Friday, March 4, 2011

Small Business in Russia

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Doing business in Russia has long endured negative stigma including accounts of corruption and unlawful criminal gangs (see video below). Those wise enough to look through theses often embellished stories, nevertheless, have profited from Russia's vibrant economy which has seen a decade of growth averaging over 6% per annum.

The current prospects for business in Russia remain just as bright. According to economic forecasts, the annual growth of consumption is 1.7-1.8% per year, largely due to a new middle class that will constitute 50-55% of the population by 2010.

Although we are by no means business specialists, we have put together a general overview of business in Russia. Since legal and financial complexities can often be a barrier to those considering new business ventures, our goal is to put things in layman's terms and provide links to the best, most relevant resources. This information, nonetheless, is not exhaustive and we encourage use of professional business consultants before making any important financial decisions.

1. Types of Business Entities

There are several options available to foreigners who want to start a business in Russia. These include...

Register with state authorities as an individual entrepreneur (commonly referred to as a sole proprietorship).
This is not a legal entity but an extension of the individual, meaning you are personally liable for all obligations of the business, including debts.
Can be a suitable option for those providing consultations or similar types of service.
Once registered as an individual entrepreneur, you become a Russian tax resident and must submit a Russian Personal Income Tax Declaration.
Russian Tax Residents (employed or operating under a sole proprietorship) are required to submit a report of their work (and other) income received in Russia.
If you live in Russia for less than 183 days (non resident status) you still must report income received in Russia, but should be subject to exemptions when paying income tax at home, thanks to Double Tax Treaties between Russia and your country of residence.
The deadline for submission of personal income tax in Russia is April 30 of the following year.
As of 2006, personal income tax rate is 13% for residents and 30% for non-residents. (more Russia tax info below)

Use a Representative Office (RO) or Branch to establish a presence in Russia.
Representative offices and branch offices are not regarded as legal entities. They only act on regulations of the legal entity that created them.
A representative office only represents the interests of the foreign legal entity while a branch is established to carry on the Russian business activities of the foreign legal entity in its own name.
Representative offices and branch offices of Russian companies do not need to be registered by the state, however it is necessary that they be registered with both the tax authorities and the social funds in the place of their location.
The management of a foreign legal entity must annually file a report on its activities with the State Registration Chamber of the Ministry of Justice of the Russian Federation.

Finally, foreigners may create a Russian legal entity in the form of a Limited Liability Company (LLC), a public or a private Joint Stock Company (JSC), or a Partnership.
The LLC and JSC can be founded by an individual or by a legal entity (either foreign or Russian).
Creating a legal entity provides greater protection than registering as an individual entrepreneur (sole proprietor) since assets and liabilities of the LLC and JSC are legally isolated from those of the founder.
It is possible for one individual to create a legal entity. When registering under sole ownership, however, the founding document, or Charter, differs from a typical corporation. In such a company there is no management body such as the Board of Directors. All decisions are taken by the sole founder, and as a result, procedural requirements such as the General Meeting do not apply.
Foreign individuals and foreign companies can be founders and shareholders in any number of companies.
For more information, look at this comparison table provided by VFBS, which outlines the main types of legal forms you can choose to start your business in Russia.

2. Registering a New Business in Russia

To keep it simple, we've used an example provided by The World Bank. The example is for a standardized company (a private LLC) set up in the city of Moscow.

Notarize foundation documents.
Deposit capital in the bank and get a proof thereof.
Pay registration fee.
Register with the Federal Tax Service of the Russian Federation (former Ministry of Taxation) at the local level for concurrent tax registration and registration with the State Pension Fund, the State Fund of Social Insurance and the State Fund of Compulsory Medical Insurance ("Funds").
Notarize Registration Certificate, Tax Payer Identification Number Certificate and Bank SignatureCard.
Open the company bank account.
Inform Ministry of Taxation of the Russian Federation of the company bank account number and obtain a special letter of confirmation.
Register the company with Moscow Center of Quotation of Work Places.

3. Paying Taxes in Russia

Updated October 2007

Russian Income Tax for an Individual Russia has a uniform income tax of 13% for residents (on most types of income). Dividend income for residents is 9%.
Non-residents pay an income tax of 30% for all types of income.
A resident is defined as one who spends 183 days or more per year in Russia in a calendar year. Russian tax residents must pay income tax on worldwide income.
Non-residents (fewer than 183 days/year in Russia) pay income on work in Russia, plus property and investment income made within Russia.
An employer is obligated to deduct, each month, the amount of tax and national insurance due from a salaried worker.
A self-employed individual is obligated to make advance payments on income tax that will be offset on filing an annual report. In the case of a new business, the advance payments will be calculated on the basis of the business owner's estimate. The advance payments will be made at least 3 times per year.

Russian Corporate TaxThe standard rate of Russia corporate tax is 24%.
The tax on company profits is made up of 2 rates:
6.5% Federal Tax
17.5% Regional Tax
Small/medium companies and individuals meeting certain criteria can choose an alternative "simplified tax system".
The simplified tax system substitutes profit tax, individual tax, VAT and property tax. The tax rates are 6% of the profit, or 15% of "profit before expenses".

Russian Capital Gains (for an individual)Like tax on regular income, the tax rate for capital gains is 13% for a resident and 30% for a foreign resident.
Russian tax residents are exempt from tax for the sale of real estate or other assets that have been held for 3 years or more.

