Incorporation of a joint venture with a foreigner in Russia

Contents:

• Choosing the legal form of a company
• Features and advantages of the joint venture
• Management bodies of the joint venture
• Incorporation of a joint venture in Russia: step-by-step instructions
• Accounting and taxation of joint ventures with a foreign company

A joint venture with a foreign participant is a legal entity formed by merging the capitals of a Russian legal person and a representative of another country.

The incorporation of such company is traditionally viewed in a positive way, as it allows attracting foreign capital and foreign technologies to Russia. Among other positive characteristics are:

• Simplified export of capital.
• Fulfilment of a wide number of investment projects.
• The ability to operate in several products or services markets.
• The opportunity to be eligible for various benefits provided by the legislation of the Russian Federation, including tax benefits or customs privileges.
• The ability to reduce financial risks.
• High competitiveness.

Other features of the incorporation of a joint venture are a subject of this article.

Choosing the legal form of a company

In the case of a joint venture, foreign partners should come to a common agreement regarding a legal form for the company’s business. Being an international structure, such company, in any case, acquires a special legal status in the country of official registration. In Russia, a joint legal entity and all its activities are regulated by separate provisions of legislation, including tax and civil law.

In theory, there are two forms of joint ventures: contractual and corporate. The first ones are issued without creating a separate legal entity and exist within the framework of joint activity agreements. A separate legal entity is created to create corporate joint ventures.

In general, anyone, who wants to operate as a legal entity in Russia should make a decision regarding one of the available ways of doing business. The choice can be made in favor of one of several options:

1. Economic partnership.

In this case, the parties deposit their funds to partnership’s capital and this capital belongs solely to the partnership. The discrepancy of this form of management is that the created capital, as well as the property purchased from it, will belong exclusively to the partnership. At the same time, according to Article 69 of the Civil Code of the Russian Federation, the founders are responsible for the company’s activities with their own property.

Both individual entrepreneurs and legal entities can create a partnership. At the same time, it is worth noting that each participant will work on his own behalf, unless otherwise provided by the agreement between the parties.

All profits and all losses will be distributed proportionally to the funds invested in the partnership.

2. Limited Liability Company (LLC).

According to Article 87 of the Civil Code of the Russian Federation, the authorized capital of the LLC is divided into shares for each of the participants. The difference from a partnership is that participants of LLC do not bear personal responsibility for the company’s debts.

There is a maximum amount of 50 founders, including non-residents, who can become a member of an LLC. At the same time, the latter must have a share of at least 10% to obtain the status of a participant.

3. Joint stock company (JSC).

A joint-stock company represents a company whose authorized capital is divided between the founders through issue of shares. Each participant of the Joint-stock company is liable for obligations only by the value of these stocks. Russian legislation allows both legal entities and individuals from among foreign investors to open joint-stock companies. The main criteria is that their contribution to the authorized capital should be at least 10%.

4. Joint Venture (JV).

A joint venture is the “youngest” of all ways to open a company with foreign participation. As a rule, this legal form involves the purchase of a company’s share that is already operating in Russia. Thus, a non-resident will increase the size of the authorized capital. Since this is one of the easiest and most understandable ways to start operating in Russia for foreign investors, we will look at this form in more detail.

It is important to bear in mind that joint ventures in one way or another have the form of a joint-stock company or LLC. Non-public joint-stock companies and LLCs allow for more flexible corporate management, keep important information private, provide for a disproportionate distribution of rights between business owners, and have fewer compliance requirements.

If you decide between LLC and a non-public JSC, you are not obliged to issue shares in an LLC, may have more flexibility in corporate aspects of company , and disclose less information. At the same time, the data on the owners of the LLC will be publicly available. In most cases, preference is given to LLC because of the need to issue stocks in the case of JSC.

Features and advantages of the joint venture

In a joint venture with a foreign company in Russia, its founders have equal rights and equal access to business management issues. Therefore, the legislation of the Russian Federation does not separate a domestic or foreign investor, creating equal conditions for enterprise management for both parties.

The second feature of the joint business is the wide opportunities for international cooperation that the joint venture opens up. This can be expressed in the following forms:

• Joint incorporation of a new legal entity.
• Opening of a branch or representative office elsewhere.
• Signing of an agreement on the opening of a new production facility through involvement of foreign funds.  
• Signing of a technologies exchange agreement.
• Participation in international scientific research.
• Joint development of goods and services.

Management bodies of the joint venture

In a classic joint venture in Russia there are three governing bodies:

• CEO.
• Board of Directors.
• General Meeting of Founders.

