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4. Volkova N.S., Khabrieva, T.Ya. Pravovye pozitsii Konstitutsionnogo Suda i parlament [Legal Views of the Constitutional Court of the Russian Federation and the Parliament]. Moscow: NORMA Publ., 2005. 176 p.
5. Zor'kin V.D. Konstitutsionno-pravovoe razvitie Rossii [Constitutional and Legal Development of Russia]. Moscow: NORMA. INFRA-M Publ., 2011. 719 p.
6. Zor'kin V.D. Sovremennyi mir, pravo i Konstitutsiya [Contemporary World, Law and Constitution]. Moscow: NORMA Publ., 2010. 543 p.
7. Seleznev N.V. Konstitutsionnyi Sud Rossiiskoi Federatsii v sisteme sudebnoi vlasti [The constitutional Court of the Russian Federation in the system of judicial power]. Moscow, 1998. 60 p.
8. Ellinek G. Sotsial'no-eticheskoe znachenie prava, nepravdy i nakazaniya [Social and Ethical Meaning of Law, Untruth and Punishment]. Moscow: Tovarishchestvo «Pechatnya S.P. Yakovleva» [Partnership «The Printing house of S. p. Yakovlev», 1910. 156 p.
Курилов Владимир Иванович, доктор юридических наук, профессор, проректор ДВФУ, директор Юридической школы ДВФУ, заслуженный работник высшей школы РФ, г. Владивосток. E-mail: [email protected]
Присекина Наталья Геннадьевна, кандидат юридических наук, доцент юридической школы ДВФУ, заместитель директора Юридической школы по науке и инновациям, почетный консул Республики Чили, г. Владивосток. E-mail: [email protected]
ПРАВОВОЕ РЕГУЛИРОВАНИЕ И ПРАКТИЧЕСКИЕ ВОПРОСЫ ЗАЩИТЫ ИНОСТРАННЫХ ИНВЕСТИЦИЙ В РОССИЙСКОЙ ФЕДЕРАЦИИ
Статья посвящена анализу правового регулирования и определенным практическим вопросам защиты иностранных инвестиций в Российской Федерации.
Иностранные инвестиции - важный элемент российского экономического развития. При регулировании деятельности иностранных инвесторов российское правительство уделяет особое внимание балансу между потребностями привлечения иностранных инвестиций в народное хозяйство и обеспечением национальных интересов.
Россия ратифицировала около 50 двусторонних договоров с различными странами, как экономически развивающимися, так и развитыми. Термин «инвестиции», как использующийся в уже заключенных международных
договорах, означает любой вид активов, инвестируемый зарубежным инвестором в РФ в соответствии с ее законами и нормативными актами. В порядке общего правила, следующие формы иностранных инвестиций разрешены в России:
1) движимое и недвижимое имущество и связанные с ним права собственности, такие как ипотеки и арендные договоры;
2) акции, доли, облигации и любые другие формы участия в компаниях и предприятиях;
3) денежные требования, которые использовались для создания экономической стоимости или требования выполнения любого обязательства в соответствии с контрактом, имеющим экономическую ценность;
4) права на интеллектуальную собственность и технологии, ноу-хау и goodwill;
5) права на осуществление любой коммерческой деятельности, включая права на разработку, добычу или эксплуатацию природных ресурсов, подтвержденные законом или в соответствии с контрактом.
Зарубежному инвестору разрешено осуществление иностранных инвестиций любой вышеуказанной формы с определенными ограничениями, которые впоследствии рассматривают авторы статьи.
Проведен анализ определенных практических вопросов: репатриация дивидендов; форм ведения бизнеса в Российской Федерации зарубежными инвесторами; миграционные вопросы; занятость и разрешения на работу; внешнеэкономическая деятельность; проблема выбора права; антимонопольные правила и защита конкуренции; лицензируемые виды деятельности; недвижимое имущество; налогообложение; судебные процедуры и урегулирование споров.
В заключение авторы заявляют извлеченные уроки: в России возможно заниматься прибыльным и законным бизнесом; Россия заполнила большинство законодательных пробелов, и права и обязательства сторон могут быть точно определены; главное препятствие эффективной правовой системе - нехватка надлежащей и быстрой имплементации принятых нормативных актов правительственными учреждениями и судебной системой; бюрократические формальности остаются препятствием для быстрого делового внедрения, а власти требуют строгого соблюдения требований, которые кажутся незначительными для иностранных руководителей.
Ключевые слова: иностранные инвестиции, инвестиционный режим, ограничения на иностранные инвестиции, формы ведения бизнеса, судебные процедуры и урегулирование споров.
Vladimir I. Kurilov, S.J.D., LL.D., Professor, Honorary University Educationalist of the Russian Federation, Vice President for International Affairs, Director & Dean School of Law, Far Eastern Federal University, Vladivostok. E-mail: [email protected]
Natalia G. Prisekina, Ph.D. in Law, Associate Professor, Honorary Consul of the Republic of Chile, Vice Director for Research and Innovation, School of Law, Far Eastern Federal University, Vladivostok, Russia. E-mail: nprisekina@gmail. com
LEGAL REGULATION AND PRACTICAL ISSUES OF PROTECTING FOREIGN INVESTMENTS IN THE RUSSIAN FEDERATION
The article is devoted to the analysis of legal regulation and certain practical issues of protecting foreign investments in the Russian Federation.
Foreign investment is an essential element of Russia's economic development. While regulating the foreign investment activity, the Russian government strikes a balance between attracting foreign investments into the national economy and securing the national interests.
Russia has ratified approximately 50 BITs with various countries, both economically developing and developed. The term "investment" as used in the already concluded BITs denotes any kind of asset invested in the territory of the RF in accordance with its laws and regulations by a foreign investor. In general, the following forms of foreign investment are allowed in Russia:
1) Movable and immovable property and related property rights such as mortgages and leases;
2) Shares, stocks, bonds and any other forms of participation in companies and enterprises;
3) Claims to money which has been used to create an economic value or claims to any performance under contract having an economic value;
4) Intellectual property rights and technology, know-how and goodwill;
5) Rights confirmed by law or under contract to undertake any commercial activity, including rights to search for or cultivate, extract or exploit natural resources.
A foreign investor is allowed to perform a foreign investment of any form as stated above, with certain limitations, which are further discussed by the authors of the article.
