doing business in russia 2011

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Doing Business in Russia

Russia2011

CMS has the most extensive presence in Europe. Our people are immersed in the local culture and understand the legal landscape. It means our clients benefit from high quality expertise wherever they need it in Europe, delivered in the local context.

Dear reader,

We at CMS have been welcoming investors to Russia for nearly twenty years and we appreciate the importance of high-quality, accurate information to the suc-cess of business here.

To help you, we have put together this introductory guide to the Russian legal system and the principal laws and regulations that are of interest to investors in this exciting, developing market. It is of course no substitute for the expert advice tailored to your project that our specialists will be pleased to provide to you on request.

Russia is changing every day and, although this guide describes the laws as at 1 April 2011, please contact us to check that it remains up-to-date. We would also recommend that you subscribe to our free CMS news service through which you will receive our newsletters, articles and invitations to our seminars and events. You can do this by contacting any lawyer at CMS, or the CMS Marketing Department.

We wish you every success.

John Hammond Senior Partner [email protected]

Jean-François MarquaireManaging Partner

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Doing Business in Russia1

IntroductionPolitical and administrative structure 4Legal environment 6

Common forms of business structures for foreign investorsTypes of structures 8Registration, liquidation and reorganisation of business structures 19Shareholders’ and participants’ agreements 21Strategic industries 21

Tax system General approach 23Corporate taxation 24Taxation of individuals 30Special tax regimes 32Incentives 34Double taxation treaties 35

Customs regulations General approach 37Trade between Customs Union and third countries 38Mutual trade between the Customs Union members 40

Energy efficiency General approach 41EE requirements 42Energy service agreements 43Energy audit mechanisms 44Incentives 44

Contents

2

Content

Anti-monopoly issues General approach 45Scope of application of the Competition Law 45Anti-competitive practices and restriction of competition 46Liability 48

Banking sector Banking industry 50Legislative and regulatory framework 50Licensing and operations 51Deposit insurance 52The anti-money laundering law 53

Lending in Russia Lending documents and governing law 55Jurisdiction 55Currency controls 56Security interests 56Security trusts and syndication 57Enforcement 57Bank guarantee and suretyship 57Insolvency considerations 58Other lending related issues 58

Currency control General approach 60Foreign currency transactions 60Import and export of foreign currency 61Sanctions 62

Corporate bankruptcy General approach 63Insolvency concept 63Bankruptcy procedures 64


Employment General approach 69Formalising the employment relationship 69Managing employment relationships 73Terminating an employment contract 74Specifics of employing foreign nationals 74

Real estate and construction Contractual aspects 78Planning and construction issues 83Latest trends 85

Intellectual property General approach 87Rights over the results of intellectual activity and means of individualisation 88Violations of intellectual property rights 92

4

Political and administrative structure

The PresidentUnder the Constitution of the Russian Fed-eration, adopted on 12 December 1993 (as amended), the President is the Head of State. The current President was elected for a four-year term in 2008, however, beginning with the 2012 presidential election, the Presidential mandate will be extended to six-year terms.

The President appoints the Prime Minister, who is the head of government, and also ap-points the Chairman of the Central Bank of Rus-sia. Both appointments must be endorsed by the State Duma (“Gosudarstvennaya Duma” – the lower house of the Russian Parliament).

The President determines the main trends of Russia’s domestic and foreign policy and represents the country in both domestic and foreign affairs. He is Commander-in-Chief of the Russian armed forces.

The President has broad authority to issue decrees and directives that in practice have the force of law and, under certain circumstances, he has the right to dissolve the Duma. The cur-rent President, Dmitry Medvedev, took office on 7 May 2008. He succeeded Vladimir Putin, who led the country for the previous eight years.

The executive branchThe executive branch of power is headed by the Government of the Russian Federation (“Pravitelstvo”). The Government is required

Introduction

5 Doing Business in Russia

to enact the decisions made by the President and the laws adopted by Parliament.

A major reform of the executive branch took place in 2004. The aim was to create a clearer and more efficient structure, and to re-duce bureaucracy levels.

The legislative branchThe Federal Assembly (“Federalnoye Sobraniye”) represents the legislative branch of power in Russia at the federal level.

The upper chamber of Parliament is called the Federation Council (“Soviet Federatsii”). There are 166 seats occupied by representa-tives of the executive and legislative branches of each of the 83 Russian regions.

The State Duma is the lower chamber of Parliament and counts 450 deputies elected by proportional representation who are at the pith of the legislative process in Russia. Duma members are currently elected for four-year terms. However, beginning in 2012, they will be elected for five-year terms.

The legislative process consists of several stages. Bills may originate in either legislative chamber, or they may be submitted by the President, the Government, regional legisla-tures, the Supreme Court, the Constitutional Court, or the Supreme Arbitration Court. Bills are first considered by the State Duma and must pass three readings before being passed to the Federation Council. After being adopt-ed by a majority of the State Duma’s mem-bers, bills are considered by the Federation Council. If a bill is rejected by the Federation Council, a Conciliatory Commission may be established. This consists of representatives of the Duma and Federation Council who review and amend the bill before it is presented to the Duma again for consideration.

When a bill is adopted by the Federation Council, it must be signed by the President. The President has the right of final veto, which,

if exercised, can be overridden by a resolution passed by two-thirds of the members of the Duma and the Federation Council.

The judicial branchThe judicial system is split into three branches:(i) the courts of general jurisdiction;(ii) the arbitration (“arbitrazhnie”) courts (i.e. commercial courts); and(iii) the Constitutional Court.

The judicial system is also divided into a federal system and a system of local courts in each Russian region.

The courts of general jurisdiction deal with criminal, civil and administrative cases involv-ing individuals who are not engaged in busi-ness activities. Cases are heard by the district court, unless they fall under the jurisdiction of the magistrates’ courts or martial courts. The head of this branch is the Supreme Court of Russia. Decisions of the lower courts can be appealed through the intermediate courts, up to the Supreme Court.

