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December 13, 2023

Dialogue with a foreigner on opening business in the Russian Federation

Ivan Katyshev
Owner of the SberSolutions legal and tax services product.
Dmitry Bazanov
Leading Lawyer, SberSolutions

We often meet with representatives of foreign companies who want to establish their presence in the Russian market. Most often, a request from such a non-resident looks like as follows: We have a company in such and such country and a network of branches and subsidiaries in other countries.

We are already working in the Russian market through our partners/distributors, but now we want to gain a foothold in the market on our own in order to increase sales, expand the range, etc. (the goals may be different). Below we present an example dialogue with such a representative.

  • Customer:
    We would like to open a branch of our foreign company in the Russian Federation
    Lawyer, SberSolutions:
    Please tell me, for what purpose do you need a branch?
    We are asking this question in order to help you to choose a more appropriate form of business.

    In short, there are 4 most popular forms of business for non-residents in Russia:

    1. a branch of a foreign firm
    2. a representative office of a foreign firm
    3. a subsidiary company (hereinafter subsidiary) with foreign participation
    4. a non-resident account of a foreign company in the Russian Federation

    The difference between these forms is significant.
    If you open without prior analysis, you can lose up to half a year to restart into a new form.

    So, very briefly: a branch and a representative office will be suitable for companies from the "friendly countries" list.

    At the same time, a branch can engage in any commercial activities (not recommended only for export and import).
    A representative office – for marketing and advertising, expenditure operations in the country, you can hire employees and rent an office.
    Everything that a representative office can do, a branch can do as well.

    A representative office is often chosen for the purposes of product certifications, drug registrations, etc., which are required for special types of goods, but deliveries are made on behalf of the foreign company itself.

    A subsidiary is needed if large-scale commercial activities, receiving revenue from local clients are planned.

    This is the only convenient form of work if you plan to independently conduct export and import activities in the country and take over customs formalities (instead of your clients).

    In addition, transactions with Russian clients in the country's territory are not subject to currency control, which will be a relieve for your clients.

    The last option is a non–resident account.
    In fact, in this case, a foreign company does not have legal presence in the country.

    The account allows you to accept and send money within Russia.
    Be sure to check in advance to which foreign banks your Russian bank, where you plan to open an account, will be able to send/accept payments. This option is chosen by companies that have direct contracts with Russian clients, but have difficulty in accepting payments from them to accounts with foreign banks.

    In this case, since the company opens neither a subsidiary, nor a branch or a representative office in Russia, it does not have the opportunity to hire employees. Import-export activities are possible, but the counterparty will still be the foreign company itself. Accordingly, warehousing is impossible, customs formalities are on the buyer.
  • Customer:
    Oh, thanks, we didn't know. We thought we needed a branch, but it seems that only a subsidiary will do, as we want to maintain and expand the amount of supplies to Russia (the business is related to equipment)
    Lawyer, SberSolutions:
    Yes, a subsidiary is more suitable for you.

    Then you will be able to purchase goods from the head office and sell them in Russia, rent a warehouse and manage inventory, save your customers from customs formalities and currency control.

    However, some companies choose a different way: they retain direct contracts of a foreign company with customers, but additionally open a representative office in Russia, which carries out promotion, advertising, and maintaining interest in the brand and specific products.

    In this case, the representative office does not participate in the conclusion and approval of transactions with customers, does not enter goods for customs clearing and does not have warehouse inventory.
  • Customer:
    Yes, everything is clear. Working through a representative office is also a good option. In fact, for the first 6-12 months we will work in the mode of such a representative office, so let us open it, and then transform it into a subsidiary company.
    Lawyer, SberSolutions:
    This is logical, because it takes time to start processes. However, please note that it is not so easy to transform a representative office into a subsidiary.

    In fact, it is necessary to close the representative office and open a company. It usually takes 1.5-2 months to open a representative office, 3-4 months to close it.

    It takes 1 month to open a company, and 6-12 months to close it.
    That is, it doesn't make much sense to open up as a representative office in order to move later to a subsidiary.

    We recommend opening a target business form right away.
  • Customer:
    Great advice! It will obviously save us money and time. Good, so it's a subsidiary then. How do we open up?
    Lawyer, SberSolutions:
    We need to decide on a few more questions:
    1. have you selected an office, at which address will the company be opened? If a large actual address is not required, you can choose a rental of workplaces with the right to register an address, or just a small room.

    2. who will be the head of the company in Russia, what their citizenship is and where will they reside.

    3. who will be the founder (a company or an individual, residents of which countries)
  • Customer:
    It is clear about the office, we are negotiating with the landlord.
    The office has been selected, you will be provided with contacts to solve registration formalities, and also we ask for help with checking and concluding the lease agreement.

    We would like to appoint a foreign citizen as a director, he already lives in Russia and now works for another company.
    Lawyer, SberSolutions:
    Great, so we register the company immediately to the address of the future office, we will resolve all registration issues with the landlord.

    Registration of a foreigner as a director at the time of opening a company may involve a liability risk.

    If you immediately appoint him as a director, he will be in office without a work permit, this may be considered a migration offense both for the company and the director.

    The liability is severe both in terms of fines and possible deportation.
    For the period of company registration and several months after, it is safer to register a person with local citizenship as a director.
    In the future, we will accompany the process of obtaining a work permit, possibly a visa for a foreigner and register the change of the director.
  • Customer:
    This is valuable information. Yes, we have a second local proxy who can act as director at the time of the launch. The founder of the company will be our 100% foreign company
    Lawyer, SberSolutions:
    Great, how many shareholders does this foreign firm have?
  • Customer:
    One, our holding company. Why do you ask?
    Lawyer, SberSolutions:
    We recommend choosing a different company with more than one owner involved.

    This is a controversial point in the legislation, but there is a risk of refusal of registration if the founder, in turn, has one owner.

    Or it is possible to add an individual, for example, a beneficiary, as a second founder in a Russian company.
  • Customer:
    Great, we will indicate the beneficiary for 1% participation
    Lawyer, SberSolutions:
    It suits
  • Customer:
    How long will it take to open the firm?
    Lawyer, SberSolutions:
    About 1-1.5 months. For the subsequent preparation of documents for a foreign citizen – about 2 months more.
  • Customer:
    Is it possible to shorten the term?
    Lawyer, SberSolutions:
    Of course, it mainly depends on how quickly the documents are prepared at the head office, on their legalization/apostilling, as well as the method of their subsequent delivery.

    Accordingly, the term can be shortened due to fast work with documents by lawyers of the head office, more urgent tariffs for legalization procedures, more urgent delivery (or sending a personal courier with documents)
  • Customer:
    Thanks for the consultation, let's start working.
    Lawyer, SberSolutions:
    We will contact you to collect the data and start the work. And after the company is opened, we will organize the bookkeeping and tax accounting process and take the company for outsourcing, if necessary.
Leave a request for consultation on choosing the form of opening a foreign business in Russia and calculating the cost of support from SberSolutions.

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