There are certain practical issues that have been analyzed: repatriation of dividends; forms of doing business in the Russian Federation by foreign investors; migration issues; employment and work permits; foreign trade and commerce; choice of legal right; antitrust rules and protection of competition; licens-able activities; real estate; taxation; litigation and dispute resolution.
The authors state in conclusion: it is possible to do business profitably and legally in Russia; Russia has now filled in most of the legislative gaps, and the rights and obligations of parties can usually be accurately determined; the main obstacle to an effective legal system is now created by the lack of proper and speedy implementation by government offices and the judicial system; bureaucratic formalities remain an impediment to speedy business implementation, and the authorities require strict compliance with the requirements that often appear counter intuitive and of minor importance to foreign executives.
Key words: foreign investments, investment regime, limitations on foreign investments, forms of doing business, litigation and dispute resolution.
A foreign investor planning to start business activities in Russia must not only take into consideration political, economic, trade and business related issues but be aware in advance of legal risks existing in Russia with respect to foreign business activities and become knowledgeable of the ways to eliminate or mitigate these risks.
Foreign investment is an important element of Russian economic development. In regulating foreign investment activity, the Russian government strikes a balance between the needs to attract foreign investment into the national economy and to secure national interests.
Russia is gradually undertaking measures to attract foreign investors by concluding and ratifying more bilateral international treaties on promotion and protection of foreign investments (BITs), and by conducting reforms aimed at simplifying certain procedures for running a business in Russia. However, much remains to be done to improve the investment climate in Russia. As of now the RF is only 120th in the World Bank Doing Business ranking; Russia's president has set the goal of reaching 50th by 2015 and entering the top 20 by 2018.
I. FOREIGN INVESTMENT RULES:
General Regulation
Russia has ratified approximately 50 BITs with various countries, both economically developing and developed. The term "investment" as used in the already concluded BITs means any kind of asset invested in the territory of the RF in accordance with its laws and regulations by a foreign investor1. In general, the following forms of foreign investment are allowed in Russia:
1Article 2 of the RF Federal law «On Foreign Investment in the Russian Federation», Article 1 of the Norway-Russia BIT (entered into force on May 21, 1998), Article 1 of the USSR-UK BIT (entered into force on July 3, 1991), e.g.
1) Movable and immovable property and related property rights such as mortgages and leases;
2) Shares, stocks, bonds and any other forms of participation in companies and enterprises;
3) Claims to money which has been used to create an economic value or claims to any performance under contract having an economic value;
4) Intellectual property rights and technology, know-how and goodwill;
5) Rights confirmed by law or under contract to undertake any commercial activity, including rights to search for or cultivate, extract or exploit natural resources.
A foreign investor is allowed to perform foreign investment of any form as stated above, with certain limitations, which will be considered subsequently.
The following persons are considered to be "foreign investors":
1) any natural person having citizenship of a foreign state in accordance with its laws;
2) any legal entity, including a corporation, company, firm, enterprise or association incorporated or constituted in the territory of a foreign state in accordance with its laws;
3) an international organization, person without citizenship, foreign organization without the status of a legal entity, or foreign state1.
The most widespread forms of making direct foreign investment in Russia are:
1. Acquisition by a foreign investor of not less than a 10% share (stocks) in the charter capital of a commercial organization already established or being newly established in the territory of Russia .
2. Accreditation (establishment) of a branch office of a foreign company .
It should be noted that recently the incorporation of joint ventures with two co-founders, Russian and foreign or just foreign, has become a widespread form of foreign investment activity in the sphere of automobile production in the Russian market. For example, a 50:50 joint venture was recently incorporated for production of Toyota vehicles by Mitsui & Co., Ltd. and Sollers, OJSC, one of the Russian leaders in automobile assembly, and a 30:70 joint venture was incorporated by two foreign investors, PSA Peugeot Citroën and Mitsubishi Motors Corporation, for production of Peugeot and Citroën automobiles.
1Article 2 of the RF Federal law «On Foreign Investment in the Russian Federation», Article 1 of the Norway-Russia BIT (entered into force on May 21, 1998), Article 1 of the USSR-UK BIT (entered into force on July 3, 1991), e.g.
2 Acquisition of less that a 10% share is not considered as direct foreign investment since it is deemed that smaller share would not actually provide the possibility to the shareholder to participate in the company management, would not give any control over the company activity (however, 10% is a nominal number, and not always in practice one will be able to participate in the company management having 10% share).
3 Article 2 of the RF Federal law «On Foreign Investment in the Russian Federation».
Investment Regime and Guarantees for Foreign Investment
Russian legislation provides for a national legal regime for activity of foreign investors and use of profit received as a result of investment activity. It stipulates that the legal rules applicable to foreign investment cannot be less favorable than the legal regime provided for Russian investors, however, except for certain specific features established directly by federal laws1.
Limitations on foreign investment activity may be established only by federal legislation and only to the extent necessary for protection of the foundations of the constitutional order, moral, welfare, health, rights and interests of other persons, and maintenance of national defense and state security. Exceptions to stimulate investment in the form of benefits for foreign investors may be established to further national social and economic development.
Foreign investors and commercial organizations containing foreign investment are provided with legal protection, guarantees and benefits established by Russian laws and regulations and international treaties to which the RF is a party. Pursuant to the federal law «On Foreign Investment in the Russian Federation», a Russian commercial organization receives the status of a commercial organization with foreign investments from the day a foreign investor becomes a shareholder of this organization . It loses such status when the foreign investor ceases its membership in the company, or if there are several foreign investor shareholders, when all the foreign investors cease their membership. At that time the organization loses the respective legal protection, guarantees and benefits.
The RF provides many of the foreign investment guarantees known worldwide, in particular.
1. Guarantee of use of various forms of making investments in Russia.
A foreign investor is allowed to perform investment activity in any form in the territory of the RF as considered above.
2. Stabilization clause (guarantee against unfavorable changes in RF legislation).
This guarantee provides that foreign investors will enjoy the same regime in the currency control, tax, and customs regulation spheres that existed at the moment of investment commencement. New legislation or amended legislation that establishes a system of restrictions and limitations for entrepreneurial activity of foreign investors or increases the overall tax burden for activity of foreign investors in comparison with the restrictions and limitations and overall tax burden effective as of the date of commencement of the investment project financing does not apply during the payback period of the investment project (but not to exceed seven years).
