Wiki Investment

Russia

1 Chapter Corporate Law

1.1 INTRODUCTION
- INTRODUCTION
  
  According to the World Bank Group, the following are the highlights of doing business in Russia:
  
  · Overall, it is easier to start a business, deal with construction permits, get electricity and register property in Ulyanovsk and Saransk.
  
  ·  No single city outperforms the others in all areas. It is easiest to start a business in Saint Petersburg, deal with construction permits in Surgut, connect to electricity in Saransk and register property in Kaluga.
  
  ·  The average start-up cost of 2.3% of income per capita places Russia among the 30 cheapest economies worldwide to start a business.
  
  ·  Property registration is easy (similar to the OECD average of 5 procedures and 31 days) and inexpensive across the country and in all cities measured. The average cost of 0.2% of property value is well below the OECD average of 4.4% of property value.
  
  · Consistent performers stayed at the top with Kazan among the top performers in the areas of starting a business and registering property. Irkutsk remained in the top third of cities measured for starting a business and dealing with construction permits.
  
  ·  Numerous procedures take a long time and carry a high cost in the areas of dealing with construction permits and getting electricity.
  
  In its Doing Business 2015: Going Beyond Efficiency the World Bank Group also finds that in the past year, the Russian Federation made it easier for entrepreneurs to open a new business by:
  
  · eliminating the requirement to deposit the charter capital before company registration and
  
  ·   eliminating the requirement to notify tax authorities of the opening of a bank account.
  
  In addition, the country made transferring property easier by:
  
  ·  eliminating the requirement for notarization and introducing tighter time limits for completing the property registration.
  
  These contributed to making Europe and Central Asia the second most business-friendly region after high-income economies in the Organization for Economic Co-operation and Development (OECD).
  
  The Russian Federation ranks among the top 20 economies globally on two indicators:
  
  1. the ease of registering property and
  
  2. the ease of enforcing contracts.
  
  Obstacles remain in some areas measured by the report, however: entrepreneurs seeking to obtain an electricity connection or to import or export goods face considerable delays compared with global averages.

1.2 BUSINESS ENTITIES

BUSINESS ENTITIES

■State-owned corporations

In Russia, a JSC can be completely or partially owned by the federal government. Such JSCs are different from another type of state-controlled company, the unitary enterprise. This is a commercial organization that operates state-owned assets. State-owned JSCs do not own or operate any state property and the state acts just like an ordinary shareholder.

Some state-owned public corporations were formerly government agencies in the Soviet Union which were reorganized into completely state-owned JSCs in 1992-1993 in order to undergo transition to a fully independent business. The management and the board of directors in such state-owned corporations were appointed by the Council of Ministers/the government, and included top government officials and ministers. The largest of such corporations were initially incorporated as Russian joint-stock companies (RAOs). Best known examples were RAO UES and RAO Gazprom. But they have since been converted to public JSCs (OAO), even though their shares remain the property of the government.

Less important or partially owned JSCs are managed through the Federal Agency for State Property Management.

■Obshchestvo s Ogranichennoy Otvetstvennostyu (OOO) or Limited Liability Company (LLC)

Board of Directors

LLCs can have a two- or three-tier management structure:

(a) general meeting of participants, (b) board of directors (optional) and (c) the executive (CEO and/or management board). In contrast to joint stock companies that operate on the basis of a one-share – one-vote principle, the number of votes held by LLC participants may be disproportionate to their respective participation interests. The law provides LLC participants with significant possibility of allocation of authority among corporate governance bodies in an LLC.

As a general rule, a transaction aimed at the transfer of participation interest requires notarial certification. It is very unlikely that a Russian notary will certify a sale and purchase agreement if it is governed by any law other than Russian law. It is important to keep in mind that Russian law does not have concepts of representations, warranties, indemnities and some other which a foreign investor expects in a share purchase agreement. Hence, an on-shore Russian joint venture in form of LLC will not allow choosing English or other foreign law as a governing law for sale of participation interest.

LLC participants have pre-emptive rights with respect to participation interests of the other participants. Like in CJSCs, this rule applies regardless of whether a proposed transferee is affiliated with the selling participant and, therefore, transfers to affiliates are subject to the general right of first refusal of the other LLC participants. However, based on a Russian court precedent, it may be possible to bypass the right of first refusal requirements by structuring the transfer of a participation interest other than as an outright sale.

The board of directors of a limited liability company in Russia or a Russian OOO is also responsible for verifying and evaluating the company’s activity. In fact, the board of directors also represents the Supervisory Board. All issues that are not discussed in the general meeting fall under the responsibility of the supervisory board.

The Russian Code of Corporate Conduct provides for general principles of determining the number of board members: “Companies should primarily seek a number that will

enable the board of directors to hold productive and constructive discussions,

make prompt and rational decisions, and efficiently organise the work of its committees.”

Our survey shows that, in practice, 90% of the top 50 Russian public

companies set limits on the number of board members in their in-house documents (e.g. charters, articles of association, terms of reference): among them, 64% set the exact number of

board members, another 8% set the interval (those registered overseas), 16% set only the minimum, and one company sets only the maximum number of directors.

Under Federal In Federal Law No. 14-FZ which took effect on February 8, 1998 on Limited Liability Companies (OOO) and which was adopted by the State Duma on January 14, 1998

Approved by the Federation Council on January 28, 1998 the following is provided:

Article 41. A Company's Collective Executive Body 1. If a company's charter provides for the establishment of a collective executive body of the company (a board, directorate, etc.) in addition to the individual executive body of the company, such collective body shall be elected by the company's general meeting of participants in the number of its numbers and for the period of time fixed by the company's charter. Only a natural person, who may not be a company participant, may become a member of the collective executive body of the company. The collective executive body of the company shall discharge the powers assigned by its charter to its jurisdiction. The functions of the chairman of the company's collective executive body shall be performed by the person who discharges the functions of the company's individual executive body, except for the case when the powers of the company's individual executive body has been transferred to its manager. 2. The procedure for the functioning of the company's collective executive body and for its decision-making shall be established by the company's charter and its internal documents.

The following are the basic features of an OOO:

Obshchestvo s Ogranichennoy Otvetstvennostyu (OOO)

1. The charter capital is divided up into percentages of membership interest (dol’). I.e. there is an assumption of the member’s active involvement in the company’s activities.

2. If a member decides to exit an OOO he can either sell his membership interest to another member or third party, or he can choose to sell to the company and demand that the company pay him his share of the current net asset value of the company. Such a provision must be set out in the charter of the company.

3. Not need to register with the FSC.

4. The charter may provide for dividends to be distributed disproportionately from the % of membership ownership.

5. 50% of charter capital must be paid before registration and 50% within 1 year. Minimum capital required – 10 000 rub.

6. Independent appraisal is not required if the "in-kind" contribution to the charter capital is less than 20,000 rub.

Part of what distinguishes a limited liability company from other types of business entities—such as partnerships or joint stock companies—are the rules governing who can establish one and the amount of charter capital needed to get started. Specifically, LLCs must adhere to the following:

· Participants. A limited liability company (LLC) may be established by one or more individuals or legal entities (“participants”). An LLC may not have as its sole participant another business entity consisting of a single person. The liability of each participant in this type of company is limited to the value of his share in the charter capital. The number of participants in a limited liability company cannot exceed 50.

· Charter capital. The charter capital of a limited liability company determines the minimum size of the company’s property, thereby guaranteeing the interests of its creditors. The minimum charter capital of a limited liability company should come to at least RUB 10,000 (approximately $150 US). The full amount of the charter capital amount must be paid within four months of the LLC’s registration date. Contributions may be made in cash or in-kind, and certain customs benefits may be available for in-kind contributions made by foreign investors. The charter capital may be increased only after the original charter capital has been paid in full.

Rights and Obligations of Participants

The participants own “participation interests” in the LLC. A participation interest in an LLC is not considered a security under current Russian law. Therefore, in contrast to the shares of a joint stock company, LLC participation interests do not need to be registered.

Participants may sell their participation interests to a third party, subject to a right of first refusal held by the other participants to purchase them at the same price offered to the third party. Participants in an LLC also have the right to withdraw from the LLC and to be compensated for their participation interests.

Finally, a participant or group of participants holding a participation interest of 10% or more may demand the expulsion of any other participant who grossly violates his obligations as a participant, or who substantially hinders the LLC in its legitimate activities.

The participants in an LLC have the right to:

· Participate in the management of the LLC in accordance with procedures established by LLC law and the LLC foundation documents.