The commercial arbitration courts deal with economic disputes involving individuals engaged in business activities, and disputes between legal entities and their participants (i.e. their shareholders). The arbitration court system consists of (in an increasing order of hierarchy) the arbitration courts in Russia’s regions, arbitration courts of appeal, federal arbitration courts and the Supreme Arbitra-tion Court of Russia. The Supreme Arbitration Court is the court of last instance in the resolu-tion of economic disputes.

The Constitutional Court has jurisdic-tion to decide on the constitutionality of fed-eral (and regional) legislation and regulations. This court also resolves jurisdictional disputes between the federal and regional authorities, and may interpret and clarify the provisions of the Constitution.

6

Introduction

Federal structureThe Russian Federation consists of 83 “consti-tuent subjects”, i.e. regions within the federa-tion. The Constitution grants the regions a de-gree of autonomy over their internal economic and political affairs. The head of the executive branch of each region is appointed by the leg-islative body of that region on the recommen-dation of the President of Russia.

The Constitution sets out a general list of powers that are of exclusive federal jurisdic-tion. Some powers are jointly exercisable by the federal and regional authorities. The re-gional authorities are then allocated all residu-al powers, which are not included in these two lists. Regional powers include the authority to manage municipal property, establish regional budgets, collect regional taxes, and to main-tain law and order. The Constitution also gives regional bodies the authority to pass laws, pro-vided those laws do not contradict the Consti-tution or existing federal laws.

Legal environment

General backgroundThe Russian legal system operates under the provisions of civil law. The legal structure de-veloped at a rapid pace during the 1990s. During this period significant reforms were enacted in almost every area of law. Many important market-oriented reforms have been implemented, for example, there is a civil code which sets out the foundation of civil law and civil relations, including business relations. There remain, however, many gaps and am-biguities in current legislation that may ham-per decision making on the part of businesses. Bringing the country in line with the standards of a modern market economy is a key priority for the present administration.

The Constitution, federal laws and the re-gional laws form the foundation of the Russian legal system. Presidential Decrees, Orders of the Government and the decisions of various ministries are used to support, and interpret, the provisions of primary legislation.

The Constitution states that general prin-ciples of international law and international treaties are part of the Russian legal system. Consequently, if Russia is a signatory to an international treaty containing provisions con-trary to the provisions of any domestic legisla-tion, the provisions of the international treaty will prevail.

Foreign investment

Facts and figures The Russian Government has stated on several occasions that it aims to encourage foreign in-vestment and to create a stable and attractive investment climate.

According to the Federal Service for State Statistics1, foreign direct investment (“FDI”) into Russia reached a record high of USD 27.8 billion in 2007. Although this trend, which was mainly due to high oil prices, continued in 2008, FDI slumped by almost half in 2009 to USD 16 billion and continued to decline in 20102 to USD 13.8 billion.

Legal regulation The main legislative act governing foreign investments is Federal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999 (the “Foreign Investment Law”). This law states that foreign investors and investments will be treated no less favour-ably than domestic investors and investments, subject to certain wide-ranging exceptions.

1 http://www.gks.ru/free_doc/new_site/business/invest/in_inv1.htm2 http://www.gks.ru/bgd/free/b04_03/IssWWW.exe/Stg/d01/

40inw24.htm


Exceptions/restrictions may be introduced to protect the Russian constitutional system; the morality, health and rights of third parties; or in order to ensure state security and/or de-fence, etc. Some of the sectors concerned are commented on separately below. By and large, foreign investment is permitted in most sec-tors of the Russian economy: for example, in portfolios of government securities, stocks and bonds, direct investment in new businesses, in the acquisition of existing Russian-owned companies and in joint ventures.

Foreign investors are protected against nationalisation or expropriation, unless this is provided for by federal law. In these cases, fo-reign investors are entitled to receive compen-sation for their investment and other losses.

Russian legislation may introduce special regulations for the promotion of foreign in-vestment.

Exclusions/restrictions In addition to so-called “strategic industries” (please see the Common forms of business structures for foreign investors chapter on page 21), restrictions on foreign investment exist notably in the insurance and banking sec-tors.

Federal Law No. 4015-1 “On Insurance” dated 27 November 1992 currently prohib-its foreign investors from owning more than 25% of the total market for domestic insur-ance. Insurance companies in which foreign shareholders own more than 49% of the char-ter capital may not engage in certain types of insurance business, including, for example, life assurance.

In the banking sector, the Central Bank of Russia has the right to use reciprocity as a criterion to specify the types of business that subsidiaries or branches of foreign banks may be licensed for to operate in Russia. In prac-tice, however, branches of foreign banks are

not able to carry out any banking activities on the Russian market). Additionally, a ceiling on the total amount of foreign bank capital, as a percentage of the total bank capital in Russia, can be imposed by federal law.

LobbyingOne of the main transformations of the last 15 years has been the redefinition of the rela-tionships between business and the State.

Given how slowly the legal culture has developed in Russia, businesses do not con-centrate their lobbying efforts on attempting to influence the drafting of new laws or the actions of those drafting them. Instead, busi-nesses try to receive de facto special treat-ment, such as tax deferments, customs bene-fits, operation licences and the right to engage in certain kinds of activity.

There are not many legally recognised lob-bying associations with a large membership base. Prominent examples of associations that do exist are: The Association of Russian Banks, the Chamber of Commerce and Industry, the Federation of Independent Trade Unions of Russia, and the Russian Gas Association.

8

Types of structures Russian legislation provides for several types of business structures, including limited liability companies, joint-stock companies, representa-tive offices, branches, as well as limited and unlimited partnerships. A basic description of each of these is set out in Part I of the Civil Code of 1994 (the “Civil Code”).

An individual is also entitled to conduct commercial activities in Russia, provided that he has the legal status of an individual entre-preneur. The legal framework for individual entrepreneurs is also set out in the Civil Code.

There have been significant developments in Russian corporate law since 2008. Some of

these have been implemented specifically as a response to the global economic crisis, whilst others are part of the ongoing development of Russian business law. Overall, the changes represent a significant improvement in the general business environment. The Russian au-thorities acknowledge that responding to the needs of business is essential if the country is to move forward economically.

