Common forms of business structures for foreign investors

Chapter contents

• Main types of structure
• Registration, liquidation and reorganisation of business structures 
• Shareholders’ and participants’ agreements
• Strategic industries

Russian legislation provides for several types of business structure, of which the most commonly used are limited liability companies, joint-stock companies, representative offices and branches. A basic description of each of these is set out in Part I of the Civil Code of the Russian Federation (the “Civil Code”). Some other specialised structures also exist but are not commonly used by foreign investors. An individual is also entitled to conduct commercial activities in Russia, provided that he/she has the legal status of an individual entrepreneur. Foreign nationals can only register as individual entrepreneurs when they hold a temporary or permanent residence permit. The legal framework for individual entrepreneurs is also set out in the Civil Code.

Main types of structure

Russian legal entities

All Russian legal entities are classified into unitary entities (no “shareholding” provided to the founder(s)) and corporations. Corporations, in turn, can be public or private. Private corporations will provide more flexibility to their members in corporate governance issues and will be subject to more limited disclosure obligations. Conversely, public corporations will have to disclose more information about their activities and the management structure of public corporations will be regulated by mandatory rules to a greater extent. 

Joint-stock companies are classified as corporations that can be either public or private and limited liability companies are classified as private corporations.

Foreign investors in Russia mostly use the limited liability company and the private joint-stock company forms for their activity in Russia. 

Other special forms of legal entity exist, such as the economic partnership which is designed primarily for the holding in common of IP rights (but of little application beyond that).

Limited liability company

A limited liability company (“obshchestvo s ogranichennoy otvetstvennostyu” – an “LLC”) is designated by the abbreviation “OOO” or “LLC” before or after its name. It is one of the simplest forms of a Russian legal entity and is often used by foreign investors for a wholly owned subsidiary.

Russian legislation prevents an LLC being wholly owned by another company (“khozyaystvennoye obshchestvo”), where that holding company is itself wholly owned by (i) another single legal entity; or (ii) a single individual.

The establishment, reorganisation and liquidation of an LLC is mainly governed by the Civil Code, Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998 (the “LLC Law”) and Federal Law No. 129-FZ "On State Registration of Legal Entities and Individual Entrepreneurs" dated 8 August 2001 (the "Registration Law").

Charter capital and contributions

The charter capital of an LLC is divided into participatory interests (“doli”). Unlike the shares issued by a joint-stock company, these participatory interests are not classified as securities and therefore do not need to be registered with the Central Bank of the Russian Federation (the “CBR” 1 The CBR performs the function of the securities market regulator and registers the shares issued by joint-stock companies. ).

Each holder of a participatory interest is referred to as a “participant”.

The minimum charter capital of an LLC is currently RUB 10,000 (EUR 111 2 At the notional exchange rate of RUB 90 = EUR 1, as used for convenience throughout this guide. ). The amount of the monetary fund for the charter capital must not be less than the amount of the minimum charter capital.

The decision of the general participants’ meeting to increase the charter capital and the list of members that were present at the relevant general meeting have to be confirmed by a notary.

Contributions to the charter capital of an LLC may be made in cash or in kind (e.g. securities, property or other tangible or intangible rights or assets having a monetary value). Any contribution in kind must be valued by an independent appraiser.

A participant may not be released from the obligation to pay its agreed contributions to the charter capital. In case of a charter capital increase, contributions to the charter capital can be made by set off against any existing monetary debt that the company owes to the participant, provided that all the participants agree. 

Exemptions from import duties and import VAT may be available for certain types of equipment contributed to the charter capital of a company by a foreign participant. 

Net asset requirements and creditor protection

An LLC must ensure that the value of its net assets does not fall below the amount of its charter capital. Failure to comply with this requirement may result in the company being required to decrease its charter capital accordingly or to increase the value of its net assets by one of the available ways. 

Also, if the value of the company’s assets is less than the minimum charter capital amount, it may be subject to compulsory liquidation.

Participation

If the number of participants in the company exceeds 50, the company is obliged either to reduce the number of participants or to re-register as a joint-stock company within one year. Failure to do so may lead to compulsory liquidation.