· Obtain information concerning the activities of the LLC and have access to its accounting and other documents in accordance with procedures established by the LLC foundation documents.

· Participate in the distribution of profits.

· Withdraw from the LLC without first seeking the approval of the other participants.

· Receive a portion of the assets left after settlement with creditors in the event of the liquidation of the LLC.

LLC law grants participants other rights as well. Beyond these statutory rights, additional rights may be granted to the participants in the original LLC charter.

Along with these guarantees, participants in an LLC are subject to certain requirements, including:

· Making contributions to the charter capital as specified in LLC law and LLC foundation documents and within the time periods specified in LLC law.

· Keeping all information concerning the activities of the LLC confidential.

LLC law imposes other obligations upon the participants. Additional obligations may be set forth in the LLC charter and may also be imposed upon all participants at a later time by a decision of the LLC’s General Participants’ Meeting, but unanimous consent is required.

Management Structure of an LLC

A limited liability company’s management structure is similar to that of a joint stock company. Limited liability companies are considered to be non-public and, thus, may enjoy more flexible options in regards to organizing their management structure, relations between shareholders, and other aspects of their activity.

The General Participants’ Meeting is the highest governing body of an LLC, and almost all matters fall within its exclusive competence. Even if the LLC participants choose to create a board of directors, the General Participants’ Meeting may nonetheless only delegate a limited number of matters to the board.

The General Participants’ Meeting has exclusive rights to:

· Amend the charter.

· Define the basic goals and directions of the LLC.

· Delegate to a commercial organization or to an individual entrepreneur the authority reserved to the LLC executive and approve the conditions of the agreements with such organizations or persons.

· Assign supplemental rights and duties to the participants in the LLC.

· Approve the annual financial report and the distribution of profits.

· Alter the amount of the charter capital of the LLC.

· Approve the regulations governing the internal activities of the LLC.

· Reorganize or liquidate the LLC, appoint a liquidation commission, and approve the liquidation balance sheet of the LLC.

Process for Registering an LLC in Russia

Activities connected with the state registration of LLCs and with their registration as taxpayers in Russia are currently under the auspices of the local tax inspectorates. The following documents are required for registration purposes:

· The application for the state registration of the new entity.

· The foundation agreement of the LLC (if the LLC has more than one founder/participant).

· The protocol of the founders’ meeting or, if the LLC has only one founder, the resolution of the founder in the establishment of the LLC.

· The Charter of the LLC.

· Power of Attorney issued by the founder for filing the application for the state registration of the LLC.

· The registration certificate, Certificate of Incorporation, an excerpt from the trade register, or certificate of good standing of the foreign participant.

· The Charter (Articles of Association, By-laws) of the foreign participant.

· Confirmation of payment of the state registration fee.

All documents from a foreign legal entity must be notarized and legalized in the country of preparation. Any document supplied in a language other than Russian must be accompanied by a notarized Russian translation.

Obshchestvo s Ogranichennoy Otvetstvennostyu (OOO) or Limited Liability Company

Director

A general director is the highest executive position in a Russian company, analogous to a US chief executive officer (CEO), or a UK managing director. The position exists for all Commonwealth of Independent States (CIS) legal forms (e.g. joint stock companies (AO) and limited-liability companies (OOO)) except for sole proprietorships (IP).

The general director is the "single-person executive body" of a company. He or she acts without power of attorney to represent the company, and issues powers of attorney to others. His or her powers are defined by the company charter, by decision of the general meeting of shareholders (AO) or participants (OOO), and by the board of directors

General Meeting

General Meeting of the founders of a company
The company’s founders conclude in a written agreement the establishment of an LLC and determines the rules for commencement of joint activities of a company, the amount of authorized capital, the size and the nominal value of shares for each of the company’s founders, as well as the size and rules governing payment for such shares within the company's authorized capita

An annual general meeting must be held within the time frame set out in the charter, and must occur at least once a year. The annual general meeting is convened by the board of directors of a CJSC and the executive body of an LLC, and it approves the annual results of the company. For both a CJSC and an LLC, an extraordinary general meeting may be convened in cases specified in the charter or when this is in the interests of the company and its shareholders or participants. The competence of the general meeting for a CJSC is set out in the law and cannot be reduced or extended by the shareholders.

Dividend

The Limited Liability Companies Law of Russia is similar to the JSC Law in its rules for distribution of the company's net profit amongst its stakeholders. We believe that the amendments described above should also be made applicable to limited liability companies.

■Aktsionernoye Obschestvo (AO) or Joint Stock Company (JSC)

The following are the basic features of an AO:

Aktsionernoye Obschestvo (AO)

1. The charter capital is divided up into shares (aktsii). This makes it easier to transfer or assign shares as there is a perception of separation of investor from management of the company.

2. If a shareholder decides to exit a ZAO then he can do so via the sale of his shares either to the other shareholders or to a third party. The value (selling price) of the shares is determined by the parties and is not linked by law to the net asset value of the company.

3. Share issues must be registered with the Federal Securities Commission (FSC). Additional start-up cost and timeline.

4. Dividends are paid proportionally to the number of shares owned.

5. 50% of charter capital must be paid within 3 months of registration and 50% within 1 year. Minimum capital required – 10 000 rub.

6. If the contribution to the charter capital is "in-kind" (property) and not cash, then an independent appraisal is required regardless of the value of such in-kind contributions. Additional cost.

There are two (2) kinds of AO:

1. Open joint-stock company (OAO or Otkritoe Aktsionernoye Obschestvo)

Open joint-stock company is a legal entity where shares may be publicly traded without the permission of other shareholders. An OAO can distribute its shares to an unlimited number of shareholders and sell them without limitations. The statutory minimum charter capital is 100,000 Russian roubles.

■Closed joint-stock company (ZAO or Zakrytoye Aktsionernoye Obschestvo)

Closed joint-stock company is a legal entity whose shares are distributed among a limited number of shareholders - maximum 50. The statutory minimum charter capital is 10,000 Russian roubles.

The OOO and the AO are the most preferred type of Russian Legal Entities (RLEs) being set up in the country today.

Rights and Powers of Shareholders in Russian Company:

The Corporate Governance Code of Russia which came into effect in March 2014 provides for the:

· Protection of shareholders rights and fair treatment of minority shareholders

1.1 The company should ensure equal and fair treatment of all its shareholders in the course of exercise by them of their rights to participate in the management of the company.

1.2. Shareholders should have equal and fair opportunities to participate in the profits of the company by means of receiving dividends.

1.3. The system and practices of corporate governance should ensure equal terms and conditions for all shareholders owning shares of the same class (category) in a company, including minority and foreign shareholders as well as their equal treatment by the company. (italics supplied by writer)

1.3.1. The company should create conditions which would enable its governing bodies and controlling persons to treat each shareholder fairly, in particular, which would rule out the possibility of any abuse of minority shareholders by major shareholders. (italics supplied by writer)

1.3.2. The company should not perform any acts which will or might result in artificial reallocation of corporate control therein.

1.4. The shareholders should be provided with reliable and efficient means of recording their rights in shares as well as with the opportunity to freely dispose of such shares in a non-onerous manner.

Board of Directors

2.1. The board of directors shall be in charge of strategic management of the company, determine major principles of and approaches to creation of a risk management and internal control system within the company, monitor the activity of the company’s executive bodies, and carry out other key functions.

2.1.1. The board of directors should be responsible for decisions to appoint and remove [members] of executive bodies, including in connection with their failure to properly perform their duties. The board of directors should also procure that the company’s executive bodies act in accordance with an approved development strategy and main business goals of the company.

2.1.2. The board of directors should establish basic long-term targets of the company’s activity, evaluate and approve its key performance indicators and principal business goals, as well as evaluate and approve its strategy and business plans in respect of its principal areas of operations.

2.1.3. The board of directors should determine principles of and approaches to creation of the risk management and internal control system in the company,

2.1.4. The board of directors should determine the company’s policy on remuneration due to and/or reimbursement of costs incurred by its board members, members of its executive bodies and other key managers.

2.1.5. The board of directors should play a key role in prevention, detection and resolution of internal conflicts between the company’s bodies, shareholders and employees.

2.1.6. The board of directors should play a key role in procuring that the company is transparent, discloses information in full and in due time, and provides its shareholders with unhindered access to its documents.

2.1.7. The board of directors should monitor the company’s corporate governance practices and play a key role in its material corporate events.

2.2. The board of directors should be accountable to the company’s shareholders.

2.2.1. Information about the board of directors’ work should be disclosed and provided to the shareholders.

2.2.2. The chairman of the board of directors must be available to communicate with the company’s shareholders.

2.3. The board of directors should be an efficient and professional governing body of the company which is able to make objective and independent judgements and pass resolutions in the best interests of the company and its shareholders.

