Ways of working on the Russian components market

Russia aims at being open to foreign investment. It seeks to create favorable conditions for foreign business, including comprehensible and convenient conditions for establishing and starting a business. Any manufacturer of electronic components, who has decided to work on the territory of the Russian Federation, will have to decide: which of the four existing methods of conducting a business is suitable:

1. establishing a Russian legal entity,
2. purchase a share in an already existing Russian company,
3. establishing a branch or a representative office of a foreign legal entity,
4. working through distributors,
5. working with an individual, a representative.

Next, we are going to analyze these options in detail and evaluate the existing conditions and opportunities for a foreign investor.

1. Establishing a company

An OOO (a limited liability company under the laws of the Russian Federation) and an AO (a joint stock company) are forms of a business legal entity that conduct its activities under according to its own charter. Many aspects of registering an OOO and an AO are similar. Therefore, let’s analyze terms and conditions, timeframe and cost of establishing a company using an OOO as an example, since it’s the most common form of conducting a business in Russia on the electronic components and distribution markets. An OOO is independently liable for its debts, has a separate balance sheet and keeps books on its own. The OOO’s functioning scheme mostly will be

Advantages: a member of this form of a company is not liable for debts of the whole company – his liability is limited by the size of his share. An OOO company is permitted to apply a simplified tax system (STS), which is favorable for small and medium-scale businesses, since the state provides a preferential taxation for this type of companies. To establish an OOO, a foreign citizen or a foreign legal entity can be a 100% participant, i.e. the sole proprietor.

When establishing an OOO company from scratch, a foreign founder can be sure that he will be the only one, whom the company’s development and business reputation will depend on.

Conditions: To establish such a company, one needs a legal address, a registered capital (no less than 10 thousand rubles), as well as a Director General and a Chief Accountant.

A foreign citizen who is about to become the founder of an OOO company must legally reside on the territory of the Russian Federation, i.e. must obtain a business visa, a permission to stay or residence permit.

The establishing procedure takes 5 business days from the date of submitting the documents up to getting the registration certificate. The costs (the average amount of 10-15 thousand rubles) include documents translation, witnessing and sending costs, as well as a state fee of 4 thousand rubles.

If a foreign company is one of an OOO founders, one will additionally have to provide legalized documents from the incorporation country, containing basic information about the company. Documents must be translated into Russian and notarized by a Russian notary.

Nuances: a foreign citizen requires a work permit, if he plans to take any position in the OOO. Obtaining such a permit according to the standard procedure is time-consuming: first, a quota and/or a permit to attract foreign labor should be issued; after that you can apply for a work permit, which can be obtained in 30 calendar days from the documents submission date. However, these terms and conditions don’t apply to highly qualified specialists that earn no less than $2,600 per month before tax. When hiring such a specialist, one won’t even need to obtain permission to attract foreign labor, post a vacancy at the Employment Center, provide a document confirming command of the Russian language, and medical certificates.

An optimal legal solution to speed up the OOO registration procedure is to appoint a citizen of the Russian Federation as a Director General, who can be replaced by a foreign citizen after having received all the permits required.

2. Establishing a JV (joint venture)/introduction of a new member of the company

Establishing a joint venture involves opening a new company with a Russian individual or legal entity participating in the registered capital. Moreover, a manufacturer or distributor working on the electronic market can purchase a share in the registered capital of a Russian company or become a new member of this company by increasing its registered capital.

Advantages: a Russian partner is well-aware of the market situation, navigates well in the legislation and possesses necessary knowledge and contacts in the industry to make the launch of a new joint venture confident. For its part, a foreign founder, for example, can secure industrial equipment import, with its analogues not being produced in Russia. In accordance with paragraphs 7 p.1 art. 150 of the Tax Code of the Russian Federation, such equipment is import tax exempt.

Conditions: the procedure and costs are similar to those applicable when establishing an OOO, if a joint venture is launched by Russian and foreign founders. In case a foreign investor purchases a share in an already operating Russian company or becomes a new member of this company by increasing the registered capital, the changes are registered within 7 business days, with documents notarization usually costing about 15-17 thousand rubles. Moreover, an increase in the registered capital is also a subject to a state fee of 800 rubles. Additionally, there will be expenditures for documents translation, witnessing and sending.

Example: a Danish company Pindstrup Mosebrug, a substrates manufacturer (peat products for agriculture), has been doing business in Russia since 2013. The Danes acquired a Russian company that produced peat products for greenhouse plants, open-ground agricultural enterprises, softscape, and so on. Due to experience of the Russian company, Pindstrup managed to adapt to the local market more quickly, which contributed to the significant growth of the Russian business. There is another example on the electronic components market – TYCO (TE Connectivity), which opened a representative office through by registering a company.