All LLCs must maintain a register of participants. This register sets out the names of the participants and the number of participatory interests that each participant has in the company.

As a general principle, the participants’ liability for the company’s debts is limited to the payment (in full) of the amount of their participatory interests. In a limited number of cases, the corporate veil can be pierced, resulting in participants having unlimited liability for the obligations of the company. This can happen if, for example, a participant gives binding instructions to the company that lead to the insolvency of the company.

Beneficial owners 

All LLCs must know who their ultimate beneficial owners are and take steps to collect certain information on them from the participants in the LLC. Such information must be disclosed to Russian state authorities upon request.

Management structure

The managing bodies of an LLC are: 

• the general participants’ meeting; 
• the collective management body – board of directors (optional); 
• the collective executive body – management board (optional); and
• the sole executive body (one or several executives) – general director.

Major decisions, such as amending the company’s charter, changing the charter capital, distributing profits and approving the annual reports and balance sheets of the company must be taken by the general participants’ meeting.

The annual general participants’ meeting must be held not earlier than two months, and not later than four months, after the end of the company’s financial year (which always corresponds to the calendar year). Extraordinary general participants’ meetings may be held at any time. General participants’ meetings must be convened according to the procedure set out in the company’s charter and the LLC Law unless all participants attend the meeting.

Unless otherwise expressly provided for by the company’s charter, a participant’s number of votes at the general participants’ meeting will normally correspond to the proportion of the company’s charter capital that such participant holds.

Generally, decisions are adopted by a simple majority of votes of all participants except for those matters in respect of which the LLC Law requires a qualified majority (e.g. liquidation of the company). In addition, a qualified majority can be set out by the company’s charter for other matters at the discretion of the participants.

Most decisions (except approval of the company’s annual reports and balance sheets) may be adopted without holding a participants’ meeting through absentee voting.

The general participants’ meeting has exclusive competence in respect of the list of matters specified by the Civil Code and LLC Law. This list can be extended in the company’s charter at the discretion of the participants.

Resolutions of the general participants’ meeting must be certified by a notary unless otherwise provided for by the charter or a notarised unanimous resolution of the general participants’ meeting. 

A board of directors is an optional supervisory body. Its authority typically includes appointing/dismissing the general director or approving certain types of transactions or transactions the value of which exceeds certain thresholds.

The LLC can also have a management board. By law, the general director chairs the management board. Unlike the general director, however, members of the management board must obtain a power of attorney from the general director in order to enter into transactions on the company’s behalf.

Powers of the board of directors and the management board are to be defined by the charter at the discretion of participants.

The general director (sole executive body) manages the day-to-day running of the company and deals with all other issues not falling within the authority of the other management bodies. The general director acts on behalf of the company, represents its interests, enters into transactions on its behalf, issues powers of attorney and hires and dismisses employees. The general director represents the company without a power of attorney. The general director’s powers may be limited by the company’s charter and his/her employment contract. 

The powers of the sole executive body can be provided to several executives of the company for individual or joint representation, which must be reflected in the Unified State Register of Legal Entities since the end of 2020. Previously, the general rule was that all executives indicated in the Register have equal and unlimited authorities.

A foreign national may be appointed as the general director of an LLC subject to compliance with work permit regulations (please see the Employment and migration chapter).

The general participants’ meeting may transfer the general director’s authority to a management company (in whole only). In such case the management company will act on the basis of the management agreement entered into with the company.

Audit

The charter may provide for an internal auditor (either an individual or an internal audit commission established under the company’s own charter). In some cases a company must have an internal auditor – as with companies having more than 15 participants – without which the general participants’ meeting will not be able to approve the company’s annual reports and balance sheets (as they must first be approved by the internal auditor).

An external auditor may also be appointed by the general participants’ meeting to audit the company’s financial and business activity. If certain turnover or asset value thresholds are exceeded, or if the company conducts certain regulated activities, an external auditor must be appointed.

Transfer of participatory interests

Participatory interests are freely transferable between participants. However, the charter may specify that a transfer of participatory interests requires the consent of the other participants and/or the company.

