In registering a subsidiary company in Russia, a cosmetics manufacturer from Europe found it necessary to give an address for legal purposes, though he did not yet have a permanent office. The lawyer advising the company proposed registering formally, using one of the addresses he had with postal service. Having checked that this address did actually exist and tha a correspondence readdressing service was indeed available, the client agreed. However, the difficulties began six months later, when the Russian FMS (migration service) refused to issue a work visa to foreign specialists from head office. It turned out that a couple of dozen different companies were registered at the same address for legal purposes. The FMS sent someone to the address to check, who of course did not find any of the staff of the registered firms there. Fortunately, by this time the cosmetics company was ready to rent its own premises. Therefore it turned out all right in the end: they had a real office in Russia and were able to change the address for legal purposes.
To avoid getting into such a situation, the following must be borne in mind when setting up an address for legal purposes in Russia:
1. You must check the databases of the tax inspectorate or other specialized internet resources to ensure that your proposed address for legal purposes is not a mass registration address. Even if the address is “clean” at the time you check it, do not fail to check it again periodically; it might become a mass registration address some time later. This is also important because the banks study the addresses for legal purposes of clients thoroughly when a clearing account is opened.
2. If you do not plan to rent a large office immediately, apply to a company which as well as postal services, offer you 4-5 square metres of office space, a phone line and office furniture. You will then have a place where you can meet anyone sent to check, and simply start working there.
A large foreign organization set up a subsidiary company in Moscow with the intention of developing its business in several Russian regions immediately. Therefore when registering their office in the capital, the foreigners also registered the separate regional branches. In fact there was no activity in most of the separate regional branches in the first year. But towards the end of the accounting period, the company discovered that the cost of bookkeeping and tax accountancy for the Russian LLC had suddenly increased. It turned out that according to the law, all the registered separate branches of the LLC, even if there were no jobs there and no actual activity was taking place, were obliged to send a tax declaration for profits tax to the regional tax authorities, and the head office profits tax declaration also had to include information about the separate branches. The work volume of the accountancy outsourcer increased, and so did his fees...
The unnecessary expenses could have been avoided altogether if the foreign company had not registered its separate branches in Russia “for the future”. It is only worth registering a business which you are actually planning to develop. It is not difficult to solve the question of registering branches in Russia today. It is best to do this after work has actually begun in them. Under Russian law, the tax authorities may be notified of the opening of a separate branch within 30 days of the first job being created there.
A foreign employment agency registered in the British Virgin Islands incurred unforeseen expenses in connection with the profits of its Russian subsidiary: it had to pay an additional dividends tax of 15%. The problem proved to be that the organization had not taken into account the specifics of profits taxation at the stage of registering its business in Russia. Foreign companies may open a Russian legal entity (a subsidiary company, usually an LLC) or foreign one (a branch or mission). A branch, unlike a mission, has the right to engage in commercial activities. A Russian legal entity is more convenient when it is a question of manufacturing, but a foreign legal entity usually uses companies operating in the services field. The procedures for registering either of these forms of conducting business are virtually identical, but there are nuances in taxation.
The error was committed in the selection of the form of conducting business. Under Russian law, a subsidiary company always pays tax on dividends. And in the absence of an agreement to avoid double taxation between the jurisdictions, the tax amounts to 15%. But Russia has no such agreement with most tax havens. If there is an agreement, the tax is paid at a lower rate. At the same time, there is nothing to prevent a branch transferring cash assets from it accounts to those of the head office without any withholdings, regardless of whether a profit or a loss has been made on the activities in Russia during the accounting period. Therefore for an employment agency, and for most other companies offering services, the optimum solution from the taxation point of view is to open branches, not LLCs, in Russia.
The global management of an international manufacturing company considered that no-one would be able to cope with conquering the Russian market better than the top manager of their Swedish office. In the documents submitted for registration, the energetic Swede was shown as the managing director. The manager, motivated by this career prospect, was to train his replacement in Sweden within six months and then go to work in Russia. To simplify the procedure for obtaining permission to work, a unique feature of Russian migration law was used. The future CEO was described as a highly-qualified specialist (HQS). Everything was done really quickly. However, it was this which cost the organization much more than it had planned...
The international company had failed to take into account the fact that under the law, the employer is obliged to inform the FMS every quarter about the fulfilment of its obligations to pay salaries to highly-qualified specialists. Therefore the organization found that it had to pay the CEO salary in the sum established by law for such cases: not less than 167,000 roubles a month. And to make the appropriate tax deductions.
As you will understand from this example, it is not worth rushing into appointing an ex-pat CEO to the new organization. If such a manager does not intend to start fulfilling his obligations immediately, it is better to name a formal general manager in the documents. This makes it possible to avoid unnecessary expense and to take your time over appointing the “real” CEO. Consultancy companies, including ours, offer the service of providing a nominal managing director for the purpose of the registration procedure. He can then be replaced at any time.