“The difficulties begin with selecting the organisational form of an enterprise”, says Ivan MEDVEDEV. “What should it be – a company office or a new legal entity opened in Russia? I would advise setting up an independent legal entity on RF territory as a subsidiary enterprise of a foreign company. In this way, the enterprise becomes a fully-fledged participant in the Russian market.
“The next problem is the method of investing cash assets for conducting this enterprise’s activities. One widespread practice is simply to add cash assets to the Company’s authorised capital. However, with this approach. if force-majeure circumstances should occur, it will be difficult to return the invested assets to the foreigner. All the investments go on the acquisition of means of production, which means that to recover the money, either these assets have to be sold, or the enterprise itself must be sold in its entirety as a property complex. The approach of providing assistance free of charge has little to recommend it either. Investments of that sort cannot be recovered at all”.
In Ivan MEDVEDEV’s opinion, the most preferable option is a loan. The foreign founder opens a credit line to the Russian firm which is a subsidiary enterprise of his foreign company. This arrangement makes it possible both to invest assets and to withdraw them without difficulty. And if the firm is liquidated, all the assets previously provided are returned as repayment of the issued credits.
Many more questions arise in the course of the operation of the enterprise. The first and greatest of these is organising good-quality bookkeeping and tax accounting. There is no point in going into tax accounting, because this theme is endless, and needs to be discussed separately. Ivan MEDVEDEV has the following to say about bookkeeping.
Simply adding money to the Company’s authorised capital is fraught with problems. If force-majeure circumstances should occur, it will be difficult to recover it.
Under Russian law, the subsidiary enterprise of a foreign company must prepare an accountancy (financial) report in accordance with the RSBU (Russian Accounting Standards) rules. The branches and offices of foreign organisations located in the Russian Federation may conduct their accounting on the basis of the rules applying in the country in which the foreign organisation is located, if this is not in breach of the International Financial Reporting Standards (IFRS) laid down by the Committee for International Financial Reporting Standards.
However, it has proved in practice that the controlling authorities in Russia require more than documents drawn up in accordance with IFRS rules. The Tax Inspectorate demands the submission of a bookkeeping (financial) report prepared exclusively in accordance with RSBU rules. And this sometimes leads foreign investors into a difficult situation, since it becomes necessary to prepare several forms of reports according to different rules, and this naturally creates extra costs for the business, with no return.
There is another complication, namely the never-ending changes in Russian legislation. The standards base for bookkeeping and tax reporting is continually being amended and updated.
The standards base for bookkeeping and tax reporting in Russia is continually being amended and updated.
In preparing an annual report, a foreign organisation should take account of the new (latest) recommendations (amendments), which usually appear towards the end of January in the year following the year under report. This means that throughout the year, the company has been conducting its bookkeeping and tax reporting under the existing rules, and it then turns out that corrections have to be made in the established reporting system, or in officially provided forms in accordance with new amendments which have only come into effect after the reports have already been compiled and sometimes even submitted.
“Also, not all foreigners take on board the fact that Russian legislative acts must always be considered in combination with acts passed previously”, says Ivan MEDVEDEV.
This is necessary, for example, in situations in which there are different requirements in different regulatory documents. In drawing up the bookkeeping report of an organisation, the regulatory legal acts on bookkeeping and reporting are applied insofar as they do not contradict previously published regulatory legal acts. In other words, if different requirements are made in different regulatory acts, priority must be given to the document published more recently.
Furthermore, there is no definition in Russian law of the concept of “fair cost”. Therefore, very frequently, the assets and liabilities of companies reflected in the bookkeeping (financial) report mentioned above are shown as a distorted (incorrect) assessment, which leads property owners into error, and makes it more difficult to take the right administrative decision.
In most companies founded in Russia by foreigners, two forms of accounting are conducted – one by Russian standards, one by international standards.
The problem for foreigners is that in Russia, all bookkeeping (financial) reports are tied to the end of the calendar year, whereas reports prepared in accordance with IFRS rules are not. This fact makes it more complicated to consolidate bookkeeping (financial) reports.