1 Item 1 of Article 4 of the RF Federal law «On Foreign Investment in the Russian Federation».
2 Item 6 of Article 4 of the named Federal law.
However, the legislation contains certain limits for application of the stabilization clause. This guarantee applies only to:
1) A commercial organization with foreign investments if the foreign investment share in the charter capital exceed 25%;
2) A commercial organization with foreign investments that implements a priority investment project. Priority investment projects are those whose cumulative volume amounts to not less than 1 bln rubles or the minimal share of foreign investors in which amounts to not less than 100 mln rubles and which are listed by the RF Government.
Also, this guarantee does not apply in certain spheres, including VAT on goods produced in Russia, excise duties and payments to the RF Pension Fund.
3. Guarantee for securing due settlement of an investment dispute.
4. Guarantee of use within and transfer outside of income, profit and other legally received amounts.
This guarantee includes the right of unrestricted use of income and profit received as a result of investment activity in Russia for reinvestment or transfer outside the territory of Russia (after payment of respective taxes), including
1) income in the form of profit, dividends, interest and other compensation;
2) amounts of money received as a result of liquidation of a commercial organization with foreign investment or a foreign company branch office, also with regard to disposal of invested assets;
3) compensation for requisition or nationalization.
5. Guarantee entitling a foreign investor to possess land parcels, natural resources, facilities and other immovable property. There are certain restrictions established for foreigners in the sphere of land use which will be considered later on.
6. Guarantee of compensation in the case of nationalization or requisition of property of a foreign investor or commercial organization with foreign investments.
In the case of requisition a foreign investor or commercial organization with foreign investment is entitled to receive a respective compensation in the amount of the value of the confiscated assets. After the circumstances that caused requisition cease the foreign investor or commercial organization with foreign investment may seek in court the return of the confiscated assets, but must pay back the amount of received compensation adjusted for any decrease in the value of the assets.
In the case of nationalization of assets the state must compensate the value of the nationalized assets and related losses.
Limitations on Foreign Investment
General restrictions applicable to Russian investors also apply to foreign investment. For example, foreign investors are obliged to comply with the RF an-timonopoly legislation and not be engaged in unfair competition and restrictive
business practices, the same as Russian investors. Article 18 of the federal law «On Foreign Investment in the Russian Federation», underlines that it is prohibited to create a commercial organization with foreign investment or foreign company branch office for production of goods that are in great demand and then to liquidate it for market promotion of analogous goods of foreign origin.
As regards special limitations, there are a number of spheres of activity that have strategic meaning for Russia and where activity of foreign investors is strictly controlled by the Government. The access of foreign investors to strategic spheres was limited several years ago, even though many of those spheres are of high interest to foreign investors. The list was established by Federal Law No. 57-FZ, «On the Procedure of Making Foreign Investment into a Business Entity Having Strategic Meaning for Maintenance of National Defense and State Security», dated April 29, 2008. It includes the following types of activity:
1) Performance of work relating to active influence on hydrometeorological and geophysical processes and phenomena;
2) Design and production of equipment for nuclear facilities and nuclear waste repositories;
3) Development, production, repair, disposal, and trade of weapons and military equipment;
4) Spaceactivity;
5) Television broadcasting and radio broadcasting in territory where more than half of the population of an RF territorial subdivision lives;
6) Harvesting of aquatic biological resources;
7) Geological study of the subsurface area and exploration and production of mineral resources1.
Agreements that lead to control by a foreign investor or group of persons over business entities that have strategic meaning is subject to prior approval of authorized state bodies. A business entity that has strategic meaning is a business entity that is incorporated under the laws of the RF and conducts at least one of the types of activity that have strategic meaning for the state. Approvals for a defined term are formalized by the RF Federal Antimonopoly Service (FAS) upon consultation with the Governmental Commission for Control over Foreign Investment in the Russian Federation and the Ministry of Defense and Federal Security Service of the RF. Before amendments that entered into force in December 2011 control of a foreign investor could own not more than 10% of the total votes corresponding to shares (stocks) in the charter capital of such strategic business entities. However, in December 2011 the requirements became less strict for foreign investors: the rate changed from 10% to 25%.
1 Article 6 of the RF Federal law «On the Procedure of Making Foreign Investment into a Business Entity Having Strategic Meaning for Maintenance of National Defense and State Security».
Also as a result of the amendments that came into force in December 2011 the requirements and procedures for obtaining the approval of the FAS became less strict. For example, the rules on receiving approval under the federal law On the Procedure of Making Foreign Investment into a Business Entity Having Strategic Meaning for Maintenance of National Defense and State Security" do not apply to international financial organizations which were established with Russian participation or with which Russia has concluded international agreements, such as the International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, and Multilateral Investment Guarantee Agency, among others.
Special rules apply to the exploration and production of mineral resources. A good example is local content requirements in mineral resource exploration and production, under which a foreign investor has to use a certain volume of local resources in the course of its activities. Thus, both Sakhalin Energy Investment Company (SEIC) and Exxon Neftegas Limited (ENL) are obligated under their production sharing agreements (PSAs) with the Russian Government to use at least 70% Russian materials and services (Russian content) in the construction and operation of their projects1. In many cases both SEIC and ENL are requiring contractors to meet the Russian content requirement as a condition for qualifying to bid on projects.
Currently there is no requirement to disclose to Russian authorities the ultimate beneficial ownership of shareholders in foreign companies that invest in Russia. But concerns over taxation, currency regulation, money laundering and anti-corruption enforcement are increasing the likelihood that legislation requiring disclosure will be enacted.
II. REPATRIATION OF DIVIDENDS
The payment of dividends by a Russian company to a foreign shareholder is subject to tax on the amount of the dividend. The Russian company is required to act as withholding agent to calculate, deduct from the dividend, and pay the tax to Russian authorities. Pursuant the RF Tax Code, the general rate of tax on dividends is 15%.
Russian tax legislation allows lower dividend tax rates to be applied pursuant to double taxation treaties to which the RF is a party. The RF has concluded such treaties with a number of countries. The rates and conditions vary from treaty to treaty. The treaty between the RF and the Republic of Cyprus allows either a 5% or a 10% tax rate to be applied depending on the amount invested by shareholders who are legal entities registered under the laws of Cyprus in the
1 There are slight differences in the definition of Russian content in the two PSAs; however, the differences are notmaterial as far as the obligations of contractors to meet Russian content requirements are concerned.
charter capital of the Russian company paying dividends (5% if the investment is less than 100,000 euros and 10% if greater1).