A participant may transfer its participatory interest to third parties, subject to a statutory pre-emption right in favour of the other participants and, if so provided for by the charter, in favour of the company itself. 

The procedure for selling participatory interests and for determining their offer price is set out in the LLC Law, although the company’s charter and/or participants’ agreement may provide a different procedure.

A participatory interest transfer agreement must be notarised. The participatory interest is deemed transferred after the information on the transfer is registered in the Unified State Register of Legal Entities. This creates difficulties in the context of settlements between the parties to Russian agreements for the sale and purchase of participatory interests since the registration of the transfer may take up to five - seven business days and is outside of the parties’ control. 

The charter may prohibit the transfer of participatory interests to third parties or make such transfer subject to the consent of other participants or the company. If such consent is not given, the company itself is obliged, by law, to purchase the relevant participatory interests.

Right to withdraw

Participants in an LLC are entitled to withdraw from the company without the consent of other participants if: (i) this is permitted by the company’s charter; or (ii) the transfer of participatory interest to a third party or another participant is prohibited and/or blocked by other participants; or (iii) the general participants’ meeting approved a major transaction or a charter capital increase (in this event, the right to withdraw is granted to any participant who voted against such decision or did not attend the meeting). The application of a participant for withdrawal from the company has to be notarised.

If a participant withdraws from the company, it has to serve a withdrawal notice to the company. Such withdrawal notice must be certified by a notary. After receipt of the notarised withdrawal notice, the general director has to apply to the Unified State Register of Legal Entities to register the relevant transfer of the participatory interest to the company. The company is then obliged to pay the exiting participant the “actual value” of its participatory interest in cash. The company may, however, pay the exiting participant in kind provided that the participant agrees to this. 

The “actual value” of the exiting participant’s participatory interest is calculated in accordance with accounting data as provided in the LLC Law. The statutory payment procedure and timing may be varied in the company’s charter.

Expulsion of a participant

Company participants holding more than 10% in the company’s charter capital (in aggregate) are entitled to apply to the court for the exclusion from the company of a participant that commits a gross violation of its duties or whose actions or failure to act renders the company’s operation impossible or significantly impairs it.

Where a creditor of a participant enforces against the latter’s participatory interest, the LLC and/or the other participants are entitled to pay the actual value of such participatory interest to the creditor. If they do so, the participant withdraws from the LLC and its participatory interest is transferred to the other participants and/or to the LLC (depending on which of them satisfied the claim of the creditor).

Joint-stock companies

Joint-stock companies belong to corporations as well and are regulated by the Civil Code, Federal Law No. 208-FZ “On Joint-stock Companies” dated 26 December 1995 (the “JSC Law”), the Registration Law and Federal Law No. 39-FZ "On Securities Market" dated 22 April 1996 (the "Securities Market Law") and the acts issued by the CBR. 

A joint-stock company (“aktsionernoye obshchestvo” – a “JSC”) can either be public or private (non-public). Public JSCs are capable of offering their shares by public offering, which results in their activity being more stringently regulated by law. They must contain the word “public” in their company name. 

Private JSCs, on the other hand, enjoy more flexibility:

• the powers can be distributed between corporate bodies in various ways (e.g. management bodies can take over most questions of the general shareholders’ meeting);
• the management bodies themselves can be omitted (e.g. the board of directors can act both as a management and supervisory body, a single director may replace the management board); 
• the charter may require a qualified majority of votes to adopt certain decisions of the management bodies; and
• shareholders may define shareholders’ rights in the charter non-proportionally to their stakes in the company, limit the number of shares or votes held by one shareholder, provide for a pre-emptive right or consent on transferring shares to a third party. 

As with LLCs, Russian legislation prevents a JSC being wholly owned by another company (“khozyaystvennoye obshchestvo”), where the holding company is itself wholly owned by (i) another single legal entity; or (ii) a single individual. 

Charter capital and contributions

The charter capital of a JSC is divided into shares (which may be split into ordinary shares and preference shares). These shares are deemed to be securities for the purposes of Russian securities legislation and must therefore be registered with the CBR.