Russian Capital Gains (for a corporation)The standard rate of tax for a corporation is identical to the tax on its regular income.
A capital loss on the sale of a fixed asset may be offset against income in the following years. The offset is spread over the remaining useful life of the asset that has been sold.
There is no cost inflation adjustment for capital gains.

UST - Unified Social TaxUST consists of contributions to the Pension Fund, Social Security Fund and Obligatory Medical Insurance Fund.
As of January 1, 2005 the rate for employers is 26%, up to an annual ceiling of 280,000 Rubles.
For income of 280,001 to 600,000 Rubles the employer pays an additional 10%.
For income greater than 600,000 Rubles the employer pays an additional 2%.

VAT - Value Added TaxIn general, revenue originating from the supply of goods, works and services in the territory of the Russian Federation and from the import of goods is subject to an 18% value added tax unless specifically exempted by the Tax Code.
VAT is imposed in Russia if the products or services are consumed or used in Russia.
Exemptions are granted for exported goods or services used outside Russia.
VAT is imposed on imports or services used in Russia.

Reporting Dates and PaymentThe tax year in Russia is the year ending on December 31.
An individual whose income is from a wage is not obligated to file an annual return. The employer deducts tax from the employee and transfers it to the Tax Authority every month.
An individual who is self-employed is obligated to make 3 advance payments: on July 15, August 15 and Nov. 15.
A self-employed individual must file a return by the end of the month of April following the end of the tax year. The balance of the tax due, after filing the annual return, is to be paid by July 15.
It is compulsory for a limited company to submit the financial statements by March 30.
During the course of the year, the company is obligated to make advance monthly payments. Prepayments are based on the profit in the previous quarter.
Small businesses are not obliged to make advance payments.
Fines are imposed on the submission of returns after the date prescribed.

Detailed Russia Tax Links and ResourcesPaying Taxes in Russia - The World Bank
Overview of Taxes on Income and Transactions
Federal Tax Service (translated to English with Google)

4. Russian Business Culture

Russian business culture is quite distinct from that in western nations. This is due largely to a history of collectivism, which has shaped a nation where co-operation and collaboration are standard practice in businesses, and where fierce competition, even amongst rival companies, is not as prevalent.

Structure and HierarchyThe hierarchical structure is widespread in Russian business.
Even though a hierarchical structure is common, most employers still seem to promote a flexible and democratic work environment, where everybody has a voice.
Showing respect for seniority and recognizing the hierarchical structure is vital for establishing and maintaining strong business relationships.
Work Relationships in RussiaRelationships between business partners and co-workers in Russia tend to be somewhat more personal than in the west where distance and formality are the norm.
Things like hugging after a meeting or asking about personal matters such as family are considered acceptable during business dealings.
Meetings often involve drinking vodka, eating sweets, and talking about everyday life.
In situations of conflict try to avoid taking an official stance and remember that Russians are people orientated and will respond to a more personal approach.
Business Practice in RussiaBusiness cards are essential. If possible, ensure that one side is printed in Russian and the other in English.
It is perfectly acceptable to bring a gift to your first meeting. Popular gifts include chocolates, a local souvenir from your home country, or an item that displays your company logo.
Russians aren't always punctual. Don't be alarmed if a business partner is 10-15 minutes late for a meeting.
Generally, the head of the organization should open a meeting, and introductions should be made in order of importance.
Although many principal concerns are discussed in an informal environment, final negotiations will be conducted in the office.
Signing documents is an essential business practice in Russia. As a rule, Russians have little faith in unsigned agreements.

5. Business Directory

Doing Business in Russia - OverviewDoing Business in Russia - The World Bank
PricewaterhouseCoopers Russia
Doing Business in Russia 2007 (pdf) - Baker & McKenzie
Russian Labor & Migration Legislation
Legal & Financial ServicesVISTA Foreign Business Support
Alinga Consulting Group
Alps & Chase Foreign Business Consulting
White & Case
Law Offices Egorov, Puginski, Afanasiev & Partners
Dewey & LeBoeuf LLP
Baker & McKenzie
Allen & Overy LLP
Banks & Financial InstitutionsAlfa-Bank
Guta Bank
Russian Trade & Business OrganizationsRussian Chamber of Commerce and Industry
Moscow Chamber of Commerce and Industry
Saint Petersburg Chamber of Commerce and Industry
American-Russian Business Council
Canada Eurasia Russia Business Association
Mid-Atlantic - Russia Business Council
The Russian Academy of Business
U.S.-Russia Business Council
Business Services & Resources - Russia & CISAlliance Media's Small Business in Russia - business information resources designed especially for non-Russian-speaking businessmen.
Russian Standard, Ltd. - provides exporters to Russia with all types of mandatory and voluntary certification for most products, ranging from nutritional supplements and foods to medical and oil equipment.
Outsourcing-Russia - Non-profit Russian portal serving Russia's offshore software development companies and international companies seeking information about Russia IT resources.
Rusmarket Business Portal - Business Directory for Russia, Ukraine and the CIS.
RIN Project Yellow Pages - Detailed directory of over 350,000 organizations in Russia and the CIS.
The Moscow Business Telephone Guide - Business directory serving not only Moscow, but the entire Russian market.

1 comment:

  1. Thanks For Sharing..........
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