In order to enjoy the lower rate the foreign investor (foreign legal entity or individual) that receives dividends from a Russian company must provide the Russian company with confirmation that the foreign investor is permanently located in the state that has the treaty with Russia. This confirmation must be certified by an authorized body of the respective foreign state and legalized or apostilled. A notarized translation into Russian should be performed as well.
Where a foreign company has established a branch office in Russia, transfer of funds by the branch to the parent company is not considered to be payment of dividends and is exempt from the tax on dividends. However, the branch is subject to payment of profit tax in Russia (the general rate is 20%) after payment of which the branch office may repatriate profit to the parent company.
III. MIGRATION RULES General rules
Russia is on the second place worldwide in number of immigrants. Under such conditions it is obvious that immigration is considered a key issue demanding special attention from state authorities and thorough legal regulation.
During the last few years the migration legislation of the RF has undergone substantial changes. The concept of highly qualified foreign specialists was introduced and the rules for immigration registration of foreign citizens were overhauled.
However, despite all the measures taken by the government many major migration problems still remain unsolved. One example is the procedure of quota assignment for foreign labor, which has not yet been appropriately regulated.
Major regulatory acts in the sphere of migration are Federal Law No. 114-FZ, «On the Procedure for Entry to the Russian Federation and Departure from the Russian Federation», dated August 15, 1996; Federal Law No. 115-FZ, «On the Legal Status of Foreign Citizens in the Russian Federation», dated July 25, 2002; Federal Law No. 109-FZ, «On Migration Registration of Foreign Citizens and Stateless Persons in the Russian Federation», dated July 18, 2006; and other regulatory acts adopted in pursuance of the said federal laws.
Among the most important migration regulations applied in the RF are the following:
2
• visa entry of foreign citizens and stateless persons to the territory of the RF ;
1 Item 2 of Article 10 of the Double Taxation Treaty between the Russian Federation and the Republic of Cyprus dated December 5, 1998.
2 This regulation is of general character, though there are some exceptions; e.g., citizens of other CIS countries can enter the RF visa-free on the basis of personal identification documents recognized as such in the RF.
• migration registration of foreign citizens and stateless persons;
• the administrative procedure for employment of foreign labor;
• the administrative procedure for labor activity.
Types of visas and entry requirements
Depending on the rules regulating the procedure of entry to the RF all foreign citizens can be conventionally divided into two categories: «visa», i.e., those required a visa to enter the RF, and «visa-free», i.e., those not required a visa to enter the RF (a visa-free system is currently in force for citizens of Moldova, Ukraine, Belarus, Kazakhstan, Tajikistan, Kyrgyzstan, Azerbaijan, Uzbekistan, and Armenia).
In compliance with the general regulations foreign citizens and stateless persons can enter and leave the RF subject to presentation of a visa on the basis of valid personal identification documents recognized as such in the RF unless otherwise provided by federal law, international treaties of the RF or decrees of the president of the RF.
An invitation issued by an authorized federal executive body or its territorial divisions is most frequently used as the ground for issuing a visa for a foreign citizen1. An invitation to enter the RF can be issued on application of:
• federal government authorities;
• local government authorities;
• diplomatic representations and consular institutions of foreign states in the RF;
• international organizations and their representative offices in the RF;
• representative offices of foreign states under international organizations located in the RF;
• Russian legal entities;
• citizens of the RF and foreign citizens permanently residing in the RF;
• branch offices of foreign legal entities ;
• foreign citizens who are highly qualified specialists .
Depending on the purpose of entry to and stay in the RF several types of visas are distinguished: diplomatic, service, ordinary, transit and temporary resi-
1 However, a bilateral agreement between Russia and a foreign country may waive an invitation requirement. For example, a recent agreement between Russia and the U.S., which took force as of September 9, 2012, provides that Russian and U.S. citizens visiting U.S. and Russian respectively for business and tourist purposes do not generally require a visa invitation.
2 It should be noted that branch offices of foreign legal entities can apply for invitations only in cases where foreign citizens are invited for labour activities within the territory of the RF.
3 Foreign citizens who are highly qualified specialists have the right to apply for invitations for their family members (Article 25 of Federal Law No. 114-FZ, «On the Procedure for Entry to the Russian Federation and Departure from the Russian Federation», dated August 15, 1996).
dence. Ordinary visas are divided into private (guest, visitor's, or homestay), business, tourist, student, work, and humanitarian and refugee visas.
Visas can be single entry (granting a foreign citizen a right to cross the state border of the RF once upon entry and once upon departure), double entry (granting a foreign citizen the right to enter the RF twice) and multi-entry (for multiple entries).
Transit visas in cases established by the law can be granted to a foreign citizen for a period not exceeding ten days for the purpose of travel within the RF in transit.
Russian authorities may prohibit foreign citizens from entering the territory of the country. Grounds for such prohibitions can be maintenance of national security of the RF, breach of the regulations for execution of documents necessary for visa granting (use of forged documents or false representation regarding personal data or the purpose of stay in the RF), or breach of Russian legislation by foreign citizens during their visits to the RF (an outstanding or unexpunged conviction, commission of an administrative offense, failure to pay a tax or fine), as well as some others.
Employment and work permits
The Russian Labor Code expressly provides that its terms apply to labor issues involving foreign persons and foreign legal entities. The labor relationship of a non-Russian citizen employed by a foreign company to provide services in Russia will be governed by the Russian Labor Code. The key to the applicability of the Code is the place of employment. If the employee is rendering services in Russia, the Code is applicable. Other provisions of the Code make unenforceable any employment agreement provisions that contradict obligatory provisions established by the Code, including any agreement that attempts to make the law of another jurisdiction applicable to the employment relationship. Companies who use foreign employees for services in Russia must understand that their expatriot employees, even though hired under contracts governed by the law of their home jurisdiction, are entitled to all the pro-employee benefits provided by the Russian Labor Code.
For labor activity within the territory of the RF foreign citizens as well as their employers are obliged to perform a number of actions provided by the legislation. These requirements differ depending on the category of foreign citizens in each case (visa or visa-free).