Russian legal entitiesThe two most common types of Russian le-gal entity are a limited liability company and a joint-stock company (which may be either “open”, meaning publicly held, or “closed”, meaning privately held).

Common forms of business structures for foreign investors


Limited liability companyA limited liability company (“obshchestvo s ogranichennoy otvetstvennostyu”) is desig-nated by the abbreviation “OOO” before or after its name. It is the simplest form of a Rus-sian company and is often used by foreign in-vestors who want to set up a wholly owned subsidiary.

The establishment of a limited liability company is mainly governed by the Civil Code and by Federal Law No. 14-FZ “On Limited Liability Companies” dated 8 February 1998 (the “LLC Law”).

Charter capital and contributionsThe charter capital of a limited liability com-pany is divided into participatory interests (“doli”). Unlike the shares issued by a joint-stock company, these participatory interests are not classified as securities, and therefore they do not need to be registered with the Federal Service for Financial Markets (the “FSFM”).

Each holder of a participatory interest is referred to as a “participant”.

The minimum charter capital of a limited liability company is currently RUB 10,000 (EUR 2501), although it is expected to be increased to RUB 500,000 (EUR 12,500).

Contributions to the charter capital of a limited liability company may be made in cash or in kind (i.e. securities, property or other tangible or intangible rights having monetary value). An amendment to the Civil Code re-quiring the minimum charter capital to be paid in cash only is under review.

A founding participant may not be re-leased from the requirement to contribute to the charter capital. However, as a result of debt-for-equity-swap mechanisms introduced in December 2009, provided that all the par-

1 At the notional exchange rate of RUB 40 = EUR 1, as used throughout this guide.

ticipants agree, increases in the charter capi-tal can be made by setting-off contributions against any existing monetary debt that the company owes to an existing or new partici-pant.

Exemptions from import duties and im-port VAT may be available for certain types of equipment contributed to the charter capital of a company by a foreign participant. Gener-ally, any asset contributed to the charter capi-tal must be independently valued.

Net asset requirements A limited liability company is required to main-tain the value of its net assets at not less than the amount of its charter capital. Failure to comply with this requirement may result in an obligation for the company to decrease its charter capital. This shortfall may also be a ground for the company’s compulsory liqui-dation if its assets do not cover the minimum charter capital amount.

ParticipationA limited liability company can be wholly owned by another commercial company (“khozyaystvennoye obshchestvo”), provided that the holding company is not itself wholly owned by (i) a legal entity or (ii) an individual.

If the number of participants in the com-pany exceeds 50, the company is obliged ei-ther to reduce the number of participants or to re-register as an open joint-stock company or production cooperative within a year.

Since 1 July 2009 all limited liability com-panies must maintain a register of participants. This register sets out the names of the partici-pants and the number of participatory inter-ests they have in the company.

As a general principle, the responsibility of participants for the company’s liabilities is limited to the value of their participatory inte-rests. In certain cases however, the corporate

10


veil can be pierced, resulting in participants having unlimited liability for the obligations of the company (e.g. when a participant gives binding instructions to the company that lead to the insolvency of the company).

Management structureThe managing bodies of a limited liability com-pany are: . the general participants’ meeting; . the general director; . the board of directors (which is optional);

and . the management board (which is optional).

Major decisions such as amending the company’s corporate documents, changing the charter capital, distributing profits and ap-proving the annual reports and balance sheets of the company must be made by the partici-pants’ meeting.

The annual participants’ meeting must be held no earlier than two months before and no later than four months after the end of the company’s financial year. Extraordinary partici-pants’ meetings may be held at any time. Par-ticipants’ meetings must be convened accord-ing to the procedure set out in the company’s charter and the LLC Law.

Subject to provisions to the contrary in the company’s charter, a participant’s voting power at a participants’ meeting will normally correspond to the proportion of the company’s charter capital it holds.

Generally, decisions are adopted by a simple majority of the votes of all participants in the company. Different majorities may be specified in a company’s charter, bearing in mind how-ever, that certain majorities are fixed by law.

All decisions (except approval of the com-pany’s annual reports and balance sheets) may be adopted without holding a meeting.

The general director manages the day-to-day running of the company and deals with

all other issues not falling within the authority of the general participants’ meeting and the board of directors (if there is one). The general director acts on behalf of the company, repre-sents its interests, enters into transactions on its behalf, issues powers of attorney and hires and dismisses employees. The general director is the only person who can represent the com-pany without a power of attorney. The general director’s powers may be limited by the com-pany charter and his employment contract. As per a decision taken by the participants’ meeting, the general director’s authority may be transferred to a management company (in whole only).

Although there are no restrictions prevent-ing a foreign national from being appointed as a general director, work permit regulations need to be complied with (please see the Employment chapter on page 74).

A board of directors is an optional su-pervisory management body of a limited liabil-ity company. The charter defines its authority, which may include appointing/dismissing the general director or approving major transac-tions and interested-party transactions.

A limited liability company can also have a management board. By law, the general director chairs the management board. Unlike the general director, however, members of the management board must obtain a power of attorney from the general director in order to conclude transactions on the company’s behalf.

AuditThe charter may provide for an internal au-ditor (an individual or a commission). In some cases a company must have an internal audit (e.g. in companies with more than 15 partici-pants), failing which the general participants’ meeting will not be able to approve the compa-ny’s annual reports and balance sheets (as they must first be approved by the internal auditor).


An external auditor may also be appointed by the participants’ meeting to audit the com-pany’s financial and business activity. If certain turnover or asset value thresholds are exceeded, or if the company conducts certain regulated ac-tivities, an external auditor has to be appointed.

Transfer of participatory interestsParticipatory interests are freely transferable between participants. However, the charter or a participants’ agreement may specify that a participatory interest transfer requires the consent of the other participants and/or the company.

A participant may transfer its participatory interest to third parties, subject to a statutory pre-emption right in favour of the other partic-ipants. The charter may also give the company a pre-emption right. Further, the charter may prohibit the transfer of participatory interests to a third party or make such transfer subject to the consent of the other participants or the company. If such consent is not given, the company itself is obliged by law to purchase the relevant participatory interests.

