Foreign companies have various options when setting up a business in Russia. Most often, the first step is to open a Representative Office, but then or later it is also possible to form a separate Russian legal entity, or to participate in a joint activity agreement. Russian business activity is conducted under the Civil Code, which allows foreign companies to form Russian organizations, including Joint Stock Companies (JSC), Limited Liability Companies (LLC), or Partnerships. New businesses have to obtain tax registration, statistics registration and state non-budget funds registration (Pension Fund, Social Security Fund and Mandatory Medical Insurance Fund). The statutory timeframe for registration of a newly established Russian company is five business days, but taking into account certain preparatory work preceding filing of a company documents for state registration as well as additional filing and registration requirements, 2 - 4 weeks is a more realistic registration period, and that's if there are no problems. A foreign investor may pay for his participation interest (shares) in a Russian company's equity (registered) capital either in rubles or in foreign currency. Payment in foreign currency may be made directly from the investor's account with a foreign bank, while payment in rubles requires a special type "K" ruble account, which involves registration with the Russian tax authorities and therefore increases overall company formation time. In fact, few banks provide this service. Incorporated Russian companies are managed via a members' (Shareholders') General Meeting (the supreme governance body) and an Executive Body (represented by either a sole General Director or a General Director jointly with a Management Board). Should a Board of Directors be created, it has supervisory rather than managerial functions; members of a Management Board or of a Board of Directors may not legally bind the company other than on the basis of a power of attorney. The characteristics of the various different corporate forms are described below.
Joint Stock Company
The shares of an open JSC are freely transferable, while in a closed JSC, share transfers are restricted and the other shareholders have pre-emption rights. The minimum capital requirement for incorporation of a JSC is equivalent to 1,000 minimum monthly wages. The maximum number of shareholders cannot exceed 50 persons for a closed JSC.A JSC cannot be established and/or owned by a single shareholder if the latter, in turn, has only one shareholder/participant. The governing bodies of a JSC are general shareholders’ meetings and the board of directors. Ordinary and preference (non-voting) shares may be issued; bearer shares are not allowed. Shares are treated as securities under Russian law, and, therefore, JSCs are subject to securities market regulations, including statutory procedures for issue, offering and placement of shares, registration of shares prospectus, redemption and conversion of shares, issue, offering and placement of convertible securities, keeping of shareholders' register, corporate information disclosure, etc.At least 50% of a company's foundation capital must be paid up within three months from the company formation (state registration) with the balance of outstanding stock to be paid up within one year from the company formation. All company shares issued at the time of its formation shall be subscribed for by the company founders (incorporators); no public offering or placement is allowed at that stage.
Incorporating a JSC involves the following three stages:
Registration of the JSC in the Unified State Register of Companies
In accordance with Russian legislation a JSC incorporated in the Russian Federation should be registered by a competent authority and listed in the Unified State Register.
Under the Government Decree of 17 May 2002 No. 319 “On the federal executive body in charge of state registration of legal entities” The Ministry of Taxes and Levies (MTL) of the Russian Federation is the competent authority that registers JSCs.
According to Sub.2, Art. 8 of the Law of 08.08.2001 No. 129-ФЗ “On registration of legal entities” the place of state registration of the JSC with the registration authorities depends on the business address of the permanent management of the JSC as indicated by the shareholder or on the business address of another body or person entitled to act on behalf of the JSC without a power of attorney.
Apart from a business address the JSC also has to obtain a registered address. To do this the JSC has to provide a title deed to the premises at the registered address or a lease agreement and a copy of the title deed.
In accordance with Art. 25 of the Law of 26.12.1995 No. 208-ФЗ “On Joint-Stock Companies” the issued share capital of a JSC consists of the nominal value of shares allocated among the shareholders. All shares must be allocated to the shareholders at the time of registration.
Under Sub.2, Art.11 of the Law of 26.12.1995 No. 208-ФЗ “On Joint-Stock Companies”, the amount of issued share capital has to be disclosed in the Charter of the JSC.
According to the Law of 22.04.1996 No 39-ФЗ “On the securities market” the shares of JSC can be common registered shares, that are registered at personal accounts kept by the registrar (referred to in the Russian legislation as “non-documentary shares”). It is also possible to issue preference shares amounting to 25% of the issued capital.
The shares of a JSC allocated at the moment of incorporation have to be paid up within a year after the state registration of the JSC unless a shorter period is provided in the constituent instruments.
At least 50% of the shares of the JSC allocated at the moment of incorporation should be paid up within three months of the date of state registration of the JSC.
In compliance with Sub.2 Art.34 of the Law of 26.12.1995 No. 208-ФЗ “On Joint-Stock Companies” payment can be made in money, securities, other goods or other property rights and other rights that can be assessed in monetary value. The form of payment for shares of the JSC at the time of incorporation is indicated in the constituent instruments of the JSC. It is possible to set limits to the types of property that can be used to pay for the shares in the Charter of the JSC.
The following documents have to be submitted in order to register a JSC in accordance with Art. 12 of the Law of 08.08.2001 No. 129-ФЗ “On registration of legal entities”:
1. A standard application form for state registration on behalf of the shareholder;
2. A certified original copy and certified translation of the Minutes of a meeting of the Board of Directors of the shareholder where the resolution to incorporate a JSC was approved;
3. The Charter of the JSC approved by the shareholder or his attorney;
4. A certificate of incorporation of the shareholder issued by the relevant Registrar of Companies, legalized and accompanied with a notarized translation;
5. A certified and translated power of attorney issued by the shareholder to the person charged with completing the application form;
6. A bank receipt to confirm that the state duty for the registration of the JSC has been paid.
If there is a legal entity as the stockholder we will also need the following information and documents:
(a) the State of incorporation;
(b) the date of incorporation;
(c) the registration/incorporation number;
(d) the registering authority
(e) the business address;
(f) the name of the executive body of each company and the name of the general director/president of the board of directors;
(g) the taxpayer’s identification number;
(h) a certified copy of its Constitution in the English language;
(i) a certified notice from the Registrar of Companies of the jurisdiction where the incorporator (if a foreign company) is domiciled or another equally valid certificate of the legal status of the foreign incorporator in the English language ; and
(j) a resolution to incorporate a Joint Stock Company in Russia.