The minimum charter capital is currently RUB 100,000 (EUR 1,111) for a public JSC, and RUB 10,000 (EUR 111) for a private JSC.

As with LLCs, contributions to the charter capital may be paid in cash or in kind. Other types of securities, such as corporate bonds, must be paid in cash only. Contributions in kind must be valued by an independent appraiser. It is possible to pay for new shares issued in a closed subscription by way of a debt-for-equity swap.

The charter capital may be increased by issuing new shares (within the number of authorised shares set out in the company’s charter) or increasing the nominal value of the shares already in issue. Each capital increase must be filed and registered with the CBR, which is a lengthy process.

As a general principle, the liability of the shareholders for the company’s debts is limited to the payment (in full) of their shares. In a limited number of cases, however, the corporate veil can be pierced, resulting in the shareholders having unlimited liability for the obligations of the company. This can happen if, for example, a shareholder gives binding instructions to the company that lead to the insolvency of the company.

Net asset requirements and creditor protection

A JSC must ensure that the value of its net assets does not fall below the amount of its charter capital. Failure to comply with this requirement may result in the company being required to decrease its charter capital accordingly or to increase the value of its net assets. 

Also, if the value of the company’s assets is less than the minimum charter capital amount, it may be compulsorily liquidated. 

In addition to other filing requirements, JSCs must submit information on their net asset value to the Unified Federal Register of Legally Significant Data about the Facts of the Activities of Legal Entities. This requirement aims to increase the transparency of the financial state of the company and protect its creditors. 

At least 5% of the charter capital of any JSC must be allocated to a reserve fund. This fund is created specifically to cover losses and to redeem bonds and shares of the company.

Beneficial owners 

All JSCs must know who their beneficial owners are and take steps to collect the relevant information from their shareholders. Such information is to be disclosed to the state authorities upon request.

Management structure

The managing bodies of a JSC are:

• the general shareholders’ meeting; 
• the collective management body (optional for private JSCs) – board of directors, supervisory board;
• the collective executive body (optional for private JSCs) – management board; and 
• the sole executive body (one or several executives) – general director.

The annual general shareholders’ meeting must be held not earlier than two months, and not later than six months, after the end of the company’s financial year (which always corresponds to the calendar year). Extraordinary general shareholders’ meetings may be called by the general director, the board of directors, the external auditor, the internal auditor of the company or by shareholders owning at least 10% of the voting shares in the company.

At general shareholders’ meetings most decisions may be passed by a simple majority of the shareholders attending the meeting (e.g. a decision to appoint executives of the company). However, a limited number of more significant decisions require not less than 75% of the votes of the shareholders attending the meeting (e.g. decisions on the liquidation or reorganisation of the company, amendments to the charter or approval of a new version of the charter). Each share entitles the holder to one vote.

Subject to certain exceptions, shareholders may adopt decisions without holding a meeting through absentee voting. In the case of public JSCs, decisions must be certified by the company’s registrar. A private JSC may use either the registrar or a notary for certifying its decisions. 

The collective management body (e.g. board of directors, supervisory board) is responsible for the general management of the company but may not interfere with the exclusive competence of the general shareholders’ meeting. It consists of at least five members and is mandatory for a public JSC.

Members of the collective management body are elected by an annual/extraordinary general shareholders’ meeting and serve until the next annual general shareholders’ meeting. There is no limit on the number of times a member of the collective management body may be re-elected.

The collective executive body (e.g. management board) is supervised by the collective management body of the company. 

The company may have one or several general directors (sole executive body). The sole executive body is responsible for the day-to-day running of the company and can represent the company without a power of attorney. In the case of appointment of several general directors, they may be authorised to act individually or jointly and this must be disclosed in the Unified State Register of Legal Entities since the end of 2020. Previously, the general rule was that all executives indicated in the Register have equal and unlimited authorities.

Legal entities or individual entrepreneurs may be appointed as the sole executive body.
A foreign national may be appointed as the general director of a JSC subject to compliance with work permit regulations (please see the Employment and migration chapter).