Among the general requirements applicable to both categories of foreign citizens are:
- the necessity to obtain individual work permits for labor activity of foreign employees within the territory of the RF;
- the necessity to inform authorized state institutions on the employment of foreign citizens;
- the necessity for the foreign citizen to perform labor activity only in the territorial subject(s) of the RF indicated in the individual work permit unless otherwise provided by the law.
The procedure for employment of foreign citizens from countries of the visa system is more complicated and consists of several stages.
The framework for employment of visa foreign citizens is the system of quota assignment. Under this system employers must inform regional government authorities of the need for foreign labor to fill vacant positions within a specified time period. The regional government officials determine the need for foreign labor at local levels and send their requests to federal authorities, who take the final decision on the distribution of quotas for individual work permits and associated invitations to enter the RF.
As an alternative to the procedure of quota assignment employers can use the annually approved list of professions (positions) of foreign citizens to which quotas are not applicable. However, this list contains a rather small number of professions and therefore is unlikely to solve all employer problems in this area.
Once having received their quota assignments, employers are in a position to obtain a permit to recruit and employ foreign labor. For this purpose the employer must submit a set of required documents to the territorial subdivision of the Russian Federal Migration Service. After obtaining the permit to recruit and employ foreign labor the employer must obtain individual work permits for each foreign employee. The final step is to organize their entry to the RF by obtaining official invitations that will be used by the foreign employees to apply for a work visa.
The procedure for employment of visa-free foreign citizens is less complicated.
Visa-free foreign citizens do not require an employer to obtain a permit to recruit and employ foreign labor.
In order to obtain individual work permits, visa-free foreign citizens may themselves apply directly to the territorial subdivision of the Russian Federal Migration Service.
Highly qualified specialists
One of the recent important changes in the migration legislation was the introduction of the concept of highly qualified specialists (HQSs). HQS is a foreign citizen having job experience, skills or achievements in a certain professional sphere and at a level of remuneration of at least 2 000 000 rubles (approximately $65,000) a year.
As compared to the general procedures the main advantages of HQS employment are:
• the quota for invitations to enter the RF to perform labor activity and the quota for work permits are not applicable to HQSs and their family members;
• employers evaluate the competence and qualification of foreign citizens they wish to employ as HQSs on their own (there is no separate official review);
• it is not necessary to obtain a federal permit for recruiting and employment of foreign employees;
• a work permit for an HQS can be issued for a period of up to three years (an ordinary work permit is issued for a maximum period of one year);
• HQSs can obtain permanent residence permits for themselves and family members according to a simplified procedure;
• the personal income tax rate for HQSs is 13% from the very beginning of their labor activity (for foreign employees not having the status of HQSs, the rate depends on the number of days in a year spent in the RF: if less than 183, the rate is 30%, and if more than 183, 13%).
IV. COMPANIES AND CORPORATE GOVERNANCE
Forms of doing business
There are two major types of entrepreneurial activities possible in the RF: an individual entrepreneurial business, when a physical person acts as an entrepreneur, and business activity through formation of a legal entity. There are several types of commercial legal entities in Russia, but the most frequently encountered are the limited liability company and the joint stock company. The RF Civil Code also provides for other commercial entities, such as full partnerships, trust partnerships and companies with additional liability, but these are rarely encountered in practice. With regard to foreign investment in Russian commercial activities, in addition to incorporating a resident company, it is also possible to do business in Russia by opening a branch office of a foreign legal entity.
Limited liability company
This type of legal entity is the most popular in Russia due to the simplified procedure for its incorporation compared to incorporation of a joint stock company. Limited liability companies do not issue share certificates; division of the charter capital into shares is registered only in the Unified State Register of Legal Entities, maintained by the Federal Tax Service of Russia.
In Russia, shareholders of a limited liability company are called participants. A participant's liability for obligations of the company is limited by the amount of his share. The participants in a limited liability company are visible to any third person, as up-to-date information on them is contained in the Unified State Register of Legal Entities.
Limited liability companies may have up to 50 participants, whether natural or legal persons. Also, a limited liability company may not have as its sole participant another legal entity that itself has only one participant or shareholder.
A charter of a limited liability company may contain a prohibition for participants to sell their shares to third parties. This mechanism is designed to protect the legal entity from unfriendly acquisition.
The minimum charter capital of a limited liability company is 10,000 rubles (approximately 200 GBP). If the amount of net assets of the company by the end of a fiscal year falls below this amount, the company should be liquidated.
Joint stock company
This type of legal entity is used for the purposes of running a medium-sized to large business. There are both closed joint stock companies and open joint stock companies in Russia. The number of shareholders in a closed joint stock company may not exceed 50, but for open joint stock companies the number of shareholders is unlimited. Closed joint stock companies are not allowed to distribute their shares to third parties; the shares may be distributed only among a defined group of persons or entities. Open joint stock companies may sell shares to anyone.
Joint stock companies issue share certificates and the emission of shares is subject to state registration. The state body authorized to register shares is the Federal Financial Markets Service.
A joint stock company is required to maintain a registry of shareholders. A company having 50 or fewer shareholders may maintain the registry itself; however, if the number of shareholders is above 50, the registry must be maintained by a professional registrar. The registry of shareholders is not a public document, so the names of shareholders of a joint stock company are not visible to third parties.
An open joint stock company has an obligation to publicly disclose some of its information, such as its annual report, annual accounting report, and prospectus, as well as to publish notice of the upcoming general meetings of shareholders.
The minimum charter capital of a closed joint stock company is also 10,000 rubles (approximately 200 GBP), and that of an open joint stock company, 100,000 rubles (approximately 2,000 GBP).
Branch office of a foreign company
A branch office in Russia is a specific form of separate subdivision of a legal entity which is entitled to perform all of the functions of a legal entity, including actual performance of entrepreneurial activity1. A branch office of a foreign company is subject to a procedure of accreditation, performed by the State Registration Chamber in Moscow. In addition to being accredited, the branch office must be registered at the place of its location by the local tax department and the
1 This defines the difference between a branch office and a representative office. A representative office is not allowed to perform entrepreneurial activity and its functions are limited to representation of a legal entity.
state funds, including the Social Insurance, Medical Insurance and Pension Funds. Business activity of the foreign company performed through its branch office in Russia is, as a rule, subject to taxation in Russia.
Incorporation of an entity
Incorporation of a legal entity in Russia is a relatively simple process.
