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How to do business in Russia

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Establishing a local Russian presence

The main options for establishing a local Russian presence include setting up a branch or a representative office, incorporating a new company or acquiring a stake in an existing company in Russia. This section, which was prepared by Linklaters, highlights some of the key legal issues which may be relevant in this context. For more information visit: www.linklaters.com.

Setting up a Russian subsidiary/branch 

The choice between setting up a Russian incorporated subsidiary or a branch (representative office) will depend on a number of considerations, including management, liability, tax, currency control issues, etc.

In summary, both branches and representative offices are relatively simple and easy structures to establish, and are subject to less formality and regulation than a Russian corporate entity. However, the founder company will be fully liable for the activities of a branch or a representative office, whereas if it chooses to establish a Russian subsidiary, its liability will generally be limited to its contribution to share capital. Moreover, some activities which require licensing in Russia, or the importation of certain products/equipment into Russia, may only be carried out through a Russian incorporated entity.

The most commonly used legal entities both for a wholly owned subsidiary and for a Russian onshore joint venture are a limited liability company (LLC) and a joint stock company (JSC), and the latter may be either public or non-public. The regulation of non-public JSCs and LLCs is quite similar in that both enjoy substantial flexibility in relation to corporate governance. A public joint stock company is, on the contrary, very heavily regulated.

For more detailed guidance on the appropriate vehicle for establishing a commercial presence in Russia, please click here.

Acquisition of a stake in an existing Russian company (M&A/JVs)

  • Foreign ownership restrictions. Foreign investors should be aware of the existence of specific foreign ownership restrictions in certain areas such as natural resources, banking, insurance, mass media, fishing, agriculture and some other industries where restrictions on participation in equity capital by foreign legal entities or individuals and/or restrictions on participation in the management of Russian legal entities are imposed.

  • Statutory consents. The direct or indirect acquisition of an existing Russian company will often be subject to a number of statutory consents:

    • Subject to certain financial thresholds, the transaction may require Russian merger control clearance, which is in most cases suspensory (for more detail click here).

    • Certain regulatory consents may be required depending on the sector in which the target is active.

    • Russian strategic investment legislation requires a prior approval from a Governmental Commission presided by the Prime Minister of the Russian Federation for the acquisition by a foreign investor of stakes in a Russian “strategic entity”. The concept of what is considered “strategic” is very broad and catches a wide range of sectors. A further layer of restrictions applies to the acquisition of stakes in entities engaged in activities on the so-called “subsoil areas of federal significance”. Where prior approval is not required, other types of pre-transaction or post-transaction filings may be required.

      A summary of the key Russian strategic investment rules is available here

  • Governing law. Until recently, the vast majority of transactions in relation to the acquisition of Russian shares or assets used to be structured using an offshore JV vehicle and/or governed by English law. However, during the last few years we have been witnessing a substantial shift towards a more frequent use of Russian onshore structures and Russian law in cross-border transactions involving Russian parties or assets.

    One of the key reasons for this is that Russian contract law is undergoing revolutionary reform specifically aimed at making it more flexible and more suitable for use in large international transactions. As a result, most customary contractual protections can now be incorporated into Russian law governed instruments. In particular, Russian law now generally recognises warranties and indemnities, conditions precedent, options and escrow arrangements. Russian corporate law now allows for greater flexibility in terms of corporate governance e.g. in relation to director appointment rights, veto matters, and requisite majorities which are important in establishing the respective rights of joint venture partners.

    In practice, the choice of law is made depending on numerous aspects of a transaction.

  • Dispute resolution. One of the key challenges in structuring Russian M&A and JV deals remains the possibility of submitting disputes to foreign arbitration (e.g. LCIA). The recent Russian arbitration reform has introduced a number of fairly onerous procedural formalities which do not technically prohibit, but may substantially impede, the choice of foreign arbitration for Russian share purchase and shareholders’ agreements.

    For more information regarding the recent Russian arbitration reform click here

[Source – Linklaters]

Legal considerations

Russian legislation gives foreign investors advantages to help provide stability and legal protection for their business in Russia. The legislation has recently been updated. You should check with a legal expert to confirm up-to-date details as these can change at short notice.

You also need to be aware that there are likely to be differences in legal practice adopted by authorities and commercial courts across Russia’s regions, so you should consider taking local advice.

[Source – DIT Russia Trade and Export guide/gov.uk]

Regulatory bodies

The major registering authority for most legal entities operating in Russia is the State Chamber of Registration, a part of the Russian Ministry of Economic Development. Visit: http://economy.gov.ru/en/home/about for further information.

Depending on the type of business activity, you are likely to need a licence issued by an authorised licensing body. Licensing is carried out at both a federal and regional level so you will therefore need to seek approval from both state and relevant local bodies.