The procedure for selling participatory in-terests and for determining their offer price is set out in the LLC Law. The company’s charter and/or participants’ agreement may vary this statutory procedure.

Since 2009 the position is that: (i) a par-ticipatory interest transfer agreement must be notarised and (ii) a participatory interest is transferred upon notarisation of the transfer agreement.

By way of exception notarisation is not re-quired: . for the transfer of company-owned partici-

patory interests to participants; . for the sale of participatory interests from

one participant to another; or . for the sale of company-owned participa-

tory interests to third parties.

Where notarisation is not required the transfer of title to the participatory interests is effective when the transfer is recorded in the Unified State Register of Legal Entities.

The introduction of the notarisation re-quirement resulted in a number of uncertain-ties relating to “preliminary” sale and purchase agreements (i.e. binding agreements in which the parties agree that they will enter into a transfer agreement in respect of the participa-tory interests in the future). The following is-sues remain unanswered: . do preliminary sale and purchase agree-

ments and other documents dealing with the disposal of participatory interests have to be notarised; and

. may agreements in relation to the prospec-tive sale of participatory interests in a Rus-sian limited liability company be governed by non-Russian law and do these agree-ments need to be notarised?

Right to withdrawSince 2009, a participant has had the right to withdraw from the company (without the con-sent of the other participants or the company) only if this right is expressly provided for in the company’s charter.

If a participant exercises this right, his par-ticipatory interests will be transferred to the company on the date when the withdrawal notice is served on the company. The company is then obliged to pay the exiting participant the “actual value” of its participatory interest in cash. The company may, however, pay the exiting participant in kind provided that the participant agrees to this.

The “actual value” of the exiting participant’s participatory interest is calculated in accordance with accounting data as provided in the LLC Law. The statutory payment procedure and timing may be varied in the company’s charter.

12


Expulsion of a participantParticipants owning at least 10% of the com-pany’s charter capital may bring a court action to expel any participant which grossly violates its obligations or prevents or materially im-pedes the company’s activities.

Open and closed joint-stock companiesThe legislation governing Russian joint-stock companies is found in the Civil Code and Feder-al Law No. 208-FZ “On Joint-stock Companies” dated 26 December 1995 (the “JSC Law”).

As mentioned above, a joint-stock compa-ny can either be “open” or “closed”. An open joint-stock company (“otkrytoye aktsionernoye obshestvo”) is designated by the letters “OAO”, and a closed joint-stock company (“zakrytoye aktsionernoye obshestvo”) by the letters “ZAO”, which appear either before or after the company’s name.

Charter capital and contributionsThe charter capital of a joint-stock company is divided into shares (which may be split into ordinary shares and preference shares). These shares are securities for the purposes of Rus-sian securities legislation and must be regis-tered with the FSFM.

For an open joint-stock company the mini-mum charter capital is currently RUB 100,000 (EUR 2,500) and for a closed joint-stock com-pany it is RUB 10,000 (EUR 250), although this is expected to be increased to RUB 5 million (EUR 125,000) irrespective of the type of joint-stock company.

As with limited liability companies, contri-butions to the charter capital may be paid in cash or in kind. However, an amendment to the Civil Code requiring the minimum charter capital to be paid in cash only is under review. Other types of securities, such as corporate bonds, must be paid in cash only. Since De-cember 2009, it has been possible to pay for

new shares issued in a closed subscription by way of a debt-for-equity swap.

The charter capital may be increased by is-suing shares or increasing the nominal value of shares already issued. Each capital increase must be filed and registered with the FSFM.

As a general principle, the responsibility of shareholders for the company’s liabilities is lim-ited to the value of their shares. In certain cases however, the corporate veil can be pierced, re-sulting in the shareholders having unlimited li-ability for the obligations of the company (e.g. when a shareholder gives binding instructions to the company knowing that this will lead to the insolvency of the company).

Net asset requirements and creditor protectionA joint-stock company is required to maintain the value of its net assets at not less than the amount of its charter capital. Failure to comply with this requirement may result in an obliga-tion for the company to decrease its charter capital. This shortfall may also be a ground for the company’s compulsory liquidation if its as-sets do not cover the minimum charter capital amount.

Since 2010, joint-stock companies have been obliged (in certain cases) to file quarterly information on the value of their net assets with the Unified State Register of Legal Entities in addition to other filing obligations.

At least 5% of the founding capital of any joint-stock company must be allocated to a re-serve fund. This fund is created specifically to cover losses and to redeem bonds and shares of the company.

Management structureThe managing bodies of a joint-stock company are: . the general shareholders’ meeting; . the general director;


. the board of directors (which is optional for joint-stock companies with fewer than 50 shareholders with voting shares); and

. the management board (which is opti o nal).The annual shareholders’ meeting must

be held no earlier than two months before and no later than six months after the end of a company’s financial year. Extraordinary meet-ings may be called by the board of directors, the external auditor, the internal auditor of the company or by shareholders owning at least 10% of the voting shares in the company.

In contrast to a limited liability company ordinary resolutions are passed by a sharehold-ers’ meeting at a majority vote of the share-holders attending the meeting (not a majority vote of the total number of shareholders in the company). One voting share gives one vote. Voting majorities for certain decisions may be set out in the charter subject to those majori-ties that are fixed by law.

Subject to certain exceptions shareholders may adopt decisions without holding a meeting.

The general director is the only person who can represent the company without a power of attorney. In companies where a man-agement board is also established the general director is the chairman of the management board. The general director is responsible for the day-to-day running of the company. He is appointed and dismissed by the sharehold-ers, unless the company’s charter stipulates that this decision falls within the authority of the board of directors. If the latter is the case, there is a legal procedure in order to avoid deadlocks relating to the appointment or dis-missal of the general director when, for any reason, the board of directors fails to agree on this matter.

The authority of the general director may be transferred to a management company if the shareholders so decide.

A foreign national may be appointed as general director of a joint-stock company sub-ject to compliance with work permit regula-tions (please see the Employment chapter on page 74).