One difference in Russian accounting rules is that the important principle called “First form has priority” does not apply here as it does abroad. To put it simply, the main thing for accounting under Russian rules is to have a document on paper, not the content of the actual deal. For example, if goods come in and are later sold, but their import for some reason was not documented, this deal cannot be reflected in the accounting documents, whereas the IFRS rules do allow such operations to be entered without supporting documents, based on the economic content of the operation.
Thus, in most companies founded in Russia by foreigners, two forms of accounting are conducted – one by Russian standards, one by international standards. The international form is purely for internal use: it is more flexible, enabling the situation to be monitored at the enterprise as the situation demands and the correct administrative decisions to be taken. On the other hand, the bookkeeping conducted under Russian rules is not analysed by the foreigner, is not used as a source of economic information and is necessary mainly for the external user, namely the tax authorities.
Altogether, questions of taxation sometimes become a serious stumbling block for foreign investors.
One should keep track of possible claims from the tax authorities and react to them in good time.
“Our company’s work included a case in which a foreign firm which had acquired a building on Russian territory came up against the problem of paying property tax”, says Ivan MEDVEDEV. “The tax inspectorate refused to accept payments from the new owners, on the grounds that this company did not have an office in Russia and it was not possible to transfer funds from abroad to meet the tax obligations”.
The applicant was advised that the correct procedure would have been to open a subsidiary enterprise in Russia, register it and open an account in a Russian bank, from which the tax should have been paid. The foreigner refused to do this, believing that in this way there would simply not be anyone to whom to pay the tax, so it seemed to the purchaser that this would enable him to “save” on these payments.
This approach is not quite correct”, explains Ivan MEDVEDEV. “This would mean that a seizure order for non-payment of tax could be issued at any time. Property would be confiscated and sold to pay off the debt to the state. My recommendation was to keep track of possible claims from the tax authorities and react to them in good time. It would also be advisable to keep the documents confirming both the wish to pay the tax and the refusal of the tax authority to accept it.”
A collective approach is necessary to solve some questions. And some situations have to be calculated several moves in advance.
Ivan MEDVEDEV warns: “The most dangerous thing for a foreign firm is to take the situation as far as bankruptcy. A certain Italian company dealing in deliveries of rolled metal strip, conducting business in Russia, suffered heavy losses. Bankruptcy proceedings were threatened, but this did not put off the investors. However, when the tax inspectors investigated this firm in the course of an on-site tax check, they found numerous schemes for the illegal export of funds, as a result of which the enterprise was making losses. The case could go as far as criminal proceedings on charge of ‘intentional bankruptcy’ and ‘money laundering’”.
“We are now working with this firm”, says Ivan MEDVEDEV. “We are providing support in the courts and taking part in negotiations with former partners about concluding settlements. Furthermore, it has been possible to repay some of the enterprise’s debts”.
Experienced lawyers have ways of getting out of many vexed situations. Ivan MEDVEDEV is confident that the main thing is to trust the advice of reputable specialists, preferably a group of professionals. “A collective approach is necessary to solve some questions”, says the managing Partner of OOO Impek Alliance. “And some situations have to be calculated several moves in advance”.
It is better to choose a consultancy organisation in Russia on the basis of advice from fellow countrymen, rather than going for well-known names.
It is also beneficial to apply to an experienced consultancy firm, because in this case comprehensive services will be provided. This means that a foreign firm does not need to hire a lawyer or an accountant in Russia and pay their salaries. In any case, it is not known how well qualified these specialists are. But a consultancy company already has all kinds of specialists on its books, and can deal comprehensively with the customer’s affairs within the framework of its obligations to him. Ivan MEDVEDEV cites an example in which a lawyer from their firm was even entrusted by the customer with concluding a deal on his behalf: that was how much he was trusted. The attraction of new clients to OOO Impek Alliance is also based on trust. Most of their clients come by recommendation from those whom the company has actually helped solve some problem or other.
Ivan MEDVEDEV advises foreign investors to choose a consultancy organisation in Russia on the basis of advice from their fellow countrymen, rather than going for Western companies with well-known names, which sometimes take a superficial attitude to their clients’ problems and often provide poor quality services due to their large volume of work.
Nor is it worth relying on the ratings: places in them are often bought. But such practices are widespread abroad as well; here, foreigners will not be let down.