2.3.1. Only persons with impeccable business and personal reputation should be elected to the board of directors; such persons should also have knowledge, skills, and experience necessary to make decisions that fall within the jurisdiction of the board of directors and to perform its functions efficiently.

2.3.2. Board members should be elected pursuant to a transparent procedure enabling the shareholders to obtain information about respective candidates sufficient for them to get an idea of the candidates’ personal and professional qualities.

2.3.3. The composition of board of directors should be balanced, in particular, in terms of qualifications, expertise, and business skills of its members. The board of directors should enjoy the confidence of the shareholders.

2.3.4. The membership of the board of directors of the company must enable the board to organize its activities in a most efficient way, in particular, to create committees of the board of directors, as well as to enable substantial minority shareholders of the company to elect a candidate to the board of directors for whom they would vote.

2.4. The board of directors should include a sufficient number of independent directors.

2.4.1. An independent director should mean any person who has required professional skills and expertise and is sufficiently able to have his/her own position and make objective and bona fide judgments, free from the influence of the company’s executive bodies, any individual group of its shareholders or other stakeholders. It should be noted that, under normal circumstances, a candidate (or an elected director) may not be deemed to be independent, if he/she is associated with the company, any of its substantial shareholders, material trading partners or competitors, or the government.

2.4.2. It is recommended to evaluate whether candidates nominated to the board of directors meet the independence criteria as well as to review, on a regular basis, whether or not independent board members meet the independence criteria. When carrying out such evaluation, substance should take precedence over form.

2.4.3. Independent directors should account for at least one-third of all directors elected to the board of directors.

2.4.4. Independent directors should play a key role in prevention of internal conflicts in the company and performance by the latter of material corporate actions.

2.5. The chairman of the board of directors should help it carry out the functions imposed thereon in a most efficient manner.

2.5.1. It is recommended to either elect an independent director to the position of the chairman of the board of directors or identify the senior independent director among the company’s independent directors who would coordinate work of the independent directors and liaise with the chairman of the board of directors.

2.5.2. The board chairman should ensure that board meetings are held in a constructive atmosphere and that any items on the meeting agenda are discussed freely. The chairman should also monitor fulfilment of decisions made by the board of directors.

2.5.3. The chairman of the board of directors should take any and all measures as may be required to provide the board members in a timely fashion with information required to make decisions on issues on the agenda.

2.6. Board members must act reasonably and in good faith in the best interests of the company and its shareholders, being sufficiently informed, with due care and diligence.

2.6.1. Acting reasonably and in good faith means that board members should make decisions considering all available information, in the absence of a conflict of interest, treating shareholders of the company equally, and assuming normal business risks.

2.6.2. Rights and duties of board members should be clearly stated and documented in the company’s internal documents.

2.6.3. Board members should have sufficient time to perform their duties.

2.6.4. All board members should have equal opportunity to access the company’s documents and information. Newly elected board members should be provided with sufficient information about the company and work of its board of directors as soon as practicable.

2.7. Meetings of the board of directors, preparation for them, and participation of board members therein should ensure efficient work of the board.

2.7.1. It is recommended to hold meetings of the board of directors as needed, with due account of the company’s scope of activities documents. The above procedure should enable the shareholders to get prepared properly for such meetings.

2.7.3. The form of a meeting of the board of directors should be determined with due account of importance of issues on the agenda of the meeting. Most important issues should be decided at the meetings held in person.

2.7.4 Decisions on most important issues relating to the company’s business should be made at a meeting of the board of directors by a qualified majority vote or by a majority vote of all elected board members.

2.8. The board of directors should form committees for preliminary consideration of most important issues of the company’s business.

2.8.1. For the purpose of preliminary consideration of any matters of control over the company’s financial and business activities, it is recommended to form an audit committee comprised of independent directors.

2.8.2. For the purpose of preliminary consideration of any matters of development of efficient and transparent remuneration practices, it is recommended to form a remuneration committee comprised of independent directors and chaired by an independent director who should not concurrently be the board chairman.

2.8.3. For the purpose of preliminary consideration of any matters relating to human resources planning (making plans regarding successor directors), professional composition and efficiency of the board of directors, it is recommended to form a nominating committee (a committee on nominations, appointments and human resources) with a majority of its members being independent directors.

2.8.4. Taking account of its scope of activities and levels of related risks, the company should form other committees of its board of directors, in and its then current goals.

2.8.5. The composition of the committees should be determined in such a way that it would allow a comprehensive discussion of issues being considered on a preliminary basis with due account of differing opinions.

2.8.6 The chairmen of the committees should inform the board of directors and its chairman of the work of their committees on a regular basis.

2.9. The board of directors should procure evaluation of quality of its work and that of its committees and board members.

2.9.1. Evaluation of quality of the board of directors’ work should be aimed at determining how efficiently the board of directors, its committees and board members work and whether their work meets the company’s needs, as well as at making their work more intensive and identifying areas of improvement.

2.9.2 Quality of work of the board of directors, its committees and board members should be evaluated on a regular basis, at least once a year. To carry out an independent evaluation of the quality of the board of directors’ work, it is recommended to retain a third party entity (consultant) on a regular basis, at least once every three years.

The following key share stakes define the powers of shareholders in a Russian company:

No. of Shares	Effect
25% plus one share in AO (more than 1/3 of the entire charter capital in OOO)	gives the shareholder a negative control stake. As a result, the holder has the ability to block decisions requiring a super majority
50% plus one share in AO (more than 1/2 of the entire charter capital in OOO)	gives the shareholder a positive control stake. As a result, the holder can adopt decisions requiring a simple majority and control the board of directors
75% in AO (2/3 of the entire charter capital in OOO)	a stake, which practically provides ownership control, including the right to take decisions regarding the liquidation of a joint stock company (for the liquidation of a limited liability company the unanimous consent of the shareholders is required)

Annual Meeting of Shareholders/Participants

Date for Holding of a Meeting	· Joint-Stock Companies (JSC) (ZAO or OAO in Russia has to be held 1^st of March and the 30^th of June · Limited Liabilities Companies (LLC) (OOO in Russia) has to be held 1^stof March and the 30^th of April
Obligatory issues to be resolved	· Approval of the annual results of the company’s activity and other matters stipulated in the Law on JSC or in the Law on LLC. · Company charter may contain other issues that have to be addressed during the Meeting
Additional issues that can be resolved	· Election of the Board/General Director · Profit distribution · Appointment of the auditor
When proper documentation of all procedures related to the organization of the Meeting is required	(a) Calling the Board meeting to convene the Meeting; (b) Preparing additional information for the Meeting participants; (c) Calling the Meeting; (d) Conducting the Meeting.

It is also important that companies with no outside shareholders (100% subsidiaries) also hold an annual meeting. The requirements are set out by law, at least formally.

In case of violations when calling, preparing and conducting the Meeting, JSC or LLC could be held administratively liable under Article 15.23.1 of the Code of Administrative Offices (CAO), which took effect on April 13, 2009, and will apply to the Meetings dedicated to the results of the year 2008. Administrative liability under Article 15.23.1 of the CAO can also arise when the Meeting is not conducted or when the proper documentation is missing. The company itself as well as the officers of the company directly responsible for the described violations (for example, the General Director, the members of the Board of Directors and others) can be held liable. The administrative fine of up to 700 000 RUR (around 15 910 Euro as of March 17, 2009) is set for the companies and of up to 30 000 RUR (652 Euro as of March 17, 2009) for the company officers. Instead of applying a fine the officer of the company can be dismissed (i.e. denied the right to keep his position) for the period of up to one year.

Audit Committee

This is a body in public companies in Russia that carries out corporate governance functions and has the following attributes:

As provided for by the Corporate Governance Code in 2.8.1. For the purpose of preliminary consideration of any matters of control over the company’s financial and business activities, it is recommended to form an audit committee comprised of independent directors.

The board should establish an audit committee of at least three, or in the case of smaller companies two, independent non-executive directors. All the companies have an audit committee. According to a PwC survey average, independent directors constitute 57% of the audit committee. In a quarter of companies, the audit committee consists solely of independent directors. In 60% of companies, independent directors constitute 50% or more of the audit committee. In more than 50% of companies, there are 2 or more independent directors on the audit committee. There are 3 or more independent directors on the audit committee in 29% of companies.

Accounting and Audit

Russian statutory accounting rules (RSA – also referred to as Russian Accounting Standards, RAS) are regulated by norms on a hierarchy of four levels.