The board of directors is responsible for the general management of the company and has the authority to take decisions on almost any issue except those within the exclusive au-thority of the shareholders’ meeting.

Members of the board of directors are elected by an annual/extraordinary sharehold-ers’ meeting and serve as directors until the next annual shareholders’ meeting. They may be re-elected any number of times.

A joint-stock company can also have a management board. Unlike the general di-rector however, the members of the manage-ment board must obtain a power of attorney from the general director in order to conclude transactions on the company’s behalf.

AuditJoint-stock companies are required to appoint an internal auditor (commission) to audit the company’s financial and business activity. Before the annual general shareholders’ meet-ing, the internal auditor (commission) prepares a report on the company’s annual report and balance sheet. The internal auditor’s report is then communicated to the shareholders who are entitled to attend the meeting.

Additionally, the internal auditor (commis-sion) may audit the company at any time: . at its own initiative; . upon a decision of the shareholders’ meet-

ing; or . upon demand of a shareholder or a group

of shareholders holding at least 10% of the voting rights in the company.Open joint-stock companies are subject to

a statutory annual audit by an external au-ditor. This requirement also applies to closed

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joint-stock companies that they meet certain legal criteria.

Issue and transfer of sharesThe shares of a joint-stock company, whether open or closed, are treated as securities and as such are subject to the registration require-ments of Federal Law No. 39-FZ “On the Se-curities Market” dated 22 April 1996. When issuing new shares all joint-stock companies must prepare and file with the FSFM a copy of the decision to issue shares, the report on the results of the share issue and, in certain cases, the prospectus for the share issue.

Share transfers take effect when recorded in the register of shareholders that all joint-stock companies are required to maintain. The register may be kept by the company itself or by an independent company duly licensed by the FSFM. In joint-stock companies with more than 50 shareholders the register must be kept by an independent registrar.

An open joint-stock company is a “pub-lic company”. It may make both closed and public offerings of its shares. There are no statutory pre-emption rights or restrictions on the transferability of shares in the company whether to other shareholders or third par-ties. Restrictions can however, be introduced through shareholders’ agreements (please see the Shareholders’ and participants’ agreements section below on page 21). However, when the charter capital is increased by issuing additional shares, existing shareholders have the benefit of statutory pre-emption rights.

Shares of a closed joint-stock company may not be issued to more than 50 sharehold-ers. Shares are freely transferable between shareholders unless a shareholders’ agreement provides otherwise. Share sales to third parties are subject to statutory pre-emption rights of other shareholders in the company (and the company itself if so provided in the charter).

The statutory procedure and terms for exercis-ing pre-emption rights may not be varied in the company’s charter.

Redemption of sharesWhen a shareholder does not agree with cer-tain decisions taken at a shareholders’ meet-ing it may require the company to purchase its shares. This is only possible in the following cases: . a decision has been taken to reorganise

the company; . charter amendments limiting the rights

of the shareholder in question have been adopted; and

. a major transaction has been approved.The shares will be redeemed at a price

fixed by the board of directors (or the manage-ment board). This price may not be less than the market value of the shares as determined by an independent appraiser in accordance with the methods prescribed in the JSC Law.

Expelling a shareholderThe general rule is that a shareholder may not be expelled from a joint-stock company.

However, there is one exception in the case of an open joint-stock company. A share-holder that has acquired more than 95% of the voting shares may expel/“squeeze out” the minority shareholders.

For ease of comparison between the three types of Russian companies described above please refer to the comparative table below.


COMPARATIVE TABLE: OAO, ZAO AND OOO

OAO(open joint stock company)

ZAO(closed joint stock company)

OOO(limited liability company)

Activities . any types of activities (subject to licensing requirements)Term . unlimited term, unless otherwise provided in the company’s charterNumber of shareholders/participants

unlimited 1 to 50 1 to 50

Minimum charter capital

RUB 100,000 (EUR 2,500)

RUB 10,000 (EUR 250)

RUB 10,000 (EUR 250)

Type of interest in charter capital

. ordinary shares . preference shares

. participatory interests

Issue of financial instruments

. bonds . other convertibles

. bonds

Subscription for shares

. public subscription

. closed subscription

. closed subscription

. N/A

Contributions to the charter capital

. cash . in kind

Payment of the charter capital

. 50% within three months of the registration of the company

. the remaining 50% within one year of the registration of the company

. 50% before the registration of the company

. the remaining 50% within one year of the registration of the company

Capital increase . only after the charter capital has been fully paid upCapital decrease . after notification of creditors and repayment of debts

. mandatory decrease in certain casesManaging bodies . general shareholders’ meeting

. general director . board of directors (optional for

ZAO and OAO with fewer than 50 shareholders)

. management board (optional)

. general participants’ meeting

. general director . board of directors (optional) . management board

(optional) Transfer of shares/ participatory interests between shareholders/participants

. without restrictions, unless otherwise provided for in a shareholders’ agreement

. without restrictions, unless the charter provides for participants’/ company’s consent or unless provided for in a participants’ agreement

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Transfer of shares/ participatory interests to third parties

. without restrictions

. subject to shareholders’ pre-emption rights

. can be subject to company’s pre-emption right under the charter

. subject to participants’ pre-emption right

. can be subject to company’s pre-emption right under the charter

. can be restricted by the charter

. can be subject to participants’/ company’s consent

. subject to mandatory notarisation

Exiting the company (redemption/ withdrawal)

. shareholders may require the company to redeem their shares when they do not agree with certain decisions, including the reorganisation of the company, charter amendments which limit their rights, and the conclusion of major transactions

. a participant may only withdraw from the company if this is provided for in the company’s charter

Expulsion of a shareholder/ participant

. a shareholder may not be expelled from the company except in the course of a squeeze out procedure by a shareholder who has acquired more than 95% of the voting shares in an open joint-stock company

. a shareholder may not be expelled from the company

. participants owning at least 10% of the company’s charter capital may bring a court action to expel any participant which grossly violates its obligations or prevents or materially impedes the company’s activities

Responsibility of the company

. the company is not liable for the obligations of the shareholders/participants

Responsibility of shareholders/participants

. liability is limited to the value of their shares/participatory interests (unless it can be demonstrated that their binding instructions to the company lead to its insolvency)


Other business structures – represen-tative office and branch Although foreign individuals and legal entities can set up wholly owned subsidiary compa-nies and may participate in the various forms of partnership prescribed under Russian law, a representative office and/or a branch remain effective first-entry vehicles into the Russian market.

