New Implications for Starting Your Business in Russia
In the September issue of Passport Magazine we offered details explaining the pros and cons of buying off-the-shelf companies in the Article “Starting Your Own Business in Russia: Off-the-Shelf Company vs. Incorporating a Company from Scratch”. It now appears that starting in 2007 you won’t be able to buy an Off-the-Shelf company because they might cease to exist due to recently introduced amendments to the laws that the government and parliament are eager to enforce, effective from 2007.
Part of the amendments will affect the general directors and chief accountants of the “one-day” companies. In most of the cases of “one-day” companies, the director is a “nominal” director, and we have described the status of such individuals in the last issue. The Ministry of Economic Development and Trade suggests that when authorities suspect that a particular company is a so called “one-day” company, the directors of these companies should at first bear responsibility for any illegal operations of the company and moreover should be banned from occupying a general director’s position in other companies in the future for a certain period of time.
It is yet unclear how this initiative will be enforced in practice, but the Ministry of Economic Development and Trade promises that relevant amendments to the laws will be developed and will go into force at the end of this year.
Another part of the amendment is devoted to the problem of “legal addresses”. We also described the existing situation in the last issue of this magazine. T
he term “legal address” appeared during the time when Russian Company legislation was being developed in the early 90’s; but it is not a legal term. The “legal address” was understood to be the address where the company was incorporated on paper. The address where the company had its office was called the “actual address”. Accordingly it was, and still is a common practice that a company is registered at the “legal address” and is physically located at the “actual address”.
This was possible because the Civil Code of the Russian Federation defined the “location” of the company as the place where the company is registered. So for registration purposes “legal addresses” were widely used.
Starting from the 1st July 2002 Federal Law “On State Registration of Legal Entities” came into force and stipulated changes to the existing definition. Accordingly, the Civil Code was amended and stated that “state registration should be done at the address where the executive body of the company is located”.
But in practice many companies have continued to have two addresses; a “legal” and an “actual” one. In order to finally resolve this issue a draft law to amend the Civil Code is being prepared. Accordingly, the “actual location of the company should be the same as the legal address”. For a breach of the new requirement companies will have to pay a fine from 30,000 rubles ($1,130) to 50,000 rubles ($1,880) or be banned from doing any business activity for a period of 90 days.
Responsibility for locating companies in violation will be vested in the tax authorities. Other relevant changes may also come into force starting from 1st January, 2007.
One may think that all of these amendments are aimed to restrict or bureaucratize the process of company formation, but in the long run these amendments should save a lot of time in solving problems due to improper company formation for future entrepreneurs and businessmen.
We also want to mention a change in another very important aspect of the company incorporation process that we briefly described in the last issue. It has been necessary to file the application to register a company by the founder personally, and the necessity of filing applications for any amendments to the tax authorities must be done by the existing general director, also in person. Otherwise tax authorities were sending the documents by regular post.
The Supreme Court of the Russian Federation in its decision on August 1, 2006 established that the founder or general director is not obliged to file relevant applications to the tax authorities personally. The founder or general director may issue a power of attorney delegating the authority to an attorney. This decision is definitely very good news for everybody, but it seems that tax inspectors are still waiting for an internal letter from the Ministry of Taxes and Levies that will enable them to start the submissions of applications as decided by the Supreme Court.
It is obvious that the Russian company incorporation process is a far cry from those of other countries where you can start a company on-line in 15 minutes. As an example, go to www.ukcorporator.co.uk; but things are definitely getting better.
Timur Beslangurov is the Managing Partner of Vista Foreign Business Support in Moscow.