Highest level- the Accounting law (passed by the Russian parliament, the State Duma). At the

second level there are the accounting standards (“PBU” in Russian, short for Polozheniya po Bukhgalterskomu Uchetu) issued by the Russian Ministry of Finance.

The ministry derives its powers in this connection from the Accounting Law (article 4 of the new accounting law).A new accounting law has been enacted in 2011 and will replace the now existing law from the beginning of 2013 (Federal law No. 402

Recognition of possibility to outsource accounting.

The new law now explicitly recognizes that outsourcing of accounting is an option alongside of employing an in-house chief accountant. Accounting outsourcing is, however, not available for banks.

The role and qualifications of chief accountant. The role and qualifications of the chief accountant have been clarified.

For most companies, all limited liability partnerships (so-called “OOO companies”) and all joint stock companies of the closed type (“ZAO companies”), there are no special competence criteria set for the chief accountant.

Statutory competence criteria have been set in respect to chief accountants of open stock companies (“OAO companies”), insurance companies, and various forms of investment companies. These are not, however, very demanding: higher professional education with a master’s degree in accounting and audit (this criterion is, however, waived if the person has 5 years experience of accounting and another form of higher education), 3 years experience, and no conviction for economic crimes.

Hereby the law does not require that the person responsible for the accounting is particularly a chief accountant, recognizing the possibility that “another officer of the firm” can be entrusted this function. Thus the function could be given, for example, to a chief financial officer, or outsourced as it was said above.

The competence criteria for chief accountants of banks and credit institutions are set by the Central Bank.

Flexibility with source (primary) documents.

An important change in the law has to do with source (primary) documents which must be in place to support the accounting transactions. The law scraps the earlier requirements to standardized document forms that are a hangover from the Soviet system. Now the template for source documents will have to be adopted by the company itself with approval by the chief executive officer. In other words, once the law comes into effect, every company will be free to use its own forms and documents. In addition, the law now allows for the primary accounting documents to be drafted in digital form and hence be approved by a digital signature.

Entities exempt from keeping full statutory accounting records.

After the new law individual entrepreneurs and private professionals are exempt from the duty to maintain accounts in conformity with the accounting laws and standards if they maintain their tax accounting records in conformity with the tax laws regulating their specific tax regimes.

Branches and representative offices (or other subdivisions) of foreign companies may waive the requirement to keep statutory financial accounting (bookkeeping) books as long as they follow the tax accounting rules prescribed by the Russian Tax Code (keeping of all the necessary tax ledgers for each type of tax applicable to the entity’s business). However if the business operations amount to a taxable permanent establishment, then full accounting is required.

The new law now removes the requirement that documents relating to monetary operations be approved jointly by the director and chief accountant, allowing for companies to adopt their own internal policy for such approvals.

The PBUs issued by the Ministry of Finance are largely based on International Financial Reporting Standards (IFRS), with each new amendment aimed at bringing RAS closer in principle to IFRS.

In addition to the PBUs the Ministry of Finance regularly issues detailed instructions as to the application of the PBUs in specific situations.

Examples of such instructions are the compulsory unified chart of accounts that all Russian firms must use and the detailed instructions on how to calculate the cost of goods sold. The standard chart of accounts is prescribed for all Russian companies by the Ministry of Finance (Order No. 94n). According to the chart each balance sheet and income statement account is given a two digit number. This two digit coding must be adopted by each company and cannot be changed through adoption of internal accounting procedures, but naturally they may be adapted to specific requirements by introducing a needed amount of subaccounts.

We may consider as the fourth level of regulations the rules that the company (or entrepreneur) establishes within the framework permissible by the government regulations. These concern areas which are not completely covered by the law, or where the company is left with a choice. The regulations individual to the company are set in its ‘accounting policy.’

Russian tax accounting

The Russian Tax Code requires taxpayers as well as permanent establishments (PEs) to keep separate accounting records for tax purposes. As with many other countries, tax accounting rules differ from statutory financial accounting principles. This can create major differences in calculations, specifically for example in regards to the treatment of depreciation, reserves, interest expenses (capitalization or deductions of interests) and losses. For many companies the existence of separate Tax Accounting rules means a third set of books must be kept alongside the Russian Statutory Accounts in addition to the books kept in accordance with some international accounting principles such as IFRS and US GAAP.

Examples of the Russian Tax Code providing for the application of individual company accounting policies are the requirements to adapt rules for ‘keeping of tax records’ and ‘determination of the tax base.’ In this regard, the Russian Tax Code (art.313, 167) allows an option for a company to choose amongst tax accounting principles, however the Russian Tax Code also details a fall back set of principles should the company choose not to adopt its own set of custom principles.

Companies must also consistently maintain their adopted tax accounting policies from one year to the next, unless legislation prescribes otherwise or the company develops a superior method of maintaining accounting policies and sees fit to change them. It is necessary that in both of these situations that the newly adopted policies take effect from the beginning of the financial year.

It should be noted that a company must issue separate regulations on financial accounting policy and tax accounting policy, respectively.

Russian Accounting Standards vs. International Standards such as IFRS and USGAAP

During the time of the Soviet Union, accounting in Russia was traditionally used for statistical purposes. All enterprises reported only to the state and accounting was largely put in place for the benefit of the state only.

Since the break-up of the Soviet Union in 1992, Russia has undergone radical changes to shift from a centrally planned economy to a market economy. In doing this, the shift in accounting policy had to reflect a shift in process for accounting, from a system of state economic administration to a process of the private business community. This posed problems for the traditional accounting system, as a shift also had to occur in regards the end use of accounting records. With the new market economy, financial reporting had to be put in place that satisfied the requirements of investors, creditors and other interest holders. This contrasted to the previous state system.

In more recent years, this initial transition has been accelerated even further through by the Russian Government identifying the necessity to align Russia’s accounting principles with those of IFRS. Although this alignment has taken place to some degree, the previous state-centered traditions have still negatively affected the contemporary development of accounting policy. While there are now some principles resembling those of IFRS, the implementation of these principles in practice still have some flaws.

The problems are often caused by the restrictions that prescribe that a source document has to be in place before specific accounting entries can be made. As a consequence, accounting statements prepared according to RAS do not necessarily show the true account of accruals and do not convey a true and fair value of the assets or liabilities of the entity. Therefore, in order to understand the financials of a Russian company in a true and fair view, the statements need to be restated in international accounting standards such as IFRS (International Financial Reporting Standards), US GAAP (US Generally Accepted Accounting Principles) or any other standard used by the parent company. In doing so, there are a number of difficulties to overcome.

The main shortfall in the development of RAS in comparison with IFRS arises from the fact that the accounting principles still favor the tax authorities as the main recipient of the information. This is in direct contrast to IFRS basic root principles, in that financial and accounting information should be produced specifically in the interests of accuracy and fairness towards shareholders and relevant stakeholders.

Form over substance – Russian administrative practice in all fields of activities and life is quite formalistic. As a consequence of this obsession with form, Russian accounting practice has been quite slow to adapt to IAS rules where subjective judgment is often needed. In addition to this, RAS is in theory ‘substance over form;, whereas in reality it is ‘form over substance’.

RAS does not provide guidance on the procedure for consolidations, business combinations, purchase price allocation, impairment of property, plant & equipment, share-based payments or employee benefits.

This means that in fact a professionally managed Russian subsidiary company has the needed to make financial reports on four different levels:

1. Russian statutory financial reports (statutory bookkeeping)

2. Russian tax accounting reports

3. Group financial accounting reports

4. Management accounting reports

Some categories of companies in Russia will have to keep their accounts according to IFRS following recent changes in law: Ministry of Finance order On Implementation of IFRS and Interpretation of IFRS in Russia (n160 of 25.11.2011) and Law on Consolidated Financial Statements (No. 208-FZ of 27 July 2010). IFRS will become mandatory for banks, insurance companies and other companies listed on a Russian stock exchange, and companies intending to offer shares to the public (to more than 500 investors) (Federal law N 39 – FZ ‘On securities market’ of 22.04.96, art. 30(4)2) and regulation of Federal Service for Financial Markets N 11- 46/pz-n ‘On disclosure of emitters’ information regarding issuance of securities’).

The official date of transition (for these types of companies) is 1 January 2011 (if they have not applied IFRS previously). The first IFRS consolidated financial statements must be audited and filed by 30 April 2013 and published by 31 May 2013.

If a listed company is presently reporting under other internationally recognized standards, for example, US GAAP, then such a company must prepare its first consolidated financial statements according to IFRS for 2015.