Representative officeStatusA representative office is not a separate legal entity, but, rather, it is an office set up to repre-sent the interests of the parent company. This does not prevent it, in practice, from conduct-ing business in Russia (and many representa-tive offices do so) and being treated by the tax authorities as a separate profit centre from the parent company. However, as a matter of civil law, a representative office’s lack of its own separate legal identity limits the types of busi-ness activities it may undertake. For example, a representative office may not formally import goods for purposes other than its own needs, nor may it register title to immovable prop-erty in its own name. A representative office may also experience difficulties in obtaining licences and permits to conduct certain types of business.

A representative office may, however, carry out representative functions on behalf of the parent company, including arranging market-ing and advertising in Russia, negotiating the terms and conditions of agreements on behalf of the parent company and facilitating the conclusion of agreements by the parent com-pany. It may also assist in other commercial and legal transactions between the parent and Russian organisations, including the rental of property.

At one time, an accredited representative office enjoyed a range of benefits that were not available to branches or companies. These benefits have been gradually withdrawn. However, foreign employees of a representa-tive office may still obtain personal accredita-tion. This confers certain practical benefits, such as the right to import and export personal effects free of customs duty and VAT, and it assists with obtaining multi-entry visas. There has been considerable debate about whether accredited employees of a representative of-fice require work permits, but, in practice, having a work permit should assist in avoiding unwanted difficulties with Russian federal and local migration authorities.

A representative office may have a num-ber of different types of bank accounts, includ-ing foreign currency accounts and rouble ac-counts. These accounts enable the representa-tive office to make payments in Russia to both residents and non-residents subject to certain currency control restrictions established by Central Bank regulations and other applicable legislation. As a representative office is merely an extension of a parent foreign company, the latter remains responsible for the liabilities of the representative office.

ManagementA representative office is managed by the head of the office who is authorised to conduct the business of the office and to represent the for-eign company under a power of attorney. A representative office should also have a chief accountant.

There is no requirement for either the head of the office or the chief accountant to be Rus-sian nationals although an accountant who understands the intricacies of Russian tax and accounting law is a practical necessity.

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BranchStatusA branch is also an office set up to represent the interests of the parent company. In addi-tion to carrying out the functions of a repre-sentative office a branch may formally carry out profit-making activities.

As a branch is merely an extension of a foreign parent company the foreign company remains responsible for the liabilities of the branch.

Foreign employees of a branch should also be personally accredited like the employees of a representative office and, in addition, they must hold work permits in order to work in Russia (please see the Employment chapter on page 74).

ManagementManagement issues are the same as those concerning representative offices (Please see the relevant paragraph above).

Other business structures The Civil Code provides for a range of other business structures including simple partner-ships (which are not legal entities) as well as full and limited partnerships and additional li-ability companies that are legal entities.

There are also non-commercial organisa-tional forms that may be used for charities, trade associations or other non-profit organi-sations.

Table showing main differences between a representative office and branch

Business structure Representative office Branch Formation Two-step accreditation procedure

(accreditation with accrediting body followed by registration in the register held by the State Registration Chamber of the Russian Ministry of Justice, unless the latter is the accrediting body)

Single-step accreditation procedure with the State Registration Chamber of the Russian Ministry of Justice

Capacity Technically restricted to representation, but functions may be wider. Unable to hold title to property, or to import or export goods. May be unable to obtain certain permits

Wider capacity. Usually able to obtain requisite licences and permits

Taxation Capable of constituting a permanent establishment for Russian tax purposes and is subject to Russian taxation accordingly

Will constitute a permanent establishment for Russian tax purposes and is subject to Russian taxation accordingly

Foreign staff May not benefit from the highly qualified specialist regime (please see the Employment chapter on page 76)

May benefit from the highly qualified specialist regime

Maximum accreditation or renewal term

Three years Five years


Registration, liquidation and reorganisation of business structures Having decided on the type of business struc-ture to use in Russia, the next step is to register the chosen vehicle with the relevant authori-ties. A distinction should be drawn between the registration of legal entities (limited liability companies, and both open and closed joint-stock companies) on the one hand, and the accreditation and registration of representative offices and branches, on the other.

Registration of a Russian legal entity Federal Law No. 129-FZ “On State Registration of Legal Entities and Individual Entrepreneurs” dated 8 August 2001 establishes a single pro-cedure for the registration of legal entities, re-gardless of their organisational/legal form and the type of economic activities they conduct.

Scope of registrationA company is duly registered under Russian law once it has undergone: . state registration (in the Unified State Reg-

ister of Legal Entities); . tax registration; and . registration with the Federal Service for

State Statistics and the three social funds (pension, social security and compulsory medical insurance).

Registration mechanicsThe tax authorities are responsible for the state and tax registration of companies, as well as for forwarding documents to the Federal Ser-vice for State Statistics and the three social funds. State registration may, however, be given to other authorities in the near future as part of the current reform of the Civil Code.

Registration takes approximately two months to complete (i.e. for the company to be fully operational), but may take longer as the process is quite unpredictable. For in-stance, the Federal Tax Service is often late in forwarding documents to the Federal Service for State Statistics and the three social funds. A newly established company may well need to intervene to speed up the process.

The application to register the company can be filed by the applicant in person or can be sent by mail (the latter adding significant time to the registration process and being unreliable). The applicant must be the chief executive of the founding parent company or the new company’s founder himself (if an indi-vidual). It is not possible to appoint an attorney to sign the application which means the pro-cess of establishment takes longer where the chief executive/founder is unable to file/collect documents in person.

