Choosing a Corporate Structure, or Legal Cyrillics
The first challenge for business people is to choose the right corporate structure. You are told there is the oh-oh-oh! Which sounds more like surrender in the face of difficulties, but you are reassured that it is the OOO which is the Russian abbreviation for LLC or Limited Liability Corporation. Another form of legal entity is ZAO or JSC, the joint stock company. Two other options are the RO or representative office (‘rep office’) and branch office.
By Jon Helevig
the Managing Partner of Helevig Klein Usov, Moscow Attorneys
Problems with learning a language in Russia do not stop with the Cyrillic alphabet, the challenges of grammar and pronunciation which require an effort best not to be taken too seriously at an adult age. Why ruin one’s health and self-esteem with an effort you can never master? When I gave up trying too hard to learn Russian I decided to excuse my grammar and pronunciation with a phrase I picked up from the I Love Lucy Show, “I speak with an accent, but think without one.” But as a practicing lawyer that excuse would not help when dealing with the language of doing business in Russia. In this role, I needed to master the ins and outs of Russian business and the traditions of law and its terminology. The fact that most of this “business speak” was equally new to Russians and under constant change for the first 10 years of my stay here, did not put me at a disadvantage compared with the natives. It was the same learning curve for the Russians as well.
The first challenge for business people is to choose the right corporate structure. You are told there is the oh-oh-oh! Which sounds more like surrender in the face of difficulties, But you are reassured that it is the OOO which is the Russian abbreviation for LLC or Limited Liability Corporation. Another form of legal entity is ZAO or JSC, the joint stock company. Two other options are the RO or representative office (‘rep office’) and branch office.
The rep office and the branch office are the first to come to mind when a company is looking to set up a marketing and sales promotion office. The rep office, as the name implies, simply represents, while all sales operations go directly between the clients and the foreign group or Russian distributor. A branch is in all essentials similar to the rep office but may engage in direct sales. The fact that the rep office is not allowed to do sales is a legal curiosity which can cause unwarranted risks; therefore those businesses that want to directly trade through a Russian entity are advised to go over to a branch form.
The OOO and the ZAO are the choices when the investor wants to set up a full-fledged operation in Russia for an unlimited time. Both forms offer the shareholder protection against unexpected business risks in a form of limited liability restricted to the capital invested. Not a bad choice in Russia, many seem to consider. Between these we always recommend OOO for a fully owned operation and a ZAO for a structure with joint ownership between two or more unrelated parties. The OOO should be chosen thanks to considerably less exposure to the notoriously heavy administrative burden in doing business in Russia. For example, even a 100% privately-held ZAO has to go through the absurd process of seeking government approval for a shareholders prospectus and officially registering shares at the founding of the company and each time capital is increased. You are offered a kind of government courtesy which protects you against the risks inherent in investing in such a risky venture as your own business. It seems that when Russian securities laws where copied from the U.S. they forgot that the Federal Securities Commission is only concerned with regulating public companies in order to protect the investors while investing in large companies; they have to manage themselves.
The OOO which is otherwise a perfect choice comes with the problem that shareholders have even less leeway to freely conclude valid legal agreements concerning the joint venture. Therefore ZAO is the choice in those cases. This has to do in particular with a provision of the Russian Civil Code granting a shareholder an absolute right to withdraw from the company and demand a pay-off corresponding to the size of the shareholding. In Western jurisdictions these kinds of issues are left to the discretion of the shareholders. The most fundamentally legal principle of freedom of agreement is unfortunately still not widely recognized by Russian judges.
Accounting and taxation issues are not greatly affected by the choice of corporate form, and the initial administrative burden is considerable in each case; while the differences are mainly a question of business volume and strategy. The corporate profit tax is 24% in each case, with a few exceptions even when conducting business through a branch. The Russian tax authorities are even happy to accept the tax revenue from rep offices, although they are not really supposed to be doing business. Putting aside the accounting nightmare, taxation as such is not a problem in doing business in Russia. I think it is rather a benefit, the tax rates belong to the lowest in Europe and are generally business friendly. Special mention should be given to the 13% flat tax, the world’s lowest personal income tax. Some real efforts and results have also been made to encourage small businesses which can choose to operate under the simplified system of taxation (SST). In this tax regime companies may choose to be taxed 6% on revenues or 15% on profit, and also gain some real slackening of the bureaucratic pressure. Best of all is being exempted from collecting VAT (value added tax) and freed from the real cancer of Russian accounting; the heavy VAT compliance procedures, a never ending source of problems, which are better avoided whenever there is a legal opportunity. Small businesses should not hesitate for a moment. To qualify the business has to be organized as a Russian legal entity: OOO or ZAO.
In 15 years Russia has made a magnificent change from a closed Soviet economy to a modern market economy which offers some of the best opportunities in the world. When I complain about the lingering problems with the bureaucracy here, my friends remind me that as a consultant one should not complain that the roads are still somewhat bumpy with too many traffic jams caused by the bureaucratic potholes. After all, it leaves a business to smooth the ride...