Primary source documents

As said above, the new accounting law, effective from 2013 will introduce considerable flexibility in regards to the form of supporting primary (or source) documents and abolish the strict and confusing rules presently in force in Russia.

Now the template for source documents will have to be designed and adopted by the company itself with approval by the chief executive officer. In addition, the law now allows for the primary accounting documents to be drafted in digital form and hence be approved by a digital signature.

Each operation has to be supported by an appropriate source document or a set of documents. According to the new accounting law the source documents must contain at least these mandatory requirements:

a) Title of the document;

b) Date on which the document is drawn up;

c) Name of the entity;

d) Nature of the business operation;

e) Volume and monetary indicators of the business operation (and other such descriptions);

f) Positions of officials responsible for the completion and proper documentation of the relevant transactions;

g) Personal signatures (and other needed identification) of these (above mentioned) officials.

For example, if one company provides services including consulting or legal services to another company in Russia, it must draw up a specific source document, including all the above reference details. In practice, such a document is called a ‘certificate of acceptance of services’. This certificate should be signed by both the service provider and the client.

Although the new accounting law now contained the welcome reform of abolishing the mandatory templates for source documents there is now a risk that the tax authority is now trying to fulfill the vacuum and claim the right to impose new mandatory forms on taxpayers. The Federal Tax Service has already issued numerous such template source documents. One of these is the template for a so-called “Consignment Note” (form TORG-12) which according to the practice the tax authority adheres to is considered as a mandatory accounting document for justifying expense and VAT deductions in connection with sale of goods. The tax authority requires that such a consignment note is signed by both the purchaser and the seller. For the purpose of supporting sales of fixed assets the tax authority has issued another template document called “Certificate of Acceptance of Fixed Assets” (form OS-1). In addition to these the tax authority has also issued templates for a waybill (Form 1-T).

The Russian Tax Code mandates that for tax compliance purposes the transactions will have to be supported by the same source documents as those required by the Accounting Law. According to the profit tax laws the deductibility of expenses is subject to proof that they are economically justifiable and properly documented. Concerning expenses that have been incurred in another country the source documents have to be drawn up in accordance with ordinary business practices applicable in the relevant state.

Recent court practice has supported a tendency of judging the accuracy of source documents not strictly in reference to the state sponsored source documents (under the old accounting law) and instead considering the extent of documentary support on more substantial criteria. The Supreme Commercial Court has determined that the taxpayer may refer to any documentary evidence in support of confirmation of the conditions of deductibility, and that all the evidence must be considered as a whole (Supreme Commercial Court Determination No. VAS-5445/09 of 17.06.2009; see also ,for example, Resolution of the Federal Commercial Court of the Central District dated February 18, 2010 on Case No. А35-5033/08-С21).

The law does not impose strict regulations in respect to the form and flow of electronic primary accounting source (as is the case with electronic VAT invoices).

As of May 2012 electronic VAT invoices may be issued in Russia (please refer to chapter VAT for more details).

Storage of accounting and tax records

According to the Tax Code (art. 23), accounting records as well as taxation documents including tax receipts must be stored for 4 years Art23(1)(8). However, it should be noted that the storing period specified in the 1996 Law on Accounting (art. 17) is 5 years. When claiming Deductions for losses relating to prior periods (Loss-Carried-Forward Rule), the corresponding accounting records will have to be available for all those periods to which the loss carried forward refers to. The Loss-Carried-Forward rule allows for the Deduction of losses relating to periods as far back as ten years (art. 283(2), Tax Code).

Audit in Russia

The Russian Law requires that the following entities have their accounting records fully audited by a licensed auditor (article 5 of the Russian Audit Law):

1. Listed companies (OAO).

2. Banks, credit or insurance companies, mutual insurance associations, clearing agencies, commodity and stock exchanges, incorporated investment funds, non-budgetary state funds, holding/management companies of investment funds, unit investment funds or non-state pension funds (excluding non-budgetary state funds).

3. Enterprises that have annual revenue in the preceding financial year exceeding 400 million RUB (approximately 13.5 million US dollars as at April 2012)

4. Enterprises that have total assets at the end of preceding financial year exceeding 60 million RUB. (approximately 2 million US dollars as at April 2012)

5. If securities of a company are admitted to trading on stock exchange.

6. If an entity provides or publishes its financial-accounting report to the public (excluding state companies and state non-budget funds).

7. In other cases as stipulated by the law.

A Russian audit requires not only a systematic verification of the accounts, but also a meticulous examination of the procedures and accounting procedures of the enterprise to ensure that the books have been kept in the manner prescribed by the law as per the accounting and tax law.

preferred

· Russia—No more than 25% of capital may be preferred stock. Voting rights are limited, but if dividends are not fully paid, shareholders obtain full voting rights.

ordinary

An ordinary share gives the right to its owner to share in the profits of the company (dividends) and to vote at general meetings of the company.

common

It is called "common" to distinguish it from preferred stock. If both types of stock exist, common stockholders usually cannot be paid dividends until all preferred stock dividends are paid in full; it is possible to have common stock that has dividends that are paid alongside the preferred stock.

treasury

The Federal Treasury (the Treasury of Russia) is a federal executive body (federal service) responsible for exercising, in accordance with the Russian legislation, law-enforcement functions to ensure the implementation of the federal budget, providing cash for the implementation of other budgets of the Russian budgetary system, preliminary and current control of transactions involving federal budget funds exercised by the chief administrators, administrators and recipients of federal budget funds.

Dividend

1.2. Shareholders should have equal and fair opportunities to participate in the

profits of the company by means of receiving dividends.

1.2.1 The company should develop and put in place a transparent and clear mechanism for determining the amount of dividends and their payment.

30. The company should adopt a dividend policy, which should be set out in its Regulationn Dividend Policy. This internal document of the company shall be drafted and approved by the board of directors. The company should set its dividend policy in the mid-term and in the longterm.

If there is a change in its dividend policy, the company should explain the reasons and rationale therefor to its shareholders in every detail. If such a change is not caused by the company’s development needs or the then existing overall economic situation, for example, if

such change occurs due to a change of corporate control over the company, this cannot be viewed as a good corporate practice.

31. To ensure transparency of the mechanism for determining the amount of dividends and their payment, it is recommended to set forth rules in the Regulation on Dividend Policy

The JSC Law presently provides that where dividends are paid on shares of Russian joint-stock companies, they should be paid from the "net profit" of the company. The proposed amendments to Article 42 would specifically establish that "net profit" for the purposes of paying and recording dividends must be based on the accounting (financial) statements of the company. Presently, the JSC Law does not specify how "net profit" for dividend purposes should be determined. While most of the companies use a notion of "net profit" set out in Russian accounting or tax laws, a number of companies have used this existing loophole to pay-out low dividends. A widely publicized example is that of "Surgutneftegas," whose dividend policy was based on a peculiarly defined "net profit," which allowed the company to deduct large sums of capital expenditure and fund payments, shrinking the net profit as reported to shareholders, and lowering the dividends to be paid.

The charter of JSCs must determine the dividend rate and/or the value which is payable in the event of the company’s liquidation for preference shares of each type.

Dividends paid to foreign companies (which do not have a permanent establishment in Russia) are subject to 15% profits tax withholding, but reduced rates may apply under applicable double tax treaties. Dividends received by Russian companies are taxed at 9% unless they qualify for the participation exemption regime. Under this regime, dividends received by Russian companies from qualifying participations in Russian and foreign companies are tax-exempt.

Dividends received by Russian companies are subject to a 9% tax rate. In order to prevent double taxation of dividends, the tax base on domestic dividends paid is determined as the difference between dividends paid to RLEs by the taxpayer and dividends received from RLEs; i.e., further distribution of dividends received by RLEs from other RLEs to their own RLE investors is not taxable. A participation-exemption regime applies to dividends received by RLEs in relation to investments meeting certain conditions. Dividends received by an RLE should be tax-exempt if (i) the RLE receiving the dividends has continuously owned for at least 365 calendar days a stake of at least 50% of the capital of the organization distributing the dividends or depositary receipts, conferring the right to receive dividends in an amount not less than 50% of the total amount of dividends payable by the organization as of the date of decision to pay dividends, and (ii) the acquisition cost of the stake exceeds RUB 500 million (approximately US$16.5 million). The RUB 500 million investment condition is abolished from 1 January 2011. There is an additional participation-exemption condition for dividends paid by FLEs: the state of residence of this FLE must not be included in a list approved by the Ministry of Finance of countries which provide preferential tax treatment and/or do not require the disclosure of information when financial operations are carried out (offshore zones). Dividends received by RLEs from non-qualifying participations are taxed at 9%. Dividends paid to FLEs are subject to a 15% tax rate with no credit for withholding tax paid on underlying dividends. The tax rate can be reduced by the provisions of an applicable double tax treaty (the minimum available rate under some tax treaties is 5% for qualifying participations).