Audit

JSCs are required to appoint an external auditor to audit the annual accounts. 

The audit committee (“komitet po auditu”) must be set up in public JSCs, and the board of directors will have to appoint an executive responsible for organising and conducting the internal audit (including evaluating risk management and the efficiency of internal control systems). 

Unless specifically excluded in their charters, JSCs should also have an internal audit committee (“revizionnaya komissiya”). It audits the company’s financial and business activity. Before the annual general shareholders’ meeting, this committee prepares an annual report and balance sheet. The report is then communicated to all the shareholders that are entitled to attend the meeting. 

Furthermore, the internal audit committee may audit the company at any time:

• at its own initiative;
• upon a decision of the general shareholders’ meeting; or 
• upon demand of a shareholder or a group of shareholders holding at least 10% of the voting rights in the company.

Issue and transfer of shares

The shares of a JSC, whether public or private, are treated as securities and as such are subject to the registration requirements of the Securities Market Law. When issuing new shares, all JSCs must carry out the requisite filings with the CBR. The documents that must be filed include among others the decision to issue shares and the report on the results of the share issue as well as, in certain cases, a prospectus for the share issue.

A share transfer takes effect when it is recorded in the register of shareholders that all JSCs are required to maintain. The register of shareholders must be kept by an independent company duly licensed by the CBR with no exceptions.

A public JSC may make both closed and public offerings of its shares. There are no statutory pre-emption rights or restrictions on the transferability of shares in the company whether to other shareholders or third parties. When the charter capital is increased by issuing additional shares, however, existing shareholders do have the benefit of statutory pre-emption rights.

Acquisition of more than 30% of the shares in a public JSC by an existing shareholder or a third party triggers a mandatory buyout offer which needs to be supported by a bank guarantee and served to the remaining shareholders. 

Shares of a private JSC are freely transferable between shareholders, although it is possible to introduce contractual restrictions by means of a shareholders’ agreement. Share sales to third parties are subject to statutory pre-emption rights of the other shareholders in the company (and the company itself if so provided in the charter). JSCs also have an opportunity to privately offer their shares via crowdfunding platforms.

Redemption of shares

In certain cases where a shareholder disagrees with decisions taken at a general shareholders’ meeting, it may be able to require the company to purchase its shares. This applies when:

• a decision has been taken to reorganise the company; 
• a decision has been taken to adopt charter amendments or to adopt a revised charter limiting the rights of the shareholder in question; or 
• a major transaction has been approved.

The shares will be redeemed at a price no less than the market value of the shares as determined by an independent appraiser in accordance with the methods prescribed in the JSC Law. 

Expelling a shareholder

A shareholder of a private JSC may expel another shareholder through court action for causing harm to the company or impeding its activity. 

In case of a public JSC a shareholder that has acquired more than 95% of the voting shares in accordance with a special procedure may “squeeze out” the minority shareholders. 

Economic partnership

The economic partnership (“khozyaystvennoye partniorstvo”) is designed for the new technology sector and is meant to provide more flexibility for its participants than the existing LLC and JSC forms. 

In general terms, an economic partnership shares many common features with a Russian LLC but with the advantage that the rights and obligations of participants, the management of the company and profit distribution are regulated by a much more flexible and less regulated notarised management agreement. 

That said, the prohibition on an economic partnership acquiring or holding shares/interests in other companies and partnerships and on advertising its business generally precludes the use of this business structure for commercial trading operations or as holding companies for joint ventures. 

Summary of legal forms

For ease of comparison between the legal entities described above, please refer to the comparative table below.

COMPARATIVE TABLE

Other business structures

Although foreign individuals and legal entities can set up wholly owned subsidiary companies and may participate in the various forms of partnership prescribed under Russian law, using a representative office or a branch remains an effective way for a foreign legal entity to enter the Russian market. An investment partnership is also a relatively new form of unincorporated legal structure which may be relevant to investment funds. 

