Passive presence
Passive investments include loans, acquisition of domestic securities, lease of equipment and trademarks.
As a rule, no particular activity is expected from the foreign investor. However, if the foreign investor is involved in real estate investment, the foreign owner is subject to mandatory tax registration for payment of property tax.
The income recipient is taxed, withheld, and paid into the budget by its domestic counterpart.
Activity through a Russian partner
Option 1: Acting Through an Agent
Activities of foreign investors through an agent (broker) do not create a permanent presence/office in Russia. Acting through an agent, a foreign investor may engage in commercial activities in Russia and be exempt from income tax, but this option is suitable only for business activities not subject to VAT. These activities include transactions with domestic securities via a professional intermediary which are exempt from Russian taxes regardless of any international tax treaties by any companies (including off-shore). Only domestic companies with more than 50% of immovable assets in the Russian Federation are excluded.
Option 2: Entering Into Joint Activity Agreement with a Domestic Partner
If the joint business is run by the domestic partner, such an agreement does not create a permanent presence/office in Russia. The income from such activity is taxed at the rate of 20%, but in the presence of an appropriate tax treaty, the rate can be reduced to zero. In fact, many tax treaties stipulate a zero tax rate for ”other income” (income not expressly covered by the treaty). The VAT is levied and paid by the domestic partner.
Activity through a Branch In Russia
The difference between a representative office and a branch lies in the authority vested in each. The Civil Code of the Russian Federation states that a representative office only “represents the interests” of a legal entity, and a branch acts as one. Neither a representative office nor a branch is a legal entity per se, and they must be registered with the State Registration Chamber at the Russian Ministry of Justice.
From the tax point of view, a representative office is similar to a domestic company and is subject to the same taxes including: corporate income tax, property tax, VAT, and social insurance payments. There are some peculiarities related to the calculation of the taxable income of the representative office, including:
The subdivisions of foreign companies (including branches and representative offices) are considered non-residents for foreign currency legislation. Accordingly, all settlements of residents with these subdivisions are subject to foreign currency regulations, as are the settlements with their parent companies.
Activity through an Entity with Foreign Investment
The incentives contained in the law “On Foreign Investment” are only available to entities with a minimum of 10% of its capital belonging to foreign investors. This company is considered a domestic legal entity with all the advantages and drawbacks or a domestic legal entity. Advantages of an entity with foreign investment include:
- Exemption from foreign currency regulations for transactions with residents;
- Goods imported as “in-kind equivalent” are exempt from customs duties provided that they:
- are not subject to excise duties;
- are fixed production assets;
- are imported in due course; and
- have no analogues in Russia
- Goods imported as “in-kind equivalent” are also exempt from the “import” VAT, if they are technological equipment, components and spare parts.
Activity through a Production Sharing Agreement.
Such agreements are of particular interest to foreign investors focused on the exploration and development of natural resources under the terms of the Federal law “On Production Sharing Agreements (PSAs)” and Section 26.4 of the Tax Code ”Taxation of PSAs”.
In such agreements, the Russian government grants the right to develop natural resources at a specified location and the output is shared between the investor and the Russian government.
In addition to the portion of the output to which the investor receives, it may be entitled, upon meeting certain conditions, to the special tax regime under Section 26.4 of the Russian Federation Tax Code. The investor is exempt from payment of certain domestic taxes and duties or is reimbursed. In addition, the investor is exempt from export and import duties, and, in return, the investor pays to the State a fixed fee. Foreign currency regulations are fully applicable to such foreign investors.
Activity through Registration of a Legal Entity
One of the most common forms of doing business in Russia is setting up a legal entity. The legal structures below are the most common in the Russian Federation:
- Limited Liability Company (LLC). A company set up by one or more individuals in which the charter capital is divided into shares of defined amounts. The shareholders are not liable for the obligations of the LLC and their liability risk from LLC losses is limited to the amount of their share contributions. The number of shareholders in a Russian LLC cannot exceed 50. 2. Joint stock company. A commercial entity in which the charter capital is divided into a defined number of shares certifying the ownership interests of the shareholders.
- Joint stock company. A commercial entity in which the charter capital is divided into a defined number of shares certifying the ownership interests of the shareholders.
- Closed joint stock company. A company in which the shares are distributed exclusively among its founders or a pre-defined group. This company may not announce open share subscriptions or sell them to outside investors. The number of shareholders cannot exceed 50. The shareholders have the right of first refusal to purchase buy shares offered for sale by other shareholders at the price offered to a third party, pro rata to the number of shares already held, unless otherwise stipulated by the charter. The charter may stipulate that priority right of the company has a second right of refusal to purchase shares offered by its shareholders, provided that other shareholders did not exercise their right of first refusal.
- Open joint stock company. This form of legal entity may conduct open subscriptions and sale of its shares. The number of shareholders is not limited. There is no priority right for the company or its shareholders to buy shares sold by other shareholders. An open joint-stock company must publish its annual report, accounts, and income statements.
- Non-commercial partnership. This is a not-for-profit organization set up by individuals and/or legal entities to engage in activities stipulated by Item 2 Article 2 of the Federal law “On Non-Commercial Organizations.” The property contributed by its members to the partnership is owned by the partnership. The members are not liable for the obligations of the partnership and vice versa. Non-commercial partnerships may engage in commercial activities to realize its goals.
- Independent not-for-profit organization. This form of legal entity is a non-membership, non-commercial entity set by individuals and/or legal entities on the basis of voluntary contributions in order to provide educational, sports, cultural, scientific and health care services. The property transferred to the independent not-for-profit organization by its founder or founders is owned by the organization. The founders waive any ownership rights to such property. The founders are not liable for the obligations of the partnership and vice versa. The organization may engage in commercial activities in order to realize its goals. The oversight over the organization activities is done by its founders as stipulated by the foundation agreement. The founders may use its services on a par with other individuals.
- Funds. These are a non-membership, non-commercial organization set up by individuals and/or legal entities on the basis of voluntary ownership contributions to engage in social, charitable, cultural, educational and other activities. The property transferred to the fund by its founder or founders is owned by the fund. The founders are not liable for the obligations of the fund and vice versa. A fund must use its property for the purposes stipulated by its charter. The fund may engage in commercial activities in furtherance of its goals and purposes. The fund may establish commercial entities or take part in them. The fund must publish annual reports on the use of the property.