3. Establishing a branch or representative office

A manufacturer’s branch and representative office are separate subdivisions operating at the direction of the parent company and performing all or part of its functions. Subdivisions are fully subordinate to the establishing company, with the parent company being liable for debts.

What is the difference between a branch and a representative office?

A representative office is granted with a least possible amount of authority and is not entitled to conducting entrepreneurial activity (parts 1, 3 of art. 55 of the Civil Code of the Russian Federation). It can only deal with marketing and advertising, searching for potential partners, concluding contracts, resolving conflicts, etc.

A branch can perform the same full-fledged business activities as the parent foreign company (part 2 of art. 55 of the Civil Code of the Russian Federation), i.e. branches have basically the same functions as Russian companies.

Advantages of working through a branch and a representative office in Russia:

1.  Branches and representative offices operating on the electronic market are eligible to opening and closing accounts in Russian and foreign banks, cutting deals, signing contracts.
2. Branches and representative offices are managed by appointed heads/directors of these separate subdivisions. The parent company, each branch/representative office separately or one of them can keep books for one or several subdivisions and submit documents to the tax office.
3. When establishing a branch or a representative office, a foreign company receives the non-resident status with its taxation issues being regulated by a bilateral Double Taxation Avoidance Agreement, if it has been concluded between the countries.
4. When an office is rented by a branch/representative office in Russia, the rent doesn’t include VAT in accordance with the Tax Code of the Russian Federation.
5. Material support of branches and representative offices is performed from the parent company’s property and assets. The “transfers” of such property and assets between the parent company and branches/representative offices are performed within the company, which is much easier than, for instance, to transfer the foreign company’s property to a subsidiary in the Russian Federation. This also applies to bank transfers. Thus, the foreign company will be able to transfer funds to cover expenses associated with business activities in Russia more quickly.

Conditions: to start operating in Russia, branches and representative offices undergo an accreditation procedure that lasts 25-30 business days and is subject to payment of a state fee amounting to 120 thousand rubles.

In fact, branches and representative offices are a form of presence on the Russian market, which is popular among medium and large-scale foreign businesses. When contacting these branches and representative offices, Russian customers understand that they are contacting the representatives of a well-known brand, whose reputation and reliability are world-renowned. For a foreign company, having a branch/representative office in Russia obviously increases efficiency when interacting with Russian and foreign clients, who work in the Russian Federation.

Example: a British company Forward 3D Limited operates in the field of advertising and marketing. The company decided to establish partnership with Google and Yandex in Russia. For that purpose, it opened a branch in Moscow, and the employees who used to work with Russia at the head office in London moved to work in Russia on a continuing basis. The key field of the Moscow office operations is related to organizing advertising campaigns in Russian social networks, as well as in the Russian segments of international social networks. These processes are directly related to studying the public opinion to form an effective advertising strategy. The presence of the Forward 3D Limited branch in Russia makes it possible to perform all these processes and interact with contract partners in our country more quickly. Moreover, payments from the branch’s bank account in a Russian bank are performed much faster than payments from the parent company’s account.

4. Working through distributors

Working through electronic components distributors is an optimal, economically viable option for foreign small-scale businesses. At this stage, a company yet doesn’t have full-time employees and reliable sales mechanisms in Russia. Therefore, a foreign company turns to distributors and concludes supply contracts with them. The company sells its products to the distributor, who later distributes them on the Russian territory.

Conditions: This operating form requires no separate legal entity on the Russian territory. All a foreign company needs is a reliable distributor and a legally correct supply contract, which will form the basis for cooperation between the parties. At the same time, you should keep in mind that the customer base is not constant, since the distributor may decide on cooperation with other companies and foreign investors may have to look for another way to penetrate the Russian market. 

5. Through your representative.
Your representative is registered on the territory of the Russian Federation as an individual entrepreneur and provides you with services under the agreement. It is liable to paying taxes for these services. You bear no responsibility for its activities. If you want to have your own agent on the Russian electronic components market, this is the most affordable way.

Thus, we have covered the main forms of penetrating the Russian market available for foreign business.

The choice of operational method depends on a business size, intended goals, special features of the products, etc. In practice, a small-scale business usually prefers to work on the Russian market through distributors or a representative. Medium and large-scale businesses choose to establish an OOO or open a branch/representative office. Internationally, these forms of conducting business are used as well, so the Russian rules of the game will be clear for foreigners.