Representative office

Status

A representative office (“predstavitelstvo”) is not a separate legal entity but, rather, an office set up to represent the interests of the parent company. This does not prevent it, in practice, from conducting business in Russia (and many representative offices do so) and being treated by the tax authorities as a separate profit centre from the parent company. However, as a matter of civil law, a representative office’s lack of separate legal identity limits the types of business activities it may undertake. For example, a representative office may not formally import goods for purposes other than its own needs, nor may it register title to immovable property in its own name. A representative office may also experience difficulties in obtaining licences and permits to conduct certain types of business.

A representative office may, however, carry out representative functions on behalf of the parent company, including arranging marketing and advertising in Russia. It may also assist in other commercial and legal transactions between the parent and Russian organisations, including the rental of property.

Foreign employees of a representative office should obtain personal accreditation. This involves certain practical benefits for the accredited foreign employee, such as the right to import and export personal effects free of customs duty and VAT, and it assists with obtaining multi-entry visas. Such employees must hold work permits in order to work in Russia (please see the Employment and migration chapter).

A representative office may hold a number of different types of bank account, including foreign currency and rouble accounts. These accounts enable the representative office to make payments in Russia to both residents and non-residents subject to certain currency control restrictions established by CBR regulations and other applicable legislation (please see the Currency control chapter). 

As a representative office is merely an extension of a foreign parent company, the latter remains responsible for the liabilities of the representative office.

Management

A representative office acts on the basis of regulations approved by the parent company and is managed by the head of the office who is authorised to conduct the business of the office and to represent the foreign company under a power of attorney. A representative office should also have a chief accountant. 

There is no requirement for either the head of the office or the chief accountant to be Russian nationals although an accountant who understands the intricacies of Russian tax and accounting law is a practical necessity.

Branch

Status

A branch (“filial”) is also an office set up to represent the interests of the parent company. In addition to carrying out the functions of a representative office a branch may formally carry out profit-making activities.

As a branch is merely an extension of a foreign parent company, the foreign company remains responsible for the liabilities of the branch.

Foreign employees of a branch should be personally accredited in the same manner as those of a representative office and, in addition, they must hold work permits in order to work in Russia (please see the Employment and migration chapter).

Management

Management issues are the same as those concerning representative offices (please see the relevant paragraph above).

Table showing main differences between a representative office and a branch

Other

The Civil Code provides for a range of other business structures, including simple partnerships (which are not legal entities) as well as full and limited partnerships – which are rarely encountered in practice –, and investment partnerships.

There are also non-commercial organisational forms that may be used for charities, trade associations and other not-for-profit organisations.

Registration, liquidation and reorganisation of business structures

Registration of a Russian company

The Registration Law establishes a single procedure for the registration of companies, regardless of their organisational/legal form and the type of business activities they conduct.

Scope of registration

A company is duly registered under Russian law once it has undergone:

• state registration (in the Unified State Register of Legal Entities);
• tax registration; and
• registration with the Federal Service for State Statistics and the social funds (the Pension Fund and the Federal Social Insurance Fund (the “Social Funds”)).

Registration mechanics

The tax authorities are responsible for the state and tax registration of companies, as well as for forwarding documents to the Federal Service for State Statistics and the Social Funds. 

The application to register the company can be (i) filed by the founder(s) in person 4 When a company or companies incorporate a Russian legal entity, the applicant must be the CEO of the founding parent company/ies. ; or (ii) submitted by a representative acting on the basis of the power of attorney given by the founder(s) (directly or, through the assistance of a notary, electronically); or (iii) sent by post, which adds significant time to the registration process; or (iv) presented in electronic form via the Federal Tax Service website or the unified portal of the government and municipal services. Specifically, the electronic filing form stipulates that the documents should contain an applicant’s electronic signature or that an applicant be allowed to have a notary verify his/her signature by electronic signature. However, in practice receiving an electronic signature is a complex and lengthy process for foreign entities and individuals. As a result, documents are usually submitted on behalf of foreign investors in paper form. 

The time taken for registration is three business days from the date of submitting the documents to the registration authorities. In practice, the whole process of company incorporation, including collecting the documents required, opening the current bank account and registering with the Social Funds, takes approximately from one to two months to complete (i.e. for the company to be fully operational). However, delays are possible.

