- Posted by Awara
- On December 7, 2017
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Branch of a Foreign Company and Limited Liability Company (Subsidiary Founded by а Foreign Company) in Russia:
Pros and Cons. Main Differences.
The two most common methods for foreign legal entities to operate in the Russian Federation are branches and limited liability companies.
Representative offices are less common, as their main goal is to ensure the protection of rights and interests of a foreign entity in Russia. Representative offices are permitted to engage in limited preparatory and auxiliary activities (search of business partners, market research, promo campaigns, etc.), but are prohibited from engaging in the full range of commercial activities available to both branches and local subsidiaries. Representative offices are not discussed herein.
A foreign legal entity can register a branch (“Filial”) in the Russian Federation to carry out commercial activities and bear material liability for obligations connected with business operations in Russia. A branch of a foreign company may start such activities only after it has been officially accredited by Russian authorities. Currently, accreditation is granted for an unlimited period of time.
Another way of setting-up a business in Russia for foreign companies is to register a subsidiary – a limited liability company (“Obshchestvo s ogranichennoi otvetstvennostyu”, or “ООО” in Russian). After registering with the tax authorities, an LLC also can carry out its business activities for an unlimited duration .
The comparative table below summarizes key features, pros, and cons of branches and subsidiaries of foreign legal entities organized as limited liability companies.
|Legal Form and Liability||Not a separate legal entity. The head office is fully liable for obligations of the Branch.||A separate legal entity, liable for its own obligations. Liability limited by its assets. In case of insolvency occurred through the fault of participants or through the fault of other persons, who are entitled to issue instructions binding for LLC or otherwise are able to determine its acts, such participants or other persons may be brought to subsidiary liability for LLC obligations in case of insufficiency of its assets.|
|Term of Existence||Term of accreditation is unlimited.||LLC is created for an indefinite period of time.|
|State fee||RUB 141,000||RUB 4,000|
|Term of registration||25 working days||5 working days|
|Governance||Director/Head of Branch/General manager acting pursuant to a power of attorney.|
Greater control exerted by foreign legal entity.
|General Director/Director acting pursuant to the charter without a power of attorney.|
|Name||The name of the Branch must repeat the name of the establishing company and contain the word “Филиал” (Filial, Russian for branch).||There are no restrictions on the official name of the LLC (except of using such words as “Москва” (Moscow) and “Россия” (Russia), which is subject to obtaining of a special permission).|
|Financing||Direct financing of the parent company.|
Easier to transfer funds.
|Participants’ contributions to the charter capital (which increases the amount of charter capital and requires additional registrations).|
Gratuitous financial assistance, provided by the participants (without increasing the amount of charter capital).
All employment issues are governed by Russian law and the legal requirements are the same regardless of the legal form.
|Taxation||Subject to all taxes in Russia if it has a permanent establishment.|
In case the international agreement contains any other taxation rules and regulations besides those stipulated in the Russian Tax Code, the provisions of the international agreement are applied.
Exempt from VAT on office lease only.
|Subject to all taxes in Russia.|
|Financial reporting||Special requirements for financial statements. Financial statements should be prepared by an accountant with the relevant specialization and experience.||Requirements are the same as for Russian LLCs. Financial statements can be prepared by an average accountant.|
|Expenses||When calculating financial results, the Branch may state a part of the parent company’s expenses.||When calculating financial results, the LLC can only state its own expenses.|
|Currency control and residency||Non-resident.|
The Branch can conduct payments and receive revenue in Russia both in foreign currency and in rubles.
A foreign branch located on the territory of Russia is a non-resident according to the Russian currency regulations. This means there are no limitations for foreign currency transactions with other non-residents.
Currency transactions between residents are prohibited in Russia. All settlements on the territory of Russia must be carried out in rubles.
|Currency||Sales in Russia can be made both in rubles and in foreign currency.Can have foreign currency accounts.||Sales in Russia must be made only in rubles.|
Can have foreign currency accounts.
|Tender Participation||There may be restrictions for participation set for foreign companies||A Russian legal entity is more preferable for participation in tenders.|
|Import Operations||Have to import goods on behalf of third parties.||Can independently import, declare, and perform customs clearing of goods.|
|Licensed Activity||Branch is not recommended for a licensed activity.||It is easier for a Russian legal entity to obtain licenses.|
|Liquidation||The decision on liquidation is taken by the parent company.|
In practice, the liquidation procedure is to some extent easier, as it does not include certain stages, obligatory for an LLC. However the Branch must undergo a full tax and insurance funds audit, the same as when LLC is liquidated.
Period of Liquidation: 6 months – 1 year.
|The decision on liquidation requires unanimous consent of all the participants.|
More complicated liquidation procedure.
Period of Liquidation: 9 months – 1,5 years.
A branch is a part of a foreign company, and not a separate legal entity (essentially the way one would have a separate office in the home country). Therefore, from the point of financing you can freely transfer money to the branch back and forth, without drafting additional service or marketing agreements, without dealing with Russian foreign currency control regulations (banks in Russia have to require a set of documents from their clients for processing transactions in foreign currencies). The registration process for a branch usually takes 1,5-2 months. Accreditation of a branch requires a one-time state duty in the amount of RUB 141,000.
An LLC is a separate legal entity. In the general, the liability of its participants (could be Russian or foreign individuals and legal entities) is limited to their charter capital in the LLC. The minimum amount of the charter capital is RUB 10,000 (we recommend to make it at least RUB 100,000 in order to cover local expenses and do not look suspicious in the eyes of tax authorities and banking inspections, who apply formal criteria for monitoring suspicious transactions and fly-by-night companies). It may fully operate in Russia, deal with customs, and obtain licenses (if required). As it is a separate legal entity, financing could be done through either charter capital or service agreements. Transaction between the Russian company and any foreign company are subject to foreign currency control regulation, it is also necessary to issue a transaction passport in certain conditions. Starting from January 1, 2018, residents and non-residents will be required to submit confirming documents and information on currency transactions to the authorized banks. In this connection, instead of the transaction passport, banks will keep records of export contracts.
The main practical difference between Branch and LLC is the way the operations can be financed. In case of a branch, the main office (because it is considered the same legal entity) can send money from abroad just by way of crediting the Russian bank account. As for LLC (a subsidiary company which is a separate legal entity), financing requires always a commercial reason, a contract, loans or services that the LLC performs for the parent company. The other possibility is of course increasing the charter capital. There is a third option which is often used in practice, when the financing is done by way of doing additional contributions to the assets by participants without extending the charter capital, but sometimes the auditors in foreign countries would not allow for such transfers to be considered as expenses.
From the point of view of Russian Labor Law, both Branch and LLC follow the same provisions of the Labor Code, and are both allowed to hire Russian and foreign citizens.
In order to hire foreigners an LLC or Branch must obtain work permits. There are two types of work permits (WP) in Russia: 1) regular one and 2) for highly qualified specialists (HQS). The regular one can be issued only for one year. The procedure for HQS WP is simplified, and it can be issued for 3 years. Employers do not pay social contribution on top of the salary of HQS employees. The personal income tax with HQS WP is 13% flat, regardless of the time spent in Russia. (With a regular WP the income tax would be 30% if not at least half a year is spent in Russia). The main criterion for obtaining this work permit is that the annual salary should be at least RUB 2,000,000 gross.