The procedures for incorporating limited liability companies and joint stock companies are similar; the chief difference is the requirement for joint stock companies to register the issuance of share certificates, which does not apply to limited liability companies. The state body responsible for registering individual entrepreneurs, limited liability companies and joint stock companies is the RF Federal Tax Service, with incorporation taking place at the local Federal Tax Service office at the place where the company is located. The Unified State Register of Legal Entities is a public record and all registered information is open for examination by third parties, except for passport data of physical persons and information on the bank accounts of a legal entity or an individual entrepreneur. Information is provided upon written request and payment of a state fee of 200 rubles, or 400 for an expedited response (approximately 4-8 GBP). A company's registered office is generally the place where the main executive body is located.
The first step in registering a company is adoption of a joint resolution by the founders, which is executed in the form of minutes of the founding meeting (or a decision of the sole founder, where the company has only one founder). The founders also draft a charter (bylaws) and execute a foundation agreement (if there are several founders). The foundation agreement is not a founding document; it is simply considered to be an internal document of the company, which should be kept in the company's files.
The founders are free to choose any company name they desire, but use of the words 'Russia' and 'Russian Federation' and derivative phrases is restricted. This requirement is established by a newly adopted Part IV of the Russian Civil Code and came into legal force in 2008. According to this new requirement the use of the word 'Russia' and derivatives may be allowed only by individual permission of the Government and if more than 75% of equity of the company is owned by the federal government.
According to current legislation no declaration of foreign investment is required where the company is established by foreign founders. However, in some cases involving "strategic" industries preliminary approvals will be required. Also, where the company has a foreign founder, no foreign tax number or special tax registration is required under the general registration procedures.
At least 50% of the charter capital of a limited liability company or a joint stock company must be paid by shareholders or participants prior to registration. Charter capital can be formed either by money or by property (in kind contributions). Where the amount of charter capital formed by property exceeds 20,000
rubles (approximately 400 GBP), the property must be appraised by a professional appraiser.
Foreign citizens may occupy administrative positions in a company without limitation, but they must hold a work permit or other document that entitles them to work in Russia. The company must also obtain separate permission to employ foreigners in such a case.
Shareholders Agreements
In Russia, conclusion of Shareholders Agreements between shareholders of a Joint Stock Company or participants of a Limited Liability Company, is not a very widespread practice, though it is still often encountered in practice, especially, among the companies with foreign investment, where shareholders are fully or partially represented by foreign legal entities.
Russian legislation does not prohibit the use of Shareholders Agreements, unless the terms of the agreement contradict imperative provision of Russian company laws and provisions of the company charter. In certain cases, the law expressly allows using such agreements.
For example, article 32.1. of the RF Law «On Joint Stock Companies» provides that the shareholders of a Joint Stock Company may conclude an agreement which would determine the order for execution of their shareholders' rights, e.g., voting in a certain way at the meeting of shareholders, agreeing in advance with other shareholders as to voting, refraining from sale of the shares in certain circumstances. The list of situations which may be regulated by a shareholders agreement is not limited, so the parties are free to agree on various subjects, unless they contradict the imperative provisions of Russian company laws.
Similarly, article 9 of the RF Law «On Limited Liability Companies» allows the participants of a Limited Liability Company to conclude an agreement for execution of rights of participants of the company. It may be concluded in the same cases as a shareholders agreement of the shareholders of a Joint Stock Company.
V. TRADE AND COMMERCE
Conclusion of a foreign trade contract
An international trade contract between Russian and non-Russian parties requires close attention to the Russian requirements regarding the form of the contract. Failure to comply with those requirements can affect not only performance of the terms but possibly also the validity of the transaction.
This is in contrast to current international legislation that does not establish mandatory requirements on the form of foreign trade transactions. In accordance with Article 11 of the UN Convention on Contracts for the International Sale of Goods (CISG), dated 1980, a contract of sale and purchase is not required to be
executed in writing or in compliance with any other requirements concerning its form. It can be evidenced by any means, including witness statements.
However, Russian legislation is committed to another approach. Consequently, the CISG contains a reservation that Article 11 is not applicable in Russia. The general procedure established by Item 1 Article 161 of the RCC, requires that transactions of legal entities between themselves and individuals are to be made in written form.
Russian legislation contains a special regulation with regard to foreign trade transactions. Item 2 Article 1209 of the RCC establishes that the form of a foreign trade transaction in which at least one party is a Russian legal entity shall be governed by Russian law, irrespective of the place where the transaction was concluded. This rule is applicable also in cases where at least one of the parties to such a transaction is a natural person pursuing entrepreneurial activities whose personal law is Russian law.
Under Russian law a foreign trade transaction can be closed in several ways:
• by compiling a single document signed by the persons who are effecting the transaction or by persons duly authorized by them to do so1;
• through the exchange of documents by mail, telegraph, teletype, or telephone or by electronic or any other means of communication which makes it possible to establish with certainty that a document comes from a party to the contract2;
• through performance by a person who has received an offer of actions required to comply with the terms of the contract indicated in the offer, for example bythe dispatch of commodities, the rendering of services, the performance of work, or the payment of a corresponding amount of money .
Choice of law
Russian civil legislation allows the parties to choose the law which shall be applicable to their rights and liabilities both for the entire contract and for its parts. This choice can be made either upon execution of the contract or later. A selection of applicable law made by parties after the conclusion of a contract has retroactive effect and it shall be deemed valid, without prejudice for the rights of third parties, beginning from the time when the contract was concluded4.
Item 2 Article 1210 of the RCC establishes that the agreement of parties as to the selection of applicable law shall be expressly stated or shall clearly arise from the terms and conditions of the contract or from the circumstances of the case.
1 Item 1 Article 160 of the RCC.
2 Item 2 Article 434 of the RCC.
3 Item 3 Article 434 of the RCC, Item 3 Article 438 of the RCC.
4 Item 3 Article 1210 of the RCC.
If there is no agreement as to the selection of the applicable law the contract is regulated by the law of the country with which the contract is most directly connected. This means the law of the country where the party responsible for the major part of the contract performance (e.g., the seller in a contract of sale and purchase, lessor in a lease contract, or agent in a contract of agency) has its residence or main place of operation.