You are therefore advised to consult with an import agency or legal professional to gain expert local advice before you export to Russia. A list of potential lawyers in Russia is available at: https://www.gov.uk/government/publications/russia-list-of-lawyers.

For more advice, contact the Department for International Trade in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us.

[Source – DIT/gov.uk]

Import restrictions

The EAEU (Eurasian Economic Union) has a list of all EAEU-prohibited or restricted items and applicable regulations, at: http://www.eurasiancommission.org/en/act/trade/catr/nontariff/Pages/ediny
_perechen.aspx
.

Law on marketing and selling

If you are selling to consumers (rather than businesses) you must comply with Russia’s consumer protection requirements.

Good after-sales service is not common in Russia. However, you should be aware of guidance from the Russian Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor), which has information related to marketing and selling. Visit: http://www.rospotrebnadzor.ru/en/ for further information.

Contact the Department for International Trade (DIT) team in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us for more information and advice on marketing in Russia.

Standards and technical regulations

It is important to check if your product requires any certification before being sold in Russia.

Suppliers and manufacturers have an obligation to make sure products are safe. Products must meet relevant safety standards, have clear instructions for proper use and include warnings against possible misuse.

The quality certification system in the Russian Federation is GOST, which is the equivalent of the ISO 9000 series certificates for Western companies. Visit: http://www.gost-r.info/ for further information.

[Source – DIT Russia Trade and Export guide/gov.uk]

 

Labelling your products

Packaging and labelling requirements for Russia vary significantly for both food and non-food items. You must check the requirements prior to shipment.

Russian Customs require specific product information, for example name, trademark, manufacturer, country of origin and composition. Additional labelling and marking requirements have been harmonised across the Eurasian Economic Union (EAEU). For further information visit: http://www.eaeunion.org/?lang=en.

Where appropriate, the official EAC certification mark should be applied, indicating conformity with the EAEU’s regulations. Certification marks showing adherence to the Russia-Kazakhstan-Belarus Customs Union (CU) on Safety of Packaging of food products should also be applied if required.

Food items

Labels on food items must feature the following information in the Russian/Kazakh/Belarussian language:

  • type and name of the product

  • legal address of the producer

  • weight/volume of the product

  • food contents

  • nutritional value (calories, vitamins if their content is significant or if product is intended for children, for medical, or for dietary use)

  • conditions of storage

  • expiration date (or production date and period of storage)

  • directions for preparation of semi-finished goods or children’s foodstuffs

  • warning information with regard to any restrictions and side effects

  • terms and conditions of use

For additional requirements for food labelling and certification, visit the Global Agricultural Information Network site at: http://gain.fas.usda.gov/Lists/Advanced%20Search/AllItems.aspx.

Non-food items

Labelling of non-food items should include for example, the product name, country of origin and name of manufacturer, usage instructions and rules and conditions for effective and safe use of the product as appropriate.

Contact the Department for International Trade (DIT) team in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us for more detailed information and advice on labelling requirements.

[Source – DIT/gov.uk]

 

Taxation

The Russian Federal Tax Service has responsibility for tax administration. For further information visit: https://www.nalog.ru/eng/1.html.

You should hire qualified finance specialists to ensure you comply with regulations, meeting both International Accounting Standards (IAS) as well as Russian accounting standards.

Double-taxation agreement

The UK and Russia have signed a double taxation agreement, which allows some taxes paid in one country to be deducted in the other. See: www.gov.uk/government/publications/russia-tax-treaties.

Provided you get and keep evidence of your export, and comply with all other laws, you can zero-rate the sale of your goods to Russia. You will need to ensure the goods are exported, and provide evidence within three months from the time of sale.

Value Added Tax (VAT)

VAT is 18%, with a preferential rate of 10% for certain items such as books, food, children’s clothing and medical goods.

Further information on VAT in non-EU markets and zero rating conditions is available at: https://www.gov.uk/guidance/vat-exports-dispatches-and-supplying-goods-abroad.

Income tax

Non-residents are subject to personal income tax on Russian-generated income.

Company and corporate tax

Profits are taxed at a maximum of 20% on net income, and employers pay 30% of total payroll to the Social Insurance Fund, Russian Pension Fund and Medical Insurance Fund.

Special Economic Zones (SEZs)

There are 28 SEZs, which grant certain tax, customs and other concessions to residents. To find out more information about the SEZs, visit the Russian Ministry of Economic Development site at: http://economy.gov.ru/en/home/about.

The DIT teams in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us can help you find tax advisers before entering into agreements in Russia.

More information on GST in non-EU markets can be found at: https://www.gov.uk/guidance/vat-exports-dispatches-and-supplying-goods-abroad.

Excise duty

You will need to pay excise duty on any alcohol, alcoholic drinks, energy products, electricity or tobacco products you send to Russia.