Payment of charter capital

The whole charter capital of an LLC must be paid within four months of its state registration. 

Not less than 50% of the charter capital of a JSC must be paid within three months of its state registration, the rest within 12 months of the state registration of the company.

If a founder fails to pay the total amount of its shares/participatory interests within these time limits, then the non-paid shares/participatory interests become the property of the company. Such shares/participatory interests do not carry voting rights and are to be sold to the JSC’s shareholders/LLC’s participants or third parties or cancelled (and the charter capital simultaneously decreased) within one year from the date of their transfer to the company.

Registration of the initial share issue

Since shares in JSCs are treated as securities, certain additional registration requirements imposed by the CBR must be completed following the registration of the JSC’s incorporation. 

The share issue registration process consists of the following stages:

• adoption of a decision to issue shares;
• state registration of the share issue;
• subscription for shares; and
• state registration of the report on the issue of the shares.

A JSC will be entered in the Unified State Register of Legal Entities provided the issue of the shares to be placed upon its establishment has been registered.

Anti-monopoly control

As a general rule, the formation of a company is not subject to merger control. 

In exceptional cases, however, the prior consent of the Federal Anti-monopoly Service (the “FAS”) will be required when a company is incorporated by:

• the contribution of assets or shares/participatory interests or rights in another company; or
• the merger of one company with another or consolidation of several companies, 

provided that, in either case, certain asset values or revenue thresholds are exceeded (please see the Anti-monopoly issues chapter).

Market regulator pre-registration clearance

If the company to be set up in Russia is a bank or non-banking credit institution with foreign investment, then the parent company/ies will require the prior clearance from the CBR.

Licensing

Once a company has been set up, it may need to obtain the requisite licence(s) or other authorisations before it can legally conduct certain kinds of business. Failing this, it may be subject to sanctions, and the contracts it will have concluded in relation to any licensed activity may be subsequently set aside by the courts as potentially voidable. 

Accreditation and registration of a representative office and a branch

The Federal Tax Service performs the function of registering representative offices and branches of foreign legal entities (except for the representative offices and branches of foreign civil aviation companies and credit institutions that are accredited by Rosaviation and the CBR respectively).

As a result of accreditation, the representative office/branch is included in the State Register of Accredited Representative Offices and Branches of Foreign Legal Entities. Information from this Register is publicly available on the Internet.

In addition, representative offices and branches must be locally registered with the Federal Service for State Statistics and the Social Funds. 

Company reorganisation 

The Civil Code provides for five types of company reorganisation: merger, consolidations, de-mergers, spin-offs and transformation. Representative offices and branches may not be reorganised into legal entities.

Company reorganisation is a complex process that may take from three to 12 months to complete. It usually involves an audit by the tax authorities (including tax reconciliation of any missing financial reports, any arrears or overpayments) and notification to the company’s creditors. 

The creditors of a company can accelerate or terminate current obligations of a company participating in the reorganisation (e.g. a bank may accelerate a loan), however, this right of the creditors is significantly limited by the Civil Code.

Liquidation 

A legal entity can be liquidated: 

• voluntarily, by a decision of its shareholders/participants; 
• by the court in the circumstances listed in the Civil Code; or
• through bankruptcy (for more details, please see the Corporate
  bankruptcy chapter).

Voluntary liquidation of a company is complex and time consuming as it involves an audit by the tax authorities (and sometimes by the Social Funds) and notification to its creditors. 

Closing branches or representative offices is almost as cumbersome as voluntarily liquidating a company. The only major difference is that there is no requirement to notify creditors of the closure of representative offices or branches.

Shareholders’ and participants’ agreements

The Civil Code provides for a definition of “corporate agreement” that covers both shareholders’ and participants’ agreements. 

These corporate agreements can be governed by non-Russian law (e.g. English law) if one of the parties to such agreement is a foreign person. This does not mean that the mere choice of foreign law will exclude the relevance of Russian law (its mandatory rules cannot be overcome). Also, the foreign law precedent commonly used in international joint ventures will still need some adaptation for a Russian company but importantly, more general provisions of such agreements and boiler plate clauses can now be retained. 