VI. ANTITRUST AND PROTECTION OF COMPETITION
In the RF there are a number of laws and subordinate acts regulating protection of competition and antitrust issues, the major such federal law being «On Protection of Competition», adopted in 2006. In addition to this law, antitrust regulations are also established in laws regulating specific spheres, such as banking activity, government contracts, trade activity and others. Liability for infringement of antitrust rules is established by the RF Code on Administrative Offenses and the Criminal Code. The major controlling authority in the sphere of antitrust and protection of competition is the Federal Antimonopoly Service (FAS).
General Rules
The RF federal law «On Protection of Competition» establishes general rules for prevention of creation of monopolies and unfair competition, as well as establishment of conditions of unfair competition by state or municipal authorities in Russia.
The law prohibits excessive use of a dominant position by any business unit which has such a position. A dominant position is defined by this law as a market situation in which one business unit (or a group of such units) can influence the market rules, including by preventing entry of other entities to the market. The legal criterion for determining that the market position of a business unit is dominant is the market share of the unit. When the market share exceeds 50%, then the position is considered dominant. However, this is not always the case because in some situations the state controlling authorities may determine that even though the market share of an entity exceeds 50%, it cannot substantially influence the market competition. Vice versa, a business entity having a market share less than 50% may be still considered as having a dominant position because of certain peculiarities of a certain market.
Excessive use of the dominant position by a business unit may have the form of
• establishment of a monopolistically high or low price of goods;
• withdrawal of goods from circulation if in such a case the market price of such goods rises;
• touting of disadvantageous contract rules to customers;
• economically unreasonable reduction or termination of production of goods which are in demand;
• economically unreasonable refusal to conclude contracts with customers;
• establishment of unreasonably different prices or tariffs on the same types of goods;
• establishment of unreasonably high or low prices for financial services by financial organizations;
• creation of discriminative conditions;
• creation of obstacles to other participants of trade markets;
• violation of price formation rules if such rules are established by laws;
• manipulation of prices in the sphere of sale of electric power.
The law also prohibits agreements between business units, as well as performance of some joint actions by such business units, that create limitations for fair competition, in particular, if such agreements lead to
• establishment or maintenance of certain level of prices or tariffs;
• increase or decrease in prices at auctions;
• division of a market by territory, assortment or otherwise;
• reduction or termination of production of goods;
• refusal to conclude agreements with certain customers.
The above agreements and joint actions of market players may, however, be allowed, in two cases: where such agreements or actions lead to an improvement in production of goods or increase in marketability of goods manufactured in Russia, and where customers shall obtain benefits in the case of such agreements or actions which would be comparable to the benefits which the market players shall obtain.
An important objective of the FAS is state control of economic concentration. Creation and mergers and acquisitions of business entities matching certain criteria, as well as certain transactions between business entities, are subject to either approval by or notification of the FAS.
FAS has the right to review and consider notices of infringement of protection of competition laws, which may be submitted by any entity, individual or other state authority. If the received information contains features of a violation of protection of competition laws FAS may initiate an administrative proceeding. In the course of such a proceeding FAS has a right to perform inspections and issue obligatory orders on termination of the relevant violation. Such orders may be appealed in court. Liability for infringement of antitrust and protection of competition laws is established by the Code on Administrative Offenses and the Criminal Code.
Administrative offenses in this sphere include:
• limitation of competition by state or municipal authorities;
• excessive use of a dominant position within a certain market by a business entity;
• conclusion of agreements limiting competition;
• unfair competition.
RF Criminal Code imposes criminal liability for limitation of competition in a case where it leads to substantial or very substantial damages to the state, business entities or individuals. Substantial damages are damages exceeding one mln rubles (approximately GBP 20,000) and very substantial damages exceed three mln rubles (approximately GBP 60,000). The highest sanction for this criminal offense which may be imposed on an individual is seven years of imprisonment.
VII. LICENSABLE ACTIVITIES
General overview
Licensing of certain types of activities in Russia related to protection of information, machinery and military industry, operation of dangerous industrial objects, fire protection, pharmaceutical and medical activity, transportation and other specified areas is regulated by RF Federal Law No. 99-FZ, «On Licensing of Separate Types of Activities», dated May 4, 2011; however, this is not the only law applicable to licensing of various activities. There are also separate laws and regulations which govern in more detail the licensing of use of atomic energy, turnover of ethyl spirit and alcohol products, protection of state secrets, credit organizations, stock exchange trading and some other activities.
In Russia each type of licensable activity requires a separate license. A license is valid throughout the entire territory of the RF. There are some exceptions, and the use of a license in a region other than the one in which it was granted requires notification to the licensing authority of this other region. A license is granted for an indefinite term.
Licensing in Russia is performed by designated state authorities depending on the type of activity being licensed. The RF Tax Code also establishes state fees for issuing licenses1.
Licenses are issued in compliance with licensing requirements which may include
• Technical requirements, such as presence of necessary buildings, premises, facilities, equipment, etc.;
• Staff requirements, i.e. presence of employees with sufficient qualification for performance of the type of activity being licensed;
• Presence of an adequate system of industrial control;
• Compliance with formal requirements, such as having a suitable form of legal entity, sufficient charter capital and an absence of debts to third parties which may influence the performance of the type of activity being licensed.
Licensing terms may also include a requirement to generally observe all legislation related to a licensed sphere of activity.
1 The state fees vary in a wide range: from 2,600 rubles (approx. GBP 50) for most licenses up to
6 mln rubles (approx. GBP 120,000) for production of ethyl alcohol and alcohol products.
General procedure for obtaining a license
To obtain a license for a certain type of activity, a potential candidate should apply to the relevant authority. An application should also include supporting documents, the list of which is specifically designated for each type of license. These documents should demonstrate that the applicant is in compliance with the licensing requirements.
The legal term for review of the application documents is 45 working days. Granting of a license may be refused if false documents or information are provided by the applicant or if the applicant does not comply with licensing requirements.
Upon granting a license, the licensing authority establishes a licensing file for the licensee and supervises the activity of the licensee. The activity of the licensee may be checked after one year from the date of granting of the license. After that a review of the licensee may be performed every three years. There can also be extraordinary checks, performed by state authorities in cases where information is received from third persons that the licensee is violating the licensing requirements.
A license may be suspended in a case where administrative liability is imposed on the licensee due to its violation of the licensing requirements or legislation. A license may also be terminated by court decision or if the licensee itself notifies the state authority on termination of performance of licensable activity.