The CEO is engaged in daily operational activities, therefore, firstly the Board of Directors needs to decide on his candidacy, the possibility of his rotation, the requirements for the candidate and his limits of independence. It is allowed to create a collegial executive body, whose head is the general director by its functionality. However, in practice, when creating a joint venture, a collegial executive body is rarely used.

The Board of Directors meets more often. It is an intermediary body between the General meeting and the General Director. The main purpose of the Board of Directors is to accelerate decision–making without convening a General meeting of owners. If the Board of Directors cannot cope with this function, then there is no need to create it. For example, representatives of state-owned companies or the state want to receive internal directives for voting in a joint venture in one way or another. At the same time, it does not depend on the level of the issue.

It is worth noting that the main governing body is the General meeting. The competence of the General meeting is prescribed in the corporate agreement and the Articles of association. Issues that are not within the competence of the General meeting are considered to be within the competence of the General Director by default.

Incorporation of a joint venture in Russia: step-by-step instructions

To create a joint venture in Russia, a foreign and Russian investor needs to complete several important stages, among which the following can be distinguished.

Stage 1. Determine the purpose and nature of joint activities.

Investment cooperation, including international cooperation, in any case, pursues a specific goal. Most importantly, investors want to receive profit from the joint venture’s activity. However, there are other goals for creating such a company:

• Widening of the product range in the Russian market.
• Quick and painless entry into the international trade market.
• Import substitution of foreign goods.
• Search for new partners.
• Obtaining new resources for products output.
• Modernization of production facilities.
• Risk mitigation due to the increasing number of partners.

Stage 2. Choosing a legal form of a joint venture.

As we noted earlier, the founders can choose one of three forms of creating a company – JSC, LLC or partnership.

Stage 3. Signing of an agreement on the establishment of a joint venture.  

A joint venture agreement is the main document regulating the activity of a company with foreign participation, even if the share of foreign investments reaches 100%. The agreement allows a foreign investor to engage in any type of activity that does not contradict the regulatory legal acts of the Russian Federation.

To sign an agreement on the incorporation of a joint venture, it is necessary:

• Determine the name of the joint venture.
• Select the type of activity – an indication of the OKVED code.
• Provide a document from the Chamber of Commerce of the registrar country of a foreign legal entity.
• Establish the size of the authorized capital and distribute its shares among the founders.
• Choose the legal address of the company’s location and its state registration.
• Provide the passport of the head of the enterprise.
• Choose a tax system in accordance with the Tax Code of the Russian Federation.

The Incorporation Agreement defines the procedure and formalizes the general activity. The Agreement also provides a list of the main directions of the company’s development and control over the work of the company’s participants.  

Stage 4. Creation of the authorized fund of the joint venture.

The authorized capital of the joint venture is formed at the expense of the founder’s property. It can be cash, stocks and other property, including real estate. The size and composition of the authorized fund is prescribed in a special agreement between the founders.

The formation of the authorized capital takes place on a temporary bank account, for the opening of which the following set of documents is required:

• Application according to the sample established by the bank.
• A special card with samples of signatures of the subjects who will subsequently manage the account.
• A copy of the General meeting of the founder’s minutes with information about the intention to create a joint venture.
• A copy of the agreement on the establishment of the joint venture.

Step 5. State registration of a joint venture.

The state registration of any joint venture takes place at the Inspection of the Federal Tax Service at the previously selected legal address. To register a company with foreign capital, the following set of documents must be submitted to the Federal Tax Service:

• Application of the prescribed form.
• The Articles of association of the joint venture being created.
• Incorporation agreement of a joint venture.
• Receipt of payment of the state fee in the amount of 4 thousand rubles.

Upon completion of the registration procedure, the founders receive:

• Tax registration certificate.
• List of record in Unified State Register of Legal Entities (EGRUL).
• A copy of the Articles of association certified by the Federal Tax Service.

Stage 6. Opening a permanent bank account.

After completing the state registration and obtaining a tax registration certificate, the founders can open a bank account in the selected banking organization on the basis of the submitted application. At the same time, participants must close the temporary account by submitting an appropriate application.  

Accounting and taxation of joint ventures with a foreign company

It is important to know that joint venture accounting must be conducted on a separate balance sheet. The document control is conducted in Russian with the possibility of a notarized translation into a foreign language for submission to the authorities of the foreign investor’s country.  

Regarding taxation, joint ventures work on equal terms with Russian companies within the framework of the general taxation system.

The incorporation of a joint venture with a foreign investor is not a labor–intensive process, but it requires certain legal knowledge. If there are difficulties with registering a company and preparing a joint venture agreement, it is necessary to seek professional help.