2. Funding your operations
Once you have made the decision to set up in Russia, some thought should be given to funding your start up and ongoing expenses. There are a few options to consider: share capital, loans, parent-subsidiary financing, or cost+ arrangements.
The statutory share capital for a Russian legal entity is rather small (approx. 220 Euros). This type of funding is not very attractive, as your funds are stuck in Russian roubles with all the related currency risk.
A loan is a popular option because it allows for better cash-flow management. Cash can be sent in tranches when needed and can be re-paid if there is an excess of cash in the subsidiary. In addition, if structured properly, interest on the loans can be charged to profits, reducing your taxes payable.
Parent-subsidiary financing is a non-taxable contribution to the capital of the subsidiary by a parent owning more than 51% of the equity of the subsidiary. Apart from the benefit of managing cash-flows and currency risks as with loans, this form of financing does not require statutory registration of the increased capital and increases the equity side of the balance sheet.
Cost+ arrangements are becoming more popular as a means of financing a local subsidiary, which is not trading locally. Basically, the subsidiary “charges” the Head Office for all costs (rent, salary, marketing) plus a mark-up based on their internal corporate practice and local market practice (5 to 25%). Taxes are paid to the local budget based on this “profit”.
3. Finding a Manager – local or expat?
Should you hire a local (Russian) manager with a clear understanding of the local culture and business ethics? He or she may be well connected, making it easier to solve problems when they arise. The disadvantage of this option is that the talent pool for managers is still relatively small in Russia, and as an SME, you will be competing with the big firms and be expected to pay top dollar to good managers.
Another option is to find an expat already settled in Russia, ideally, with a Russian family and looking to stay for a while. These candidates usually speak Russian and have a good understanding of the Russian culture and values. They may have good connections and have worked for start-ups before, and so understand the needs of SMEs on a tight budget. The downside of this group of candidates is that they tend to be entrepreneurial and looking to set up their own business and may not be a long-term solution.
One option that has become more popular is bringing a young expat over from the home country. Usually unmarried, ambitious, and looking for international experience, they are generally willing to give 2-3 years with relatively low pay to gain this type of experience.
4. HR issues in Russia
Twenty years ago staffing was not a problem; instead the issue was a shortage of skills. Now we almost have the reverse situation where in today’s market there is generally not a problem with skills but there is an issue in finding available staff.
It is generally accepted that Russia has a very well-educated work force and that many young people are innovative. One successful owner told us recently that in his view “Russia is a laboratory of ideas.” We therefore find that many SMEs succeed in attracting good people by offering a good working environment, consensual decision-making, attention to training and development, and maybe some form of ownership participation. What we have also been told by successful owners of SMEs is not to underestimate the importance of treating people well, being appreciative and having a good working environment. Also, be open with people and let them know what is happening and treat them with the respect that they deserve. With regard to talent retention and motivation, salary is still the biggest factor. However, job satisfaction and career growth are becoming more significant. With regard to additional employee benefits, private medical insurance has become the norm, even for SMEs.
One peculiarity about compensation in Russia is that all employees think in terms of “net salary”. Therefore if a potential candidate says he is looking for 100 roubles in salary, that means 100 roubles in his pocket, with the tax grossed up and paid by the employer.
5. Accounting and Taxation
There are several systems of taxation in Russia. The most frequently encountered include the following:
General system of taxation – may be applied by all types of legal entities. All taxes and appropriate tax rates will be applied.
Simplified system of taxation – was implemented specifically for SMEs and can be applied by legal entities where the total annual revenue does not exceed RUB 60 million (this number is not fixed and may vary from year to year). There are several other limitations including one that prevents a corporate shareholder from owning more than 25% of the shares (i.e. a 100% subsidiary of foreign legal entity does not qualify). The tax rate is 6% (if tax basis is revenue) or 15% (if tax basis is profit). Revenue and expenses are to be calculated on a cash basis.
Taxes and tax rates applied under the General system of taxation are:
Value Added Tax (VAT): General tax rate is 18%; for certain groups of goods 10%; export operations 0%.
Corporate Profit Tax: Tax rate is 20%.
Property tax: The tax rate depends on the region of Russia, but cannot exceed 2.2%.
Personal Income Tax: This is the employee’s personal obligation; the tax rate is a flat 13% for residents and 30% for nonresidents.
Social insurance payments: This is the employer’s only obligation; the rate is 30% for 2012. There is also an additional 10% for employees that earn over a certain threshold.
6. Practical experiences of setting up an SME – interview with a Russian business owner
We recently conducted a short interview with Mr Orlin Efremov, Founder and General Director of Performance Partners, Russia who established a legal entity in Russia during 2013.
Q. Mr. Efremov can you please summarize the main business activities of your company in Russia, and the form of legal entity that you have established?
A. “Performance Partners” was created on 26 July 2013 as a limited liability company (“OOO”). Its purpose is to provide consulting, training, and coaching B2B services in the field of personal leadership, communication, and strategic culture.
Q. What were the key steps that you needed to take to form the company and how long did the whole process take?
A. In terms of a company’s registration process the first thing to do is to find a reliable lawyer, who will guide you through the information and paper work. I don’t think there is a need to look for a big attorney firm, one could find suitable assistance by following advice from friends, partners, embassies or associations. After finding the lawyer it takes about a month or even just three weeks to obtain the registration.
Q. Can you describe how the whole process went and whether you experienced any particular difficulties or delays?
A, The main difficulty for me has been to find complete information about the process of registration and subscribing to the full range of state insurances and tax institutions. That’s why I addressed a lawyer, instead of doing it all myself as I had done several years before in France when I established a company there. There weren’t any delays in the procedure. In fact I was positively surprised by the ease of handing over the registration documents in the respective offices. It was all done in 15 minutes!
Q. Now that the company is established, what are the main requirements to keep the company compliant?
A. First of all, of course there is the book-keeping, and second, surprisingly, is to arrange for the secure receipt of state authorities’ correspondence. The post does not working correctly, letters are delayed, and often not delivered at all. One of the main secretarial tasks is to deal with the post! And it takes time!
Q. What is your advice to anyone wanting to set up their own business in Russia?
A. Well you mentioned before (in this article) that one need is time (and money) to set up a company here. This is true and I would like to stress that the time and efforts of the company’s highest executive is needed as well. Without this, the odds are that the daughter company will not adapt the product features, business processes or organizational culture to the Russian specificities. I have 3 managerial experiences at CEO level and this is the first and main conclusion I found.
7. Closing down your business in Russia
Before investing in setting up a legal presence, be aware that closing down a legal entity or rep office can take from 6 to 12 months and can be quite expensive. The main problem is reconciling your tax records with the tax office. As mentioned, the tax administration is still quite bureaucratic and records may not be easily accessible due to technical difficulties.
Nearly all aspects of start-up and ongoing compliance (legal and tax/financial) require either hiring one or more individuals, or out-sourcing. Either way, it is a real cost when it comes to Russia and it doesn’t wait for your sales revenue to come in. For some businesses, working initially via a distributor or other partners, using a Professional Employer Service, or simply working directly from the home office for a period, until business revenue can be more clearly projected, may be a sensible first step.
* In should be noted that there is intense discussion about removing this form if incorporation from the law. As of the date of writing the law has not changed
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