Don’t get lost when setting up your business: a road map for navigating the local bureaucracy.
Ten years ago, foreign business people didn’t bother registering officially. Multinationals with a brand name to bring to Russia did of course, but the wave of entrepreneurs seeking to “strike it rich” in the new Russia did not see much point. Transactions were easier to conduct offshore and in cash; with a weak banking and legal system, there was little advantage to investing in the set-up and maintenance of a legal business structure.
Subsequent events, most notably those of August ’98, followed by legislation, that at least on the surface appears to be sound, have led to a more long-term approach toward investing in the Russian economy.
Registering a Business
Before July 1, 2002, the registration process was such that it drew heavily on the ranks of line-standers critical to most businesses in Moscow at the time. Documents were to be submitted to the local Registration Chamber within the Justice Ministry, then the tax authority and then the social funds. The company was fully functional in no less than six weeks.
This year, legislation was introduced that was intended to simplify this process. It has been referred to as the one-window system, whereby the tax authorities, which now has responsibility for company registration, would be the only stop along the way. The line-standers, however, still have an important role to play. Some tax inspectorates even require that you stand in two lines — one for company registration and one for tax registration.
General Registration Procedure
First, run a check on the proposed name of the company. The Registration Chamber performed this function, but as of July 1, 2002, it is still not clear whether this will be transferred to the tax authorities as well.
Any foreign shareholders should obtain a translated and notarized copy of their passport, a “business certificate” from their embassy, and a letter from their bank (can be Russian) stating they have an account. Determine your legal address (registered office). This is often bought, which is risky and can cause delays in the registration process. If you rent an office, the rental agreement is sufficient.
If you are registering an “OOO” (Limited Liability Company), deposit half of the statutory charter capital — 10,000 rubles ($316) — with a bank of your choice.
Have your signature notarized where required and take all documents, including the charter, to the Tax Inspectorate. In five days to two weeks you will be issued your Certificate of Incorporation and Certificate of Tax Registration.
Armed with several copies of the certificates, order a pechat, or stamp, and register with the State Statistics Committee and the three social funds. This can take an average of two weeks. Fines for late registration with these bodies can range up to 10,000 rubles.
Once you finish with the social funds, you may open your bank account and do business.
What Structure Is Suitable?
Foreign businesspersons entering the Russian market first face the choice of whether to set up a Russian company or a representative office of a non-Russian company.
While a branch office is much more expensive to set up (stamp duties range from $1,000-$3,500), it has some advantages, e.g. easier movement of funds in and out of Russia, no work permits required (this may change based on a new law on the status of foreigners in the Russian Federation coming into effect January 1, 2003) and visas can be extended in-country.
A Russian-registered business traditionally takes one of three forms. The “OOO”, the “ZAO” (Closed Joint-Stock Company) or the chastni predprinimatel (sole proprietor). From a broad legal standpoint, these forms are very similar to their non-Russian counterparts. From a tax perspective, the chastni predprinimatel, which is not a legal entity, has more risks since business liability is borne by the individual. However, the 13 percent tax rate on business income may provide sufficient returns for those risks. Note that the Registration Chamber (still responsible for the registration of the chastni predprinimatel) is somewhat reluctant to register foreigners for this status.
After Registration: Compliance
Legal compliance in Russia requires attention. For example, all Russian companies must now resubmit their charter documents by Dec. 31, 2002, to the tax authorities or face automatic liquidation.
A Russian company should file taxes monthly and quarterly. In a small company, the bookkeeper is often the frontline for all compliance issues — both tax and legal. While in the past bookkeepers were often hired for their ability to negotiate with the tax inspector, there is now far greater value placed on a bookkeeper who knows the new Tax Code and how to apply it.
Increased demand for trained and experienced bookkeepers has led to a steep increase in salaries in the past two years, and in the appearance of companies specializing in accounting and payroll services. While larger companies tend to use the payroll and consulting side of such services, small and medium-sized businesses find that outsourcing this distracting part of their business is increasingly attractive.
Another compliance issue is the work permit requirement. Although not strictly enforced, more attention is being paid to foreigners working in Russia.
Some time-saving tips
by Chet Bowling, Partner at Alinga Consulting Group (ACG)
- Pay particular attention to the advice of those who really have been running legitimate businesses.
- Develop a relationship with a notary.
- Choose a bank with internet banking.
- Choose your bookkeeper (individual or firm) carefully.
- Check licensing requirements when registering or engaging in new activities.
The Moscow Times Business Review
October 2002, Vol. 10, # 9