Before documents are submitted for state registration the new company must have iden-tified its future premises (as the address is set out in the documents to be filed for state reg-istration). It should have a lease agreement or a letter from the owner or landlord guarantee-ing that, upon registration, the premises will be leased to the company.

The registration application must be no-tarised and, if signed abroad, legalised. For-eign documents must also be accompanied by a certified Russian translation. The most practical approach is to execute the company charter and the supporting documents in Rus-sia on the basis of a power of attorney (except for the application as stated above).

Payment of charter capitalAt least 50% of the charter capital must be paid prior to state registration for a limited li-ability company and within three months of state registration for a joint-stock company.

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In all cases, the balance must be paid within one year of state registration. If a founder fails to pay the total amount of its shares/partici-patory interests within these time limits, then the non-paid shares/participatory interests be-come the property of the company.

Registration of the initial share issueAs shares in open and closed joint-stock com-panies are treated as securities, there are cer-tain additional registration requirements im-posed by the FSFM.

The share issue registration process con-sists of the following stages: . passing a decision to issue shares; . approving the decision to issue shares; . state registration of the share issue; . subscription for shares; and . state registration of the report on the issue

of the shares.

Anti-monopoly controlAs a general rule, the formation of a company is not subject to merger control.

In exceptional cases, however, the prior consent of the Federal Anti-monopoly Service (the “FAS”) will be required when a company is incorporated by: . contribution of assets or shares/participa-

tory interests or rights in another com-pany; or

. merger of one company with another or consolidation of several companies;

provided in either case that certain asset value or revenue thresholds are exceeded (please see the Antimonopoly issues chapter on page 49).

Accreditation and registration of a representative office or branchThe procedure for opening accredited represent-ative offices and branches in Russia is more bur-densome than for incorporating a limited liability company. In Moscow and Saint Petersburg, it is

divided into two main stages (which normally take up to 2–3 months to complete) while in other Russian regions preliminary approval of the location of the representative office or branch must be obtained from the local authorities (which can sometimes result in long delays).

For a branch, the accreditation is exclusive-ly given by the State Registration Chamber of the Russian Ministry of Justice (the “SRC”). In the case of a representative office it will gener-ally be either the Chamber of Commerce and Industry of the Russian Federation or the SRC.

As a result of accreditation, the representative office or branch is included in the State Register of Accredited Representative Offices/Branches of Foreign Legal Entities held by the SRC.

In addition, representative offices or branches must be locally registered with the Federal Service for State Statistics, the tax au-thorities and the social funds.

All documents submitted to the accredit-ing body and registration authorities must be prepared in Russian (or translated into Russian) and legalised (where applicable). The parent company is responsible for organising the ac-creditation and various registrations (none of the bodies involved will co-ordinate the pro-cess). All applications may be filed by a repre-sentative under the power of attorney.

Accreditation is limited in time (up to three years for representative offices and up to five years for branches). Before the accreditation expires the parent office will have to apply to the accrediting authority for the accreditation to be extended. Failing that, the representative office or branch will have to close.

Reorganisation The Civil Code only envisages mergers, con-solidations, de-mergers, spin-offs and trans-formations of legal entities. Representative offices and branches may not be reorganised into legal entities.


Company reorganisation is a complex pro-cess that may take between 3–12 months to complete. It involves an audit by the tax author-ities and notification of the company’s creditors. The latter can demand early execution or termi-nation of the current obligations of a company participating in the reorganisation (e.g. a credi-tor, such as a bank, may ask the company being reorganised to repay a loan ahead of time).

Liquidation A legal entity can be liquidated: . voluntarily, by the decision of its share-

holders/participants; . by the court in the circumstances listed in

the Civil Code; or . through bankruptcy.

For more details, please see the Corporate bankruptcy chapter on page 64.

Voluntary liquidation of a company is com-plex and time consuming as it involves an au-dit by the tax authorities and notification of its creditors.

Closing branches or representative offices is almost as cumbersome as voluntarily liquidat-ing a company. The only major difference is that there is no requirement to notify creditors of the closure of representative offices or branches.

Shareholders’ and participants’ agreements2009 marked a turning point in Russian corpo-rate law as the LLC Law and the JSC Law were amended to allow participants and sharehold-ers to enter into agreements regulating their rights in the relevant company. Historically, the courts held this type of agreement to be valid only when it repeated Russian company law provisions.

For this reason Russian joint ventures have often been structured off-shore with the Rus-

sian company being a wholly owned subsidi-ary of a joint venture company established in a foreign jurisdiction where shareholders’ agree-ments are well regulated and enforceable. The choice of jurisdiction also depends on the existence of suitable double taxation arrange-ments with Russia.

This legislation is still fairly new and re-mains unclear in some respects. On the face of it, the scope of issues that may be regulated in a shareholders’ agreement for a joint-stock company appears to be more limited than those that can be regulated in a participants’ agreement of a limited liability company.

Strategic industriesThe foreign investment law2 and other regula-tions have been amended by Federal Law No. 57-FZ “On the Procedure for Foreign Invest-ments in Commercial Organisations of Strategic Importance for the National Security of the Rus-sian Federation” (the “Strategic Industries Law”), which came into force on 7 May 2008.

The Strategic Industries Law does not reg-ulate foreign investments insofar as they are already governed by other federal laws or by international conventions ratified by Russia.

Under the Strategic Industries Law, 42 sec-tors of the economy are currently deemed to be strategic, including: . military technology, nuclear power, aircraft

and the space industry; . natural monopolies, such as pipelines, the

maintenance of ports and airports, (with limited exceptions);

. companies with a dominant market posi-tion in Russia;

. communication services, including fixed-line telecommunications, excluding Inter-net access services;

2 Federal Law No. 160-FZ “On Foreign Investment in the Russian Federation” dated 9 July 1999.

22


. television and radio broadcasting; and . subsoil use.

Amendments to the Strategic Industries Law were considered in first reading in the State Duma on 23 March 2011. Among other things, they are aimed at reducing the num-ber of regulated activities (i.e. if adopted, the amendments will mean that the restrictions imposed by the Strategic Industries Law will no longer apply to some activities).

