurance contributions
- Simplified taxation system (STS)
This is mostly used by start-ups and small businesses. The LLC must not have more than 100 employees and the income cannot exceed 150 million RUB per annum (US$2.65 million). The LLC may also apply for the simplified taxation system if its authorized capital is less than 25 percent of foreign funding. Please note that excepting the 25 percent equity, the balance (or even 100%) can be invested by foreign citizens from the position of private individuals. This is common practice in Russia today.
STS frees an LLC from paying:
- Income tax (except for income from dividends tax and certain types of debt obligations)
- Property tax (except for property tax for real estate projects that are defined in the taxation base through their resale value)
However, personal income tax and insurance contributions have to be paid.
The Simplified Taxation System also offers two options:
(i) «Revenue» – basic rate* from 1 percent to 6 percent.
(ii) «Revenue minus expenses» – basic rate* from 5 percent to 15 percent.
*depends on the region, business field and level of income.
For both, all additional taxes and duties have to be paid as required: excise taxes, state and custom duties, transport tax, land tax, mineral extraction tax etc. Professional advice should be sought to evaluate the real taxable responsibilities and on-going tax burden of the LCC operations.
Once a decision has been made over the choice of tax system, documents that need to be submitted to the Interdistrict Federal Tax Service Inspectorate (one-side printing only) are as follows:
– Company Charter – in a set of two;
– Application for LLC registration (form P11001);
– Receipt of state duty payment attached to application (4000 RUB);
– Shareholder resolution on creating LLC or protocol of the meeting of founding parties;
– Incorporation contract (if more than one shareholder);
– Copy of the certificate of the ownership of the office or guarantee letter of the owner of the office;
– If a shareholder is a foreign legal entity: extract from the commercial register of the country of registration, with a notarized Russian translation.
If the investor is from the country that is a signatory to the Mutual Assistance Pact with the Russian Federation, then document notarization is enough. Residents of the countries that adopted the Hague Convention have to use apostilization (together with notarized Russian translation). Residents of other countries must legalize the documents at the Russian consulates of their respective countries.
All shareholders must appear in person to the pertinent Interdistrict Federal Tax Service Inspectorate with their passports and submit the documents. The CEO’s presence (if he/she is not a shareholder at the same time) is not needed. Each shareholder signs the application in the presence of the tax inspector. The consideration time is five working days. After this, the Inspectorate either gives a notice of registration following the receipt of documents or informs of a denial of registration.
Following successful registration, an LLC can commence business activities associated with manufacturing or providing services, or both. Some manufacturing facilities may require obtaining additional licensing (like developing, producing, selling of cryptographic equipment, equipment for surreptitious obtaining of information and activities aimed to detect usage of this equipment, developing and producing of data privacy equipment, activity of technical protection of confidential information).
In the service industry (architecture, design, IT etc.) no licenses are needed.
Important changes in Russian tax law in 2017 (for foreign invested LLCs)
Russia has started to apply international standards to prevent tax avoiding strategies such as those incorporated in the OECD’s BEPS (Base erosion and profit shifting). It is expected that in 2017, Russia will elaborate the national legal framework to allow the automatic exchange of tax and financial information in accordance with international Common Reporting Standards (CRS). Russia plans to start the international information exchange in 2018, making 2017 the first tax period requiring new data reporting.
We recommend seeking a legal establishment concurrent with tax advice when setting up an LLC in Russia. Qualified and experienced professional firms will be able to provide both.
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.