1.3 BUSINESS LAWS
- BUSINESS LAWS
  
  ■Company Law
  
  1. Companies Act 1995
  
  The amendments to the Companies Act 1995 concern, in particular:
  
  • the procedure for reduction of capital with the view to protect better the rights of creditors (Article 30);
  
  • new provisions governing shareholders’ agreements (Article 32.1);
  
  • the methods of payment for the company’s shares permitting to offset monetary claims against the company against the amounts owed for the shares allotted by private placement (Article 34);
  
  • the consequences of the value of net assets of the company falling below its equity capital (Article 35);
  
  • joint liability of the company and registrar for losses caused to shareholder by improper maintenance of the register of shareholders and the rights of recourse of the persons jointly liable against each other (Article 44);
  
  • invalidity of decisions of general meeting of shareholders approving major transactions and interested transactions, decisions of general meeting of shareholders made on the matters not included in the agenda of the general meeting of shareholders, in breach of the competence of general meeting of shareholders, in the absence of the quorum or without the majority of the votes of shareholders necessary to make the decision (Article 49);
  
  • information required to be provided to the shareholders when preparing a general meeting of shareholders (Article 52);
  
  • the consequences of refusal of the board of directors (supervisory board) of the company to include a proposed question in the agenda of general meeting of shareholders or a candidacy in the list of candidacies for a management body of the company (Article 53);
  
  • the procedure for requisitioning an extraordinary general meeting of shareholders where the board of directors fails to convene it (Article 55);
  
  • the procedure for holding meetings of shareholders prescribed by court order (Article 58);
  
  • the time allowed for the counting commission to report the voting results of a general meeting (Article 62)
  
  • the time allowed to draw up and sign the minutes of shareholder meetings (Article 63);
  
  • the circumstances in which a board member or a shareholder may challenge decisions of the board, the circumstances in which the court may uphold the decisions being challenged, the limitation periods for such claims, the consequences of invalidation of decisions to convene a board meeting or a general meeting, and the legal status of board decisions made ultra vires, in the absence of the quorum, or in the absence of the requisite majority vote (Article 68);
  
  • new provisions governing formation of the sole-member executive body of the company or early termination of its powers (Article 69);
  
  • invalidity of decisions made by collegiate executive body of the company (management or directorate) (Article 70);
  
  • invalidity of the transactions of the company requiring compulsory price assessment (Article 77);
  
  • invalidation of major transactions and the circumstances in which the court ought to upheld non-compliant major transactions (Article 79);
  
  • invalidation of interested transactions and the circumstances in which the court ought to upheld non-compliant interested transactions (Article 84);
  
  • exclusion from the compulsory buy-out of acquisition by the Russian Federation of shares in order to form the property of State-owned corporations (Article 84.2);
  
  • the list of the documents that a company required to safe-keep (Article 89);
  
  • the documents which the company must make available to shareholders on demand (Article 91)
  
  2.    Companies Act 1998
  
  The amendments to the Companies Act 1998 concern, in particular:
  
  • taking private security companies and foreign investments into companies of strategic importance for defence and national security outside the scope of application of the Companies Act 1998 (Article 1);
  
  • the rights of participants of the company including the right to enter into an agreement of the participants and the scope of that agreement (Article 8);
  
  • the duties of participants of the company (Article 9);
  
  • the procedure for formation of the company (Article 11);
  
  • the charter of the company (Article 12);
  
  • the capital of the company and payment for participatory interests in the capital of the company (Articles 14 and 15);
  
  • increase of the capital of the company (Articles 18, 19);
  
  • reduction of the capital of the company (Article 20);
  
  • transfer and alienation of participatory interests in the company and new requirement for certification by notary of transactions for alienation of participatory interests (Article 21);
  
  • pledge of participatory interests (Article 22);
  
  • exit of participants from the company and redemption by the company of participatory interests (Articles 23 and 26);
  
  • participatory interests held by the company (Article 24);
  
  • imposition of sanctions on participatory interests on demand of creditors (Article 25);
  
  • new obligation of the company to maintain the list of participants of the company (Article 31.1);
  
  • new provisions governing the competence of the board of directors (Article 32);
  
  • the competence of general meeting of participants (Article 33);
  
  • new requirement to send to participants of the company a copy of the minutes of general meeting of participants (Article 37);
  
  • transfer of the powers of the sole-member executive body to the manager (Article 42);
  
  • consequences of disputing of decisions of management bodies of the company (Article 43);
  
  • interested transactions (Article 45);
  
  • major transactions (Article 46);
  
  • safekeeping of the company’s documents and provision of information to the participants (Article 50); and
  
  • reorganisation of the company (Articles 51 to 56).
  
  ■Federal Law on Special Economic Zones In The Russian Federation 2005
  
  The Federal Law is the backbone of a legislative reform aimed at replacing and simplifying the existing Russian regulation of special and free zones. The new system will include two Federal Laws on the Special Economic Zones of Kaliningrad and Magadan3. The draft gives a predominant role to the Federal Government is all aspects pertaining to the policy, the creation, the financing and the management of SEZ. It is vague or ambiguous on certain characteristics of the zones and silent on others key issues such as:
  
  ·   the purpose of setting up SEZ (in particular the draft delegates to the Government the task of defining the activities that may be conducted in each SEZ at a later stage)
  
  ·   the balance of public and private funding of adequate infrastructure
  
  ·   how domestic investors will benefit the SEZ and how benefits will be spread around the economy, stimulating employment regionally and preserving the environment
  
  · tax concessions and other incentives for potential investors ; no ways to alleviate the permissive effect of administrative barriers
  
  · the private sector is denied any role in the management and the promotion of SEZ.
  
  Article 4 of this law defines and provides what are special economic zones.
  
  Types of Special Economic Zones
  
  1. The following types of special economic zones shall be established on the territory of the Russian Federation:
  
  1) industrial-and-production special economic zones;
  
  2) technological-and-innovative special economic zones;
  
  3) tourism-recreational special economic zones;
  
  4) by-port special economic zones.
  
  2. Industrial-production special economic zones shall be sited on plots of territory with a common border whose floor area does not exceed twenty square kilometers. Engineering-new-technique-introduction special economic zones shall cover no more than two plots of territory whose total area is not in excess of three square kilometers.
  
  2.1. Tourism-recreational special economic zones and by-port special economic zones shall be sited on one or several plots of territory to be designated by the Government of the Russian Federation.
  
  2.2. The by-port special economic zones shall be set up on the territories of sea ports and river ports open for international traffic and call-in of foreign vessels, or territories of airports open for receipt and dispatch of aircraft carrying out international air transportation and also on territories intended in the established procedure for construction, reconstruction and operation of sea port, river port or airport. The by-port special economic zones may not include property complexes intended for passenger boarding upon vessels, disembarkation out of vessels or for other passenger service.
  
  2.3. The by-port economic zones shall be set up in accordance with Part 2.2 of this Article on the plots of the territory which have the common border and whose floor area is not in excess of fifty square kilometers. The increase of said floor area shall be subject to decision of the Government of the Russian Federation.
  
  3. A special economic zone, except for a tourism-recreational special economic zone and the by-port special economic zone, may not be sited on territories of several municipal entities. A special economic zone, except for a tourism-recreational one, shall not cover wholly a territory of any administrative-territorial entity.
  
  4. It is not allowed to locate within a special economic zone, except for a tourism-recreational special economic zone, facilities of the housing fund.
  
  5. The following shall not be allowable on the territory of a special economic zone:
  
  1) development of mineral deposits, extraction thereof, except for the development of deposits of mineral water, medicinal mud and other natural medicinal resources, extraction thereof and steel-making in accordance with the All-Russia classification of economic activities;
  
  2) processing of mineral resources, except for commercial bottling of mineral water, other use of natural medicinal resources and processing of ferrous and non-ferrous scrap;
  
  3) manufacture and processing of excisable commodities (except for passenger cars and motorcycles).
  
  6. The Government of the Russian Federation shall have the right to specify other types of activity conduct of which shall not be allowed within a special economic zone.
  
  In Article 5, the terms and conditions for establishing SEZ are provided.
  
