10.01.10

Establishing a Legal Presence in Russia
Representative Offices, Branch Offices, and Legal Entites
Legal Department, Alinga Consulting Group

Establishing a representative or branch office in Russia differs from company formation in both purpose and procedure. A representative office (rep office) is established as purely an observing body; its role is to represent the interests of the home office, but may not automously engage in business transactions in Russia. A branch office is similarly structured, but does engage directly in business transactions.

While Russian companies undergo a process of registration at formation, a rep. or branch office instead applies for accreditation with the State Registration Chamber within the Ministry of Justice. The accreditation period is determined by the duties paid and can last up to five years (with subsequent renewal). Representative offices of NGOs, according to recent legislation, now undergo a different procedure.

Rep offices may additionally apply for accreditation with the Chamber of Commerce and Industry, which carries the added benefits (with added costs) of making the government accreditation process smoother (in Soviet times this was the institution that dealt with foreign companies). Also, a rep office accredited with the chamber must still be accredited with the ministry. Branch offices may not be accredited in this manner through the chamber.

One of the main benefits of have a branch or rep office is that the accreditation bodies provide assistance in gaining visas for employees, partners, and even the family members of foreign employees. The chamber can also issue invitations for firms accredited through them. 

As the rep office or branch office is not a separate legal entity, it cannot be a "party" to a contract. Any rights acquired and obligations undertaken are considered the rights and obligations of the Home Office itself. Engagement in commercial activity (e.g. the determination of the material terms of contracts and their execution, receipt of payments under such contracts) may then cause a rep office/branch office to be defined as a "Permanent Establishment," i.e. a "tax resident" of the Russian Federation.

An rep office generally takes on a purely "representative" or "observer" function, and under applicable law is not allowed to engage in commercial activities. In addition to the "representative" and "observer" functions of an rep office, a branch office is allowed to take on more active functions (i.e., commercial) of the Home Office.

As branch offices are able to engage in almost any kind of commercial activity, many investors opt for this form of entity at the outset, on the basis that it is easier to establish a branch office and reporting requirements are less onerous (as compared to a Russian Legal Entity (RLE)) . At the same time, the nature of many investments, including joint ventures, production plants, licensing, customs or privatization issues, may mean that an RLE is better suited to a given investor's needs.

RLE vs. Rep/Branch Office

An RLE, such as an OOO (Limited Liability Company) or ZAO (Joint-Stock Company), is a separate legal entity (from the Home Office). The RLE itself may be the legal owner of any properties purchased or rights acquired and may conduct commercial activities from its own name and be a “party” to a contract.

Russian Legal Entity (RLE)	Branch/Rep Office (B/R O)
Legal
A separate legal entity that bears its own liabilities	Liability is borne by the Home Office
Financing and Repatriation of Profits
The start up activities and working capital requirements of the RLE can be financed by the following methods: charter capital, loans, parent (shareholder) financing. Dividends and repayment of loans can be viewed as forms of repatriation. Service contacts, royalty payments and other similar transactions can also be forms of repatriation. In this arrangement, VAT and income tax withholding, as well as increased foreign currency controls when moving funds out of Russia, are a concern.	There is no tax due on repatriation of profits after tax [1].  Funds are sent to B/rep office from the Home Office to finance operations -> income from sales in RUR received into ruble account of B/rep office -> RUR converted into $ and repatriated. The B/rep office is responsible for filing and paying taxes. There is better control of the flow of funds when needed as there are fewer applicable foreign currency regulations.
Accounting Compliance and Tax Filing
If revenues are more than 1 mil RUB/month, the RLE must make monthly advance payments on profit taxes, and if less - quarterly. In general the accounting requirements are bit more burdensome for RLE as quarterly financial statements must be prepared as well as full tax accounting, including VAT.	B/rep offices are allowed to file and pay quarterly profit taxes. This is an opportunity for tax planning. No VAT accounting is necessary if there is no commercial activity and VAT is recognized as a cost. It should be noted that if a branch office or rep office engages in commercial activity then full tax accounting and reporting is mandatory. The accounting requirements are not as burdensome – there are no quarterly financial statements, but an annual report on activities (includes quasi financial statements). Rep Offices which do not carry out commercial activities are exempt from VAT on their rent payments.
Foreign Employees
The RLE would need to apply for permits (for the Company and for the employee) and, in addition, register with the Migration Services to issue work visa support. In recent times this process has become unclear and the rules change often making it difficult to predict the results.	Current regulations require B/rep office to obtain work permits for foreign employees. However in practice this is ignored without serious consequences. If the B/rep office deals with government agencies e.g., Customs, then the permit should be obtained. The procedure for obtaining work visa support is simpler. i.e. the foreign employee can be in Russia on the proper work visa even if he/she does not have a work permit.

Accreditation vs. Registration

Companies with a strong brand name or presence outside of Russia often choose accreditation as the first stage of presence in the market as it allows representation of the company name inside Russia. As there are some perceptual limitations to the size that a rep office can be (number of employees) and still be considered to be performing limited "observatory" functions, such companies will eventually establish a Russian company, ultimately transferring to it all or most local business activity. If you plan to have sales people or other employees with such active roles on the ground in Russia, you should consider only the branch option, or establish a subsidiary.

Other Reasons for Establishing a Representative/Branch Office

• Accreditation of foreign employees. The rep office can provide up to five foreign nationals with accreditation. This has been historically easier to work with than the work permit system.
• Tax planning. A rep office can be one component of a tax-efficient structure, which might also include a local Russian company. Such planning is sector and company specific.
• Foreign currency regulation.  There is more flexibility in moving funds in and out of Russia if you have a rep office or branch as compared to a Russian-registered subsidiary.

One of the primary disadvantages of a rep/branch office structure is that liability flows through to the Home Office. There are ways to minimize or even eliminate this risk to the Home Office.

Note also that you cannot "convert" a rep office into a branch office. You would need to repeat the accreditation process from the beginning.

[1]   Applicable taxes: Profit tax (20%); Social tax (26%. 34% from 2011); Property tax (2% per year); VAT 18%.

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