Other forms of control
In addition to licensing, there are also other forms of state control of various entrepreneurial or industrial activities in Russia. One of the most important forms is control through membership of companies in a self-regulating organization (SRO).
SRO is a non-commercial organization which unites commercial organizations by the type of activity they are performing. This non-commercial organization performs control of the activity of its members in the same way that a licensing authority performs control of the activity of licensees.
The spheres of activity where membership in an SRO is required in Russia are the following:
• Capital construction, construction planning and engineering research;
• Professional participation in the securities markets;
• Professional evaluation services;
• Professional audit services;
• Bankruptcy manager services;
• Energy audit;
• Bill collection services;
• Activity of management companies.
To become a member of SRO, a candidate must apply to this organization. The application should include documents confirming the abilities of the candidate to perform the required type of activities and its compliance with legal requirements established for companies performing such type of activities. Each SRO also has a membership fee.
A member of SRO may start performing controlled activity only upon receiving admission to such activities, which is issued by the SRO upon successful review of its application.
SRO is in charge of supervision and control of the activity of its members. According to the law, regular checks are to be done not less than once in three years, but not more often than once a year. A member may be expelled from the organization for noncompliance with the established requirements.
In addition to licensing and membership in SRO, performance of certain activities in Russia must also be secured by liability insurance.
VIII. REAL ESTATE
Obtaining ownership rights
There are certain restrictions related to ownership of land in Russia by foreigners.
Foreign individuals and legal entities are not allowed to own land located in frontier territories of the Russian Federation. On January 9, 2011, a list of frontier areas in which foreign individuals and legal entities may not purchase or own land was established by a presidential order1. Such territories include administrative units within certain regions which are connected to national borders (either terrestrial or maritime).
Another restriction for ownership by foreigners is that land within the borders of seaports may not be owned by a foreign individual or legal entity (Article 28 of the Law on Seaports).
A third restriction relates to agricultural land. Foreign individuals, foreign legal entities, and Russian legal entities with more than 50% foreign ownership may not own agricultural land in Russia.
Registration of rights
Transactions involving real estate as well as rights to real estate are subject to state registration in Russia and are enforceable only after registration in the regional body of the Federal Service for State Registration, Cadastre and Cartography of the Russian Federation (Rosreestr) which is the state body authorized to register the rights to real estate.
1 Order of the President of the Russian Federation «On Establishment of a List of Frontier Territories within Which Foreign Citizens, Stateless Persons and Foreign Legal Entities May Not Exercise Property Rights to Land Parcels» dated January 9, 2011, no. 26.
The statutory period for registration of rights to real estate is one month (30 calendar days)1. The registration of rights can be suspended for a period of no more than 30 calendar days if not all or incorrect documents are provided for registration. If the defects are not eliminated within this period, the registration authority will issue a refusal of registration and the parties will have to apply again.
IX. TAXATION
Types of taxes and tax rates
The major document regulating the principles and procedures of taxation in Russia is the RF Tax Code. In addition, Russian tax legislation also includes a large number of resolutions of the Government and acts adopted by the Federal Tax Service.
All taxes in Russia are divided into federal, regional and local taxes. The division is made on the basis of determination of to which budget the tax should be paid. Federal taxes are paid to the federal budget, while regional taxes are paid to the regional budget and local taxes to the budget of the municipality.
Federal taxes: VAT, excise tax, personal income tax, company income tax, mineral resources extraction tax, water tax, payment for use of wildlife objects and other biological resources
State fees
Various state fees established in Russia are listed in article 333.33 of the RF Tax Code. Such fees include various registration fees, from fees for registration of a legal entity to fees for registration of ownership rights to real estate.
Regional taxes: company property tax, gambling business tax, transport tax.
Local taxes: land tax, private property tax.
Avoidance of double taxation
RF Tax Code regulates the procedure for avoidance of double taxation. The general rule is that taxes paid by a tax resident of the RF abroad for income received outside the RF shall not be taken into account when such income is taxed in the RF. At the same time, a double taxation treaty concluded between Russia and the relevant country may provide otherwise.
In order to be exempted from payment of tax in Russia in accordance with a double taxation treaty, a taxpayer should provide tax authorities with an official confirmation that he or she is a tax resident of a country with which the RF has a
1 Registration of some specific rights is performed in shorter terms. For example, registration of mortgage of residential premises is performed within five working days.
double taxation treaty and that the tax was paid outside Russia. Currently Russia has double taxation treaties with over 70 countries.
X. LITIGATION AND DISPUTE RESOLUTION
Regrettably there is significant distrust of the fairness and evenhandedness of Russian courts among both foreigners and Russian citizens. As a result, many contracts involving agreements between Russian and non-Russian parties call for arbitration of disputes outside of Russia. The Russian Federation adheres to the New York Convention on the Enforcement of Arbitral Awards, however, the record in Russia for enforcement of foreign arbitral awards without independent reexamination by Russian courts is spotty at best. Court judgments, as distinguished from arbitral awards, are only enforceable where the issuing country and Russia are signatories to treaties providing for enforcement of court judgments, or where it can be proven to the satisfaction of the Russian court considering the request for enforcement that reciprocal enforcement is available for Russian court judgments in the country where the judgment was granted.
In addition to enforceability questions the process of obtaining a foreign arbitral award and then requesting enforcement in Russia is likely to be both more time consuming and less effective than seeking redress for grievances directly from a Russian Arbitrazh Court. The Arbitrazh Court system in Russia should not be confused with private arbitration. The Arbitrazh Courts grew out of the Soviet system for resolution of disputes between State enterprises, and these Courts today have jurisdiction over most commercial disputes between juridical persons. One of the distinctive features of the Arbitrazh Court system is the availability of pre-trial injunctive relief which can often spell the difference between immediately stopping a partner's violation of shareholder rights and waiting for the enforcement of a final foreign arbitration award.
Lessons Learned
• It is possible to do business profitably and legally in Russia.
• Russia has now filled in most of the legislative gaps, and the rights and obligations of parties can usually be accurately determined.
• The main obstacle to an effective legal system is now the lack of proper and speedy implementation by government offices and the judicial system.
• Bureaucratic formalities remain an impediment to speedy business implementation, and the authorities require strict compliance to requirements that often appear counter intuitive and of minor importance to foreign executives.