  Article 5. Terms and Conditions of Establishing Special Economic Zones
  
  1. Special economic zones, except for the by-port special economic zones, may be only established on the land plots that are in the state and (or) municipal ownership.
  
  2. At the time of establishing an industrial-and-production special economic zone the land plots constituting its territory must not be in the ownership and (or ) use of citizens and legal entities, except for the land plots which are allotted for location and use of engineering infrastructure units and where such units are situated.
  
  3. At the time of establishing a technological-and-innovative economic zone the land plots forming its territory, except for the land plots which are allotted for location and use of engineering infrastructure units and where such units are situated, must not be in the ownership and (or) use of citizens and legal entities, except for educational and (or) scientific research organisations.
  
  3.1. At the time of setting up a tourism-recreational special economic zone, the land plots making up that zone (including land plots which have been made available to locate and operate facilities of the engineering, transport, social, innovation and other infrastructures of that zone, facilities of the housing fund and those on which such facilities are located) may be held in ownership and/or usage of either citizens or legal entities. The land plots for setting up a tourist-recreation special economic zone may be a part of lands of the forest fund, lands of specially protected territories and bodies, including lands of national parks.
  
  3.2. At the time of setting up a by-port special economic zone, the land plots making up that zone (including land plots made available for the siting and use of facilities of engineering, transport, social, innovation and other infrastructures of that zone) may be held in the ownership and/or use of citizens or legal persons.
  
  4. At the time of establishing an industrial-and-production special economic zone on the land plots forming its territory may be only located the units which are in the state or municipal ownership and which are not in the ownership and (or) use of citizens and legal entities, except for the units pertaining to engineering and transport infrastructure.
  
  5. At the time of establishing a technological-and-innovative economic zone on the land plots forming the territory thereof may be only located the units which are in the state and (or) municipal ownership and which are not in the ownership and (or) use of citizens and legal entities (apart from the units pertaining to engineering and transport infrastructure), except for educational and (or) scientific research organisation.
  
  6. At the time of setting up a tourism-recreational special economic zone, land plots making up that zone may be the site of facilities held in state, municipal or private ownership.
  
  7. At the time of setting up a by-port special economic zone, land plots making up the by-port special economic zone, may be the site of facilities of infrastructure which are held in the state, municipal or private ownership and are used in conducting the port-related activity in accordance with Part 2.2 of Article 10 of this Federal Law or activity associated with construction, reconstruction and operation of facilities of infrastructure of sea port, river port or airport.
1.4 REGULATORY BODY/BODIES AND AFFILIATED INSTITUTIONS
- REGULATORY BODY/BODIES AND AFFILIATED INSTITUTIONS
  
  ■Ministry of Economic Development
  
  The Ministry of Economic Development (Minekonomrazvitiya) is a federal executive body responsible for drafting and implementing government policy and legal regulation in the field of socioeconomic analysis and forecasting, development of business, including small and medium-sized business, protection of the rights of legal entities and self-employed entrepreneurs when undergoing state control (supervision) and municipal control, licensing, accreditation of certification agencies and test laboratories (centres) responsible for compliance certification with the exception of compliance certification for defence products (work, services) supplied under state defence orders; products (work, services) used for the protection of information considered to be a state secret or any other information considered restricted in accordance with the legislation of the Russian Federation; products (work, services) information about which is considered to be a state secret; products (work, services) and facilities with special requirements that are concerned with nuclear and radiation security in the use of nuclear energy, accreditation of citizens and organisations recruited by state control (supervision) agencies for control actions, experts and expert organisations recruited by federal agencies under the executive branch for the exercise of certain powers, safety of production processes, self-regulation of professional and entrepreneurial activities, support for socially oriented non-profit organisations, foreign economic activities (excluding foreign trade), property relations, insolvency (bankruptcy) and financial rehabilitation, valuation activities, land relations (excluding agricultural land, as well as the rezoning of land registered as water resources and land in restricted areas, notably conservation areas, and under restricted facilities), state cadastre of real estate, state cadastral registration and related activities, state cadastral valuation, state monitoring of land (excluding agricultural land), state registration of ownership rights to real estate, geodesy and cartography, creation and further development of the spatial data infrastructure of the Russian Federation, investment activity and state investments, development of interstate and targeted federal programmes (long-term targeted programmes), departmental targeted programmes, development and implementation of socioeconomic development programmes of the Russian Federation, creation and operation of social economic zones in the Russian Federation, management of state material reserves, placement of orders for goods, work and services for state and municipal purposes. The Ministry of Economic Development of the Russian Federation is an authorised federal agency under the executive branch charged with regulating valuation activities.
  
  ■Ministry of Industry and Trade
  
  The Ministry of Industry and Trade (Minpromtorg) is a federal executive body responsible for:
  
  ·  drafting and implementing government policy and legal regulation in the industrial and defence sectors, energy conservation and improving energy efficiency in the movement of goods, and also in the development of aviation technology, technical regulation and unity of measurements, science and technology in the interests of state defence and security, foreign and domestic trade, public catering and consumer services, and folk handicrafts;
  
  · providing government services and managing state property in mechanical engineering, the metallurgy, chemical, pharmaceutical, biotechnological, medical, light, forest, pulp and paper, wood-processing, electronic, aviation and shipbuilding industries, the communications industry, radio industry, munitions and special chemicals industry, chemical disarmament, conventional arms manufacturing, and folk handicrafts;
  
  ·  supporting industrial exports, ensuring the market availability of goods and services, holding exhibitions and fairs, conducting investigations prior to the introduction of special protective, anti-dumping or compensatory measures when importing goods, and also compensatory measures as set out in the Agreement on Unified Rules for Providing Industrial Subsidies of December 9, 2010, implementing non-tariff regulation measures, and acting as the authorised federal executive body in charge of implementing government regulation in foreign trade, with the exception of matters relating to customs and tariff regulation and issues connected with the accession of the Russian Federation to the World Trade Organisation;
  
  
  
  · acting as the federal body responsible for technical regulation.

1.5 MINIMUM REQUIREMENTS

MINIMUM REQUIREMENTS

The following are the minimum requirements for starting a business in Russian Federation - Moscow

Procedure	Time to complete	Associated Costs
1. Notarize company registration application Each founder must fill out and sign a standard registration application, which must be notarized. There is a stamp duty of RUB200 per copy. This cost does not include fees for technical work charged by notaries or lawyers if this application form is completed by them – the cost of RUB 200 assumes that the application form is filled out by the entrepreneur themselves. Fees of technical work by lawyer/notaries are only applicable in cases where there is a need to draft a charter, and thus are not applicable to the Starting a Business case study. Starting from May 5, 2014 this procedure ceased to be compulsory. If the founder is able to attend the Tax Service office and file all the documents in person, the application does not have to be notarized and the tax officer can certify the founder’s signature instead. However, this is possible only in case when all the founders are able to visit the Tax Service in person, otherwise the application must be notarized. Agency: Notary Public	1 day	RUB 200 per copy
2. Pay registration fee New company must pay a registration fee of RUB 4,000, and collect a payment receipt from a terminal machine. Business registration receipt is required for Procedure 4, registration with Federal Tax Service. The entire process takes only a few minutes, but it must be done in person. Payments can be made at the post office, any bank office, including Sberbank offices throughout Moscow, or at payment terminals at the Moscow Tax Service Office #46, where business registration is done. The registration service is free of charge only at Sberbank, all other entities charge a commission. Agency: Bank	1 day	no charge
3. Register with the unified register at the Federal Tax Service on the local level, obtain state registration number and identification number of taxpayer (INN) The company must submit the following documents for registration: • Resolution of the founders on the establishment of the company; • Charter (2 originals required, one is stamped by the Federal Tax Services and returned to applicants after the registration); • Notarized Registration Application; • Receipt of payment of the state registration fee (procedure 2). • Document Certifying the Physical Address of the New Company (this could be a lease agreement or a letter by the property owner of the leased property, certified with signature and building company’s stamp. If the leasing office space is from an individual owner this document would need notarization.) The tax authorities sometimes implement a number of additional requirements, and failure to comply may lead to the rejection of the application. At the time of application, the applicant receives a confirmation slip, which specifies the date that the registration will be complete and ready for pick up. This is always 5 working days (not counting the day of the application) after application. The registration fee is RUB 4,000. On the day of pick up, the applicant will receive a package of documents, including Abstract of the state registration, abstract of tax registration with a Tax Identification Number (TIN), one of the original company charters (that the applicant submitted) stamped by the government, and certificate of business entry in the unified State Register of Legal Entities. If the applicant does not pick the registration documents from the office, it is sent by mail. The procedure could also be done online http://www.nalog.ru/rn77/service/gosreg_eldocs/- with electronic signature. However, obtaining online signature is costly and time consuming. In practice, most businesses do not utilize the online services. The online service has been available since 2012. Agency: Federal Tax Service	7 days	RUB 4,000
4. Make a company seal On 6 April 2015, the President of the Russian Federation signed Federal Law #82 that eliminates requirement for a company seal. However, in practice, majority of the businesses still obtain a company seal as part of the process of starting a business. A company seal typically costs RUB 500. Agency: Seal-making service	1 day	RUB 500
5. Open the company bank account According to the Central Bank of Russian Federation instruction No. 153-I from May 30, 2014, the following documents are required in order to open a business bank account: • A certificate of state registration of the legal entity; • Founding documents of the legal entity; • Certificate of tax registration; • The license (permit) issued for a legal entity if such licenses (permits) are directly related to the capacity of the legal entity; • Bank signature card; • Documents confirming authorities of the persons defined in bank signature card; • Documents confirming authorities of the sole executive body of the legal entity. In accordance with Article 22.1.10 of the Basic Principles of Russian Legislation on Notaries Public, the notary's fee for certification of signatures and bank cards is equal to RUB 200. The notary's total fee for such certification, including technical work, is approximately RUB 800 - 1200. The signature of the entrepreneur must be certified and registered by a bank. There is a special form (provided by the government) that must be completed for this procedure. Entrepreneurs have two options. They can either (a) have the signature form notarized and then it can be brought to the bank when opening the bank account, or (b) they can certify the signature of the entrepreneur at the bank, when opening a bank account. According to the Federal law No. 52-FZ on Introduction of Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation, as of May 1, 2014 a company is not obliged to inform the Federal Tax Service on opening, closing or changing details of the company's bank account. Agency: Bank	2 days	free if done at the bank; RUB 200 (signatures and bank card) + RUR 1000 (notary fees) approximately if done with the notary