[Source – DIT Russia Trade and Export guide/gov.uk]

 

Customs and documentation

The Russian Federal Customs Service regulates all goods imported into Russia. Visit http://eng.customs.ru/ for further details. You can calculate duty by percentage of customs value of goods imported, or by specific value (charged for one piece of the relevant goods category), or by a combined volume (a combination of the above).

Import customs duties are collected based on the Classification Code and the country of origin of the goods, usually 5%, 10% or 15%. However, some goods are exempt from import customs duties. You should also be aware that the import of certain goods will require a licence.

All issues such as tariffs, tariff rate quotas, technical regulations, licensing and certification are currently being harmonised by the Eurasian Economic Union (EAEU). Visit: http://www.eaeunion.org/?lang=en for the latest details.

You can find out about import tariffs at the EU’s Market Access Database (MADB) has information about import tariffs. See: http://madb.europa.eu/madb/indexPubli.htm and a full list of trade barriers for Russia, visit: http://madb.europa.eu/madb/barriers_result.htm?isSps=false&countries=RU.

[Source – DIT Russia Trade and Export guide/gov.uk]

Complying with HMRC regulations to export

To export your goods to Russia you must make export declarations to HMRC through the National Export System (NES). Visit: https://www.gov.uk/guidance/export-declarations-and-the-national-export-system-export-procedures for further details.

You can find out how to declare your exports to Russia through the NES at: https://www.gov.uk/guidance/export-declarations-and-the-national-export-system-export-procedures. You must classify your goods as part of the declaration, including a Commodity Code and a Customs Procedure Code (CPC).

Commodity Codes and other details applying to exports in the UK Trade Tariff can be found at: https://www.gov.uk/trade-tariff.

Contact the HMRC Tariff Classification Service at: https://www.gov.uk/guidance/finding-commodity-codes-for-imports-or-exports#list-of-useful-contacts for more help.

You must declare any goods that you take with you in your luggage to sell outside the EU. See: https://www.gov.uk/take-goods-sell-abroad for further information.

Temporary export of goods

You can use an ATA (Admission Temporaire/(Temporary Admission) Carnet to simplify the customs procedures needed to temporarily take goods into Russia. Visit: https://www.gov.uk/taking-goods-out-uk-temporarily for further information.

To apply for a temporary export licence, you will need to use the SPIRE system at: https://www.spire.trade.gov.uk/spire/fox/espire/LOGIN/login.

[Source – gov.uk]

Import requirements/documentation

Every item imported into Russia requires a Customs Freight Declaration, supported where appropriate, by additional documents such as contracts, invoices, packing lists, certificates of origin/safety/conformity, permissions and licences etc.

All customs import declarations are submitted electronically via Russia’s Federal Customs Service. Visit: http://eng.customs.ru/ for further information.

To monitor and control movement of goods classified as sensitive by member states and the international community, the EAEU maintains a unified list of goods.

You may choose to work with a Russian customs agent. Contact the DIT in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us for further advice and lists of agents.

[Source – DIT/gov.uk]

 

Shipping your goods to Russia

You can use a freight forwarder to move your goods if you are not knowledgeable about international shipping procedures. A freight forwarder will have vast expertise and familiarity with local documentation requirements, regulations, transportation costs and banking practices in Russia.

The British International Freight Association (BIFA) at: http://www.bifa.org/home and the Freight Transport Association (FTA) at: http://www.fta.co.uk/ can assist in locating freight forwarders to transport your goods to Russia.

Posting goods

For information about sending goods by post to Russia, visit Royal Mail at: http://www.royalmail.com/russia. Russian Post, the postal system in Russia, has its own restrictions and prohibitions for international mailing of specific items. Visit: http://www.pochta.ru for further details.

Shipping restricted, banned and dangerous goods

Certain goods are classed as restricted or dangerous. If you wish to import any of these goods into Russia they are subject to special rules. For more information visit: https://www.gov.uk/shipping-dangerous-goods/what-are-dangerous-goods.

You should seek advice on the latest import licensing requirements, or even consider employing a local agent who will have this knowledge. For information and assistance contact the Department for International Trade (DIT) team in Russia at: https://www.gov.uk/world/organisations/department-for-international-trade-russia#contact-us.

Terms of delivery

You should ensure your contract includes agreement on terms of delivery using incoterms. Visit: https://www.gov.uk/guidance/international-trade-paperwork-the-basics#international-trade-contracts-and-incoterms for more information.

UK Export Finance

The UK Government can provide finance or credit insurance specifically to support UK exports through UK Export Finance (UKEF) – the UK’s export credit agency. See: https://www.gov.uk/government/organisations/uk-export-finance.

For up-to-date country-specific information on the support available see UKEF’s cover policy and indicators for Russia at: https://www.gov.uk/guidance/country-cover-policy-and-indicators#russian-federation.

[Source – UKEF/gov.uk]


 

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