Concurrently with the state registration of the JSC an application must be filed to list the JSC in the Tax Authority at the business address of the JSC.
State registration is usually completed within 10 business days after submission of the above documents. A Certificate of inclusion in the Unified State Register and a Certificate confirming the taxpayer’s identification number of the JSC are issued to the registered JSC.
After the above Certificates have been issued the JSC has to obtain individual statistics codes and a company seal.
Registration with the off-budget state funds
Within ten days of being listed in the Unified State Register the JSC has to register with the following bodies:
· The Pensions Fund of the Russian Federation;
· The Social Security Fund of the Russian Federation;
· The Obligatory Medical Insurance Fund of the Russian Federation.
The JSC cannot open a bank account before it has registered with the above funds.
Registration of the share issue with the Federal Securities Commission (“FSC”) of the Russian Federation
Under the Law of 22.04.1996 No. 39 – ФЗ “On the securities market” the FSC is in charge of state registration of prospectuses, share issues and reports on results of share issues.
The procedure for the initial issue of shares of the JSC comprises the following stages:
· a decision to issue shares;
· an approval of the decision to issue shares;
· state registration of the share issue;
· allocation of shares;
· state registration of the report of the results of share issue.
State registration of the share issue completes the process of incorporation. Thereafter the shareholders can enjoy all the shareholders’ rights under the securities legislation of the Russian Federation.
Limited Liability Companies
As in many other jurisdictions, LLCs occupy a position between partnerships and companies in terms of liability and members' rights. In particular, members of an LLC, unlike shareholders of a JSC, may exercise supplementary rights and bear supplementary obligations without regard to the size or value of such members' participation interest, as determined by the company's statutes, or as approved by unanimous vote of all company members. Moreover, in some circumstances a member of an LLC may be expelled by a court at the request of other members holding at least 10% of the equity capital in the aggregate. The maximum number of members of an LLC members is 50. The statutory minimum capital 100 minimum monthly wages. At least 50% of the equity capital must be paid up before the company documents are filed for state registration with the balance to be paid up within one year from the company formation. Normally this requires that a local bank should open an interim bank account that may only be used for the purposes of new company registered capital formation; once the company formation is completed and relevant documentation is filed, the interim account can be converted into a current account .LLCs' equity (registered) capital is composed of participation interests that do not qualify as securities under the Russian law and, therefore, LLCs are exempted from securities market regulations. No type of public offering or placement is possible. Participation interests may be of unequal size and value; however, all participation interests confer on the holders the right to vote in the company members' meeting (pro rata to the size thereof unless otherwise provided by the company statutes).LLC members have statutory pre-emption rights in connection with offering of participation interests to third parties and the company constitutive documents may (optionally) prohibit the transfer of participation interests to third parties. Other forms of disposal of participation interests (including pledge thereof) are also subject to certain restrictions.
In order to open LLC the following documents must be presented to the Tax Authorities:
- Application form
- The charter documents of the newly formed company
- The charter documents of the foreign company ( if it is the participant of LLC)
- The notarify copies LLC participants' passports
- Documentation of State Tax payment
- Documentation confirming the location of the company within the Russian Federation.
Procedure of incorporating a LLC involves the same stages as in case with JSC with the exception of the procedure of issuing and registration of shares.
In compliance with art. 32 of the law on “Limited liability companies” all the participants have the suffrage and can participate in the decision making by the company.
A Charter and a foundation agreement are the foundation documents of an LLC. Art. 11 of the law on “Limited liability companies”. In compliance with art.9 and 11 of the law “Joint stock company”
At the same time we should take into consideration that if an LLC has only one participant, it will have only a charter. A foundation agreement is required only when there are more than 2 participants.
Besides the above-mentioned we should remember at the registration of a JSC and an LLC the following:
1. The Register of Companies will not accept a name considered misleading, too general or suggesting a national or international connection, unless this can be substantiated. The Register will also not accept certain names containing words such as ‘banking’, ‘brokerage’, ‘insurance’, ‘funds’, ‘portfolio’, ‘securities’, ‘trustees’, ‘Russia’, ‘State’ etc, without the consent of the relevant Russian regulatory authority. Please propose 3 or 4 alternative names in order of preference.
2.Joint Stock Company or LLC cannot be incorporated by another legal entity, which has only one participant.
Basic documents
As I mentioned above, a Chapter and a Foundation Agreement are the basic documents for establishment of a legal entity. In general they should contain the following data:
- Company name;
- Legal address;
- Rules of management;
- Rules of closing down of business.
Some additional data should be added to these documents for:
Limited Liability Company and Extra Liability Company:
- Volume of authorized capital;
- Amount of each founder’s contribution;
- Content of each founder’s contribution and procedure for forming authorized capital;
- Terms of responsibilities for violation of forming authorized capital;
- Content of managing body and its authorities.
Joint stock company:
- Category of shares issued by the company, their par value and issued volume;
- Volume of authorized capital;
- Rights of shareholders;
- Content of managing body and its authorities.
All other information, which isn’t contrary to legislation, can be included into these documents.
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