A foreign company has invited a foreigner to the post of СЕО of its Moscow office. The drawing up of the employment contract has been entrusted to lawyers. Income tax accounts (NDFL) made available have raised several doubts. The foreign company has asked experts to carry out an inspection.
Everything seemed to be in order at first glance. But on closer inspection of the documents submitted it came to light that the lawyers made some initially incorrect assumptions and that some of the CEO’s private business trips to CIS countries (the company operates across the whole of the former Soviet Union) were completely unaccounted for, as well as his trips back home or to holiday resorts. As a result of this, the amount of over-withheld income tax seemed to be minimal. Over-withheld income tax comes about due to the particularities of the Russian tax code which requires the application of the standard rate of 13%, instead of the 30% for foreigners, in cases where they have spent no less than 180 days in the territory of the Russian Federation. Taking into account these private business trips, the CEO would have clocked up his 180 days later and, accordingly, the period for which he was liable for tax at the higher rate would have been longer. New accounts for over-withheld income tax for the different versions of the CEO’s work schedule were filled out. Russian tax legislation has its nuances regarding tax payments by RF non-residents. There are usually many foreigners in Western companies operating in Russia. The conditions governing their tax obligations are a substantial factor in drawing up their employment contracts and should be carefully worked out by financial experts.
An Austrian company has negotiated the construction of a factory making irrigation equipment with a regional government having signed a memorandum of intent. To carry out the project, a Russian daughter company has been registered. The local government has set aside a plot of land to build on and put the rights to lease it out to tender. However, on the eve of the tender, it refuses to name a price for any subsequent purchase of the land.
According to Russian law, the price for privatised land is calculated as a product of the cadastral values of the site, as well as the rate and divisible factor of the land tax. All three parameters are mutable, hence the government has refused to fix the sum. After looking into the situation, the Austrian company was recommended not to take part in the tender. As a result, the tender did not go ahead due to the lack of any bids submitted. The future fate of the project will be decided in a fresh round of negotiations between the Austrian company and the regional government.
A decision to launch the project with the prospects for the privatisation of the area of land being unclear would have been imprudent. This situation could have been envisaged in advance. Russian law does not allow for the possibility of including areas of land under state or municipal ownership in rental agreements, or for conditions to fix the future price of plots of land. Thus foreign companies implementing their projects on Russian territory should acquire land in ownership first, before embarking on the building of any sites. In any case, this issue should be raised in negotiations as early on as possible.
A foreign and Russian company have created a joint venture for the construction of a concrete factory. The Russian side has provided a plot of land which it owns, the foreign company is financing the construction. Once the factory has begun operating, the Russian side announces that it is exiting the joint venture and shuts off its partner’s access to the manufacturing area having filed for bankruptcy a year later.
Bankruptcy is a fairly widespread means of seizing assets. In this case, an unscrupulous partner, using its property ownership rights to the land, has attempted to take over the buildings and manufacturing infrastructure built with foreign money. The foreign company has filed a counter claim to recognise its rights to the land and received a positive court decision regarding its access to the manufacturing area, but the overall situation hasn’t changed. The factory is idle, and each side has filed new claims, one against the other. The result of which is that the ground was prepared for the file for bankruptcy. Further proceedings are in prospect.
Not having foreseen such a turn of events, the foreign company has incurred serious losses. When setting up a parity joint venture, it is best to observe parity in everything including investments. Under no circumstances agree to undertake the construction of manufacturing capacity at your own expense on land which you do not control, or to lease land without a stake in its ownership. Setting up a JV on an equal footing, with various shares at 50-50, in the event of conflict with owners is fraught with the risk of stalemate situations. You should only proceed with your investments into a JV when you have a controlling stake.
A Western company concludes an agreement with a Russian agricultural producer, putting up a 100% prepayment. But this year’s harvest is a failure. The Russian partner is not in a position to supply any produce or to return the funds paid to them in advance.
In this case, it is not a matter of unscrupulousness on the part of the partner, but of force majeure. The supplier promises to correct the situation and fulfil its obligations in the future but there are no guarantees of this.
It is inadvisable to provide a 100% advance payment for proposed deliveries especially in cases where circumstances beyond the partner’s control may interfere with contract fulfilment. Western companies often go into such deals assuming that they will be able to defend their interests through the courts. However, the system in Russia for reclaiming losses via the court is still extremely poorly developed. Assets can be easily removed via legal proceedings (so-called “asset draining”), and then there is nothing to take from the former partner. For foreign companies used to being able to rely on the courts, this turns out to be a huge surprise.
In such agreements, it is necessary to negotiate payment for post factum receipt of goods, or in proportion to their availability. Prepayment should be to the amount the company is prepared to risk as irrecoverable losses.