A corporate agreement can be entered into by all the shareholders or some of them. The company itself still cannot be a party to the corporate agreement. The shareholders must notify the company upon the conclusion of a corporate agreement. 

A corporate agreement can be entered into with a person who is not a shareholder to the company provided that such person has a legitimate interest in respect of the company (e.g. a creditor, a potential investor).

The corporate agreement survives the exit from the company of one of the participants/ shareholders unless otherwise is provided in such agreement.

Private corporations (LLCs and private JSCs) are not obliged to disclose the content of corporate agreements. Public corporations must disclose the content of any corporate agreement within the limits provided by the JSC Law. 

Strategic industries

The Foreign Investment Law 5 Federal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999. , together with Federal Law No. 57-FZ “On Procedures for Foreign Investment in Companies of Strategic Significance for National Defence and Security of the Russian Federation” dated 29 April 2008 (the “Strategic Industries Law”), provides for a strict regulation of all transactions or agreements involving the participation of foreign investors in any entities engaged in activities in those sectors of Russia’s economy which are deemed strategic for Russia’s defence and security.

Under the Strategic Industries Law, 45 sectors of the economy have been defined as strategic, including:

• military technology, nuclear power, aircraft and the space industry;
• natural monopolies, such as pipelines, the maintenance of ports and airports (with limited exceptions); 
• companies with a dominant market position in certain markets in Russia;
• communication services, including fixed-line telecommunications, but excluding Internet access services;
• television and radio broadcasting; and
• subsoil use. 

The Strategic Industries Law does not affect foreign investments which are already governed by other federal laws or by international conventions ratified by Russia.

Restrictions on foreign investors

Under the Strategic Industries Law, transactions that result in foreign investors or Russian corporate groups with a foreign element gaining control over a strategic company must be cleared by the specifically appointed Governmental Commission (the “Strategic Approval”).

In June 2018, important changes to the Strategic Industries Law came into force. These changes introduced the amended definition of a “foreign investor” for the purposes of the Strategic Approval. This definition now includes those types of investors mentioned in a comprehensive list provided by the Strategic Industries Law. 

The procedure for obtaining a Strategic Approval is lengthy and cumbersome; however, if the Strategic Approval is not obtained for a transaction requiring such approval, the respective transaction is void under Russian law.

If prior approval is obtained, the transaction should be conducted within the timeframe set out in the respective approval.

Foreign investors are deemed to “gain control” over a company if they are acquiring:

• directly or indirectly more than 50% of the voting shares in a Russian company operating in a sector deemed to be of strategic importance (a “Strategic Company”) which does not conduct geological surveys on the subsoil and/or explore and extract minerals on subsoil plots of federal significance (i.e. not “operating federal subsoil plots”);
• directly or indirectly less than 50% of the voting shares in a Strategic Company that is not operating federal subsoil plots, if the acquirer gains effective control over the company;
• directly or indirectly 25% or more of the voting shares of a Strategic Company operating federal subsoil plots; or
• control of a Strategic Company as a result of a change in the number of voting shares in that company. 

It should also be noted that certain transactions require post-transaction notification, which must be made within 45 days of the change of control taking effect. One example of this is when foreign investors acquire at least 5% of the shares in a Strategic Company.

Restrictions on state and international organisations and non-disclosing entities

The Strategic Industries Law prohibits foreign states, international organisations and organisations controlled by them, as well as the companies that do not disclose information about their beneficial owners and controlling persons (“non-disclosing entities”), from gaining control over a Strategic Company.

It also provides that foreign states, international organisations, organisations controlled by them and non-disclosing entities must obtain prior approval from the FAS when acquiring:

• directly or indirectly more than 5% of the voting shares of a Strategic Company operating federal subsoil plots; or
• directly or indirectly more than 25% of the voting shares of a Strategic Company that is not operating federal subsoil plots or otherwise acquiring the right to block decisions of that company’s management bodies.