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Introductory Business Guide: Russia’s Legal Overview

Freytak and Sons Law Office

Interlegal Permanent Officer

First published in 2019 - Updated from time to time.

Introduction

In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World - Starting and Growing a Business. It is the result of collective work with the accountants' firms network EuraAudit. This article aims to introduce the legal environment of Russia for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with Freytak and Sons Law Office's firm on the issues arising from starting and running a business in Russia.

Legal Overview

Executive Summary

The Russian legal system is in the process of continuous transformation since the USSR’s collapse 25 years ago. In recent years it has become quite modern with the adoption of the best business practices from English law and the rest of the world. The rate of change and complexity do, however, mean that those deciding to do business in Russia find it is beneficial to have a local advisor to assist with compliance and to reduce costs and the administrative burden.

Registered Companies and Partnerships

The types of companies in Russia are similar to English law. You can choose among branches of your parent company, partnerships, limited liability companies (public or private) or individuals can register as individual entrepreneurs.

Each type of companies has a number of tax systems applicable to it with various tax rates, periods and other.

In addition, the type of the company should correspond to the business type (for example banking services, international trading, broadcasting, etc.)

Classification of Registered Companies

The most common types of companies in Russia are:

  • Company limited by shares (“ООО” in Russian) (which has a close similarity to “LLC”)
  • Company limited by shares (private or public) (“АО” or “ПАО” in Russian) (which is similar to a JSC)
  • Companies with unlimited liability (partnership), which is very rare

Even for companies, in certain limited circumstances courts can extend shareholders liability beyond their share interest – see “Share Capital” below.

Memorandum and Articles of Association

Every company should have articles of association – the main constitutional document for the company. Usually AoA are very similar to each other for the same types of company. The AoA contain information about type of the company, the size of the share capital, the number and type of governing bodies, the city of incorporation and similar details.

Share Capital

The liability of the shareholders in a company is usually limited to their contribution to the issued shares. Those in partnerships have unlimited liability. In certain situations, when the liability of the company is social or is tax related, the liability could be extended to the private property of the shareholders. To do so, however, requires a court decision.

Public Offer of Shares

There are number of requirements for public companies in Russia such as number of shareholders, minimum share capital etc. The public companies have stricter regulations of their corporate and tax duties, have to have Board of directors, oversight committees and independent auditors. They must also report and publish their results on a quarterly basis.

The steps required to permit a business to provide an initial public offering of its shares (IPO) is broadly similar to other jurisdictions and is based on MoEx (Moscow Stock Exchange) rules.

General Meetings

All companies have to have an Annual General Meeting in a highly regimented order, so every company has its own “corporate calendar” for each year. Depending on company type and the AoA statement, powers should be distributed among three levels of ruling bodies – the General meeting, the Board of Directors and the Managing Committee or Managing Director (CEO/General Director).

Directors

Every company should have at least a Managing Director (CEO) unless it is required by law to have a Board of Directors. For public companies, a Board of Directors is mandatory, for private companies, this is a decision of the shareholders. The Managing Director has full power and responsibility for the company except the matters reserved to the Board and General Meeting.

Financing of a Company

The methods of financing private (non Government) companies are shareholder contribution by equity (including rights) or money by bank or other company loan. It is prohibited for non-shareholders to grant a financing to company without compensation.

Commencement of Business

The process of establishing a company is relatively simple and takes approximately one week to obtain a registration number of the taxpayer (called an “INN”). It takes one further day to open a bank account. There are number of methods, chosen by shareholders, of paying taxes and preparing accounts for tax authorities. The preferable system depends on size of the business and its type, number of shareholders and other matters.

Mergers and Acquisitions

In the last two years, the hottest topic for Russian legislation has been “De-offshorisation”. This means a transition of Russian equity to companies incorporated in Russia from widely used off- shore and low tax jurisdictions.

Companies based in Russia can, subject to legal requirements, also acquire the share capital of other companies or purchase their businesses.

Corporate Insolvency

The insolvency of a company in Russia is tightly connected to liquidation procedure and usually occurs where one or more shareholders raise a dispute with the company or its management. Otherwise, a more common practice to avoid the formalities of insolvency is to sell the shares of the company to a special law firm’s special purchase vehicle (SPV) but the potential pit-falls in the process and consequent liabilities mean it should only be undertaken by a well-trusted law firm in Russia.

Winding Up of Companies

Liquidation is very complicated process in Russia as the legislation system is trying to protect shareholders equity in the best way. A special institution appoints Arbitrary managers to lead the process when the company has a large number of shareholders or there is a dispute about companies' assets. Every liquidation of a significant company will usually trigger criminal courts trial which can last for several years.

For more details, please contact Nikolay Freytak, Freytak and Sons, freytak@freytakandsons.com, tel: +7 985 774 8626

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