The following are the minimum requirements for starting a business in Russian Federation - Saint Petersburg

Procedure	Time to complete	Associated Costs
1. Pay the Registration Fee and Registration with the Unified State Register Documents needed to start a Business in Saint Petersburg: · Application for state registration of a legal entity upon its foundation; · Decision to found a company formalized by sole founder decision or protocol of the general meeting of founders; · Articles of incorporation of a legal entity (charter) (in two original copies – if filed in hard copy)	5 days	RUB 4,000
2. Make a seal in a private company The company needs to make a company seal before opening a bank account. The cost of acquiring a company seal at the average market price is RUB 350 Agency: Seal maker	1 day	RUB 350
3. Open a company bank account Fees may vary depending on the bank. According to the Federal law No. 52-FZ on Introduction of Amendments to Parts One and Two of the Tax Code of the Russian Federation and Certain Legislative Acts of the Russian Federation, as of May 1, 2014 a company is not obliged to inform the Federal Tax Service on opening, closing or changing details of the company's bank account. This is done automatically by the bank. Agency: Commercial Bank	1 day	RUB 500

1.6 FOREIGN INVESTMENTS
- FOREIGN INVESTMENTS
  
  ■Overview on Special Economic Zones (SEZ)
  
  Russia’s special economic zones (SEZ) are one of the most effective instruments of attracting investment in the country. It has 28 SEZ classified into 4 different types:
  
  · 6 Industrial and Production zones (in Republic of Tatarstan, Lipetsk, Samara, Sverdlovsk, Pskov and Kaluga regions);
  
  · 5 Technology and Innovation zones (in Moscow, Saint-Petersburg, Tomsk, Dubna (Moscow region) and Republic of Tatarstan);
  
  · 14 Tourist and Recreational zones (in Republic of Altai, Republic of Buryatia, Altai Territory, Stavropol Territory, Primorsky Territory, Irkutsk region, also there is cluster in the Krasnodar Territory, Republic of Ingushetia, Republic of Dagestan, Republic of North Ossetia-Alania, Republic of Adygeya, Kabardino-Balkar Republic, Karachi-Cherkess Republic and Chechen Republic);
  
  · 3 Port zones (in Ulyanovsk, Murmansk regions and Khabarovsk Territory).
  
  SEZ in Russia are located in the most developed regions. There are hi-technology enterprises, scientific and research laboratories in the zones. By December 2013 there were 338 residents in the special economic zones, including leading foreign companies from 24 countries, among them there are the major transnational companies: Ford, Yokohama, 3M, Air Liquide, Rockwool, Hayat, Novartis, etc. The total volume of scheduled investments is more than US $12 billion.
  
  Residents of technology and innovation zones obtained 350 industrial patents. The world’s largest companies, such as Boeing, Airbus, Apple are among the consumers of SEZ residents products, and such companies as Phillips, Samsung, IBM, etc. are their partners. The SEZ residents’ products are in demand, and this indicates the high potential of SEZ as a tool to support innovative companies, through which residents compete successfully in the global market.
  
  From 2005 the "industrial assembly" regime was established in Russia to attract investment from foreign automakers. "Industrial assembly" means gradual localization of automotive vehicles and components production in Russia with different benefits and preferences. However, in accordance with the commitments made by the Russian Federation during the WTO accession, further development of this regime became impossible. Thus, the mechanism of the SEZ is currently the only existing mechanism for attracting foreign investors, which allows potential investors to use preferential government support.
  
  The benefits of special economic zones can reduce the expenses of the investor up to 30%.
  
  ■Advantages of SEZ
  
  Special economic zones provide special condition of doing business for the residents which is guaranteed by the Government of the Russian Federation:
  
  1. Tax preferences:
  
  Income tax: for the SEZ residents tax rate is 0-13.5% instead of 20%;
  
  The residents of technology and innovation and tourist and recreational special economic zones which are combined into cluster are exempt from income tax;
  
  Property and transport tax exemption for 10-15 years;
  
  At the federal level investors are exempt from land tax for 5-10 years.
  
  2. Investors receive modern transport, social, customs and other infrastructure for business development created at the expense of state budget;
  
  3. Special custom regime – is a regime of free customs area which means that investors in the special economic zones’ territory don’t have to pay customs duty and value-added tax for foreign goods and it is also forbidden to use prohibitions and restrictions of economic character;
  
  4. Reduced administrative barriers (the system "single window" simplifies the interaction with regulatory authorities). Single window means that investor give all documents to one special agency and this agency assist in agreement procedures that reduce the time on initial stage of the investment project.
  
  5. Access to the qualified personnel resources.
  
  6. There is simplified migration regime for highly qualified foreign staff, involved in the special economic zone.
  
  ■Registration of SEZ
  
  The process of obtaining the status of a SEZ resident is legally transparent and easy for an investor and consists of 4 major steps:
  
  1. Company registration and business-plan making;
  
  2. Handing in an application to the Ministry of economic development of the Russian Federation;
  
  3. Application acceptance by the Expert committee;
  
  4. Signing triangular agreement between investor, Ministry of Economic Development and SEZ management company.
  
  Any company or individual entrepreneur, legally registered in the boundaries of the special economic zone can become the resident of SEZ.
1.7 REFERENCE LIST
- REFERENCE LIST
  
  1.    Companies Act of 1995
  
  2.    Companies Act of 1998
  
  3.    Federal Law on Special Economic Zones In The Russian Federation 2005
  
  4.    Laws on the issue of mapping, cadaster and registration of property
  
  5.    Corporate Governance Code of Russia 2014
  
  6.    Federal Law No. 14-FZ on Limited Liability COmpanies
  
  7.    http://www.jusprivatum.com/practice_areas/limited-liability-company-llc-formation-registration-russia.cfm
  
  8.    http://www.awarablogs.com/accounting-and-audit-in-russia/
  
  9.    http://economy.gov.ru/en/home/about/
  
  10. http://government.ru/en/department/79/events/
  
  11. http://government.ru/en/department/54/events/
  
  12. https://www.pwc.ru/en/doing-business-in-russia/assets/doing-business-and-invest-in-russia_fin.pdf
  
  13. http://www.acg.ru/english/russian_legal_entities_in_russia
  
  14. http://www.bridgewest.eu/article/russian-company-types
  
  15. http://www.hg.org/article.asp?id=28381
  
  16. http://russianamericanchamber.com/en/business/establishing.htm
  
  17. http://www.ey.com/Publication/vwLUAssets/Doing-business-in-the-Russian-Federation-2011/$FILE/Doing-business-in-the-Russian-Federation-2011.pdf
  
  18. http://www.awaragroup.com/annual-general-meetings-of-a-russian-subsidiary/