Restrictions on private foreign investorsUnder the Strategic Industries Law transac-tions resulting in privately operated foreign investors or Russian corporate groups with a foreign element gaining control over a strate-gic company must be cleared by the FAS.

The clearance procedure is similar to the merger control procedure provided by Federal Law No. 135-FZ “On the Protection of Com-petition” dated 26 July 2006 (please see the Antimonopoly issues chapter on page 45). If prior approval is obtained, the transaction must be conducted within the timeframe set out in the approval.

Foreign investors are deemed to “gain control” over a company if they are: . acquiring directly or indirectly more than

50% of the voting shares in a Russian company operating in a sector deemed to be of strategic importance (a “Strate-gic Company”) which does not conduct geological surveys on the subsoil and/or explore and extract minerals on federal subsoil plots (i.e. not “operating on federal subsoil plots”);

. acquiring directly or indirectly less than 50% of the voting shares in a Strategic Company that does not operate on federal subsoil plots, if the acquirer gains effective control over the company;

. acquiring directly or indirectly 10% or more of the voting shares of a Strategic Compa-ny operating on federal subsoil plots; and

. acquiring control of a Strategic Company as a result of a change in the number of voting shares in that company. If a foreign investor already owns directly

or indirectly over 50% of a Strategic Com-pany’s voting shares, then the transactions referred to in the preceding paragraph do not require prior approval from the FAS. However, this exception does not apply to transactions involving a Strategic Company operating on federal subsoil plots.

It should also be noted that a limited num-ber of transactions only require post transac-tion notification which must be made within three months of the change of control taking effect. One example of this is when foreign in-vestors acquire at least 5% of the shares in a Strategic Company.

Restrictions on state and international organisations The Strategic Industries Law prohibits foreign states, international organisations and organi-sations controlled by them from gaining con-trol over a Strategic Company.

It also provides that foreign states, inter-national organisations and organisations con-trolled by them must obtain prior approval from the FAS when: . acquiring directly or indirectly more than

5% of the voting shares of a Strategic Company operating on federal subsoil plots; or

. acquiring directly or indirectly more than 25% of the voting shares of a Strategic Company that does not operate on feder-al subsoil plots or otherwise acquiring the right to block decisions of that company’s management bodies.


Tax system

General approachTrendsThe Russian tax system is relatively new, but is changing rapidly. Some progressive tax con-cepts are currently being introduced into leg-islation.

For example, two fundamental and very long-awaited draft laws – one concerning transfer pricing rules and the other regulating tax consolidation issues – are being actively discussed. Both draft laws have now passed the first of three legislative hurdles in the State Duma (the lower house of the Russian Parlia-ment). There is no doubt that the tax policies of the majority of Russian companies will have to be substantially revised once the draft laws are signed into law.

It is also noteworthy that in recent years, the Government’s attempt to attract foreign investment into the Russian economy has been one of the main forces behind changes to tax legislation.

Also, tax legislation is being developed on a technical level. For instance, new accounting standards, new tax-return forms and various notifications, as well as new requirements for electronic documents filed with the tax au-thorities are currently being elaborated.

Core legal frameworkPart I of the Tax Code dated 31 July 1998 has been in force since 1 January 1999; and Part II dated 5 August 2000 has been in force since 1 January 2001 (together, the “Tax Code”). The Tax Code sets out all general tax princi-

24

Tax system

ples and applicable taxes, as well as the rights and obligations of taxpayers and the state tax authorities.

According to the Tax Code, taxes in Russia may be categorised as follows: . Federal taxes applied throughout Russia

at uniform rates, such as VAT. Many taxes have a federal and a regional component (e.g. corporate profits tax) and may have their regional component reduced at the discretion of the relevant regional authority.

. Regional taxes and local taxes determined by the Tax Code and the local or regional government authorities, which are collect-ed locally or regionally. Lower-tier authori-ties may not grant concessions for taxes governed by a higher authority.

Federal taxes

. Corporate profits tax . Value-added tax (VAT) . Excise tax . Payroll-related taxes . Taxes on natural resources . State duties . Personal income tax

Regional taxes

. Corporate property tax . Transport tax

Local taxes

. Land tax . Individual property tax

This tax structure can result in tax burdens in different locations. It may also cause a need for both federal and regional tax filings, as well as for several tax payments when a company has branches in more than one Russian region.

In this chapter, we have grouped our out-line of the various taxes provided for under the Tax Code around the following aspects: . corporate taxation; . taxation of individuals; . special taxation regimes; . tax incentives; and . double taxation treaties.

Corporate taxationCorporate profits tax

TaxpayersTaxpayers are defined as: . Russian companies that pay tax on their

worldwide income; and . foreign companies that conduct business

in Russia through a permanent establish-ment and/or are in receipt of income from a Russian source.Profits tax is always levied at the individual

company level.

Permanent establishmentsThe Tax Code defines a “permanent establish-ment” as a representative office, branch, divi-sion or any other separate fixed place of ac ti-vity through which a foreign company regu-larly engages in certain business activities (as specified in the Tax Code) in Russia.

If a foreign company does not have a per-manent establishment, it is not subject to Rus-sian profits tax. Any Russian-sourced income (interests, dividends, royalties, etc.) will subse-quently be subject to withholding tax.

Please note that if a foreign company con-ducts activities listed in the Tax Code through an agent representing the company and acting on its behalf, it may also be considered as ha-ving a permanent establishment in Russia.

As a general rule, a foreign company has the right to allocate income and expenses to its Russian permanent establishment, if there is: . a double taxation treaty between Russia

and the respective country; and . if the possibility of this allocation is pro-

vided for in that treaty. If there is no double taxation treaty, then the costs of a foreign company may be allocated to its Russian permanent establishment, pro-


vided that they were incurred for the purpose of that permanent establishment.

Tax baseThe tax base is the total income received by the taxpayer less income exempted from taxa-tion and expenses, as defined by the Tax Code.

The types of income which are exempt from profits tax are as follows: . income in the form of property received

from a parent company, a subsidiary or an individual, if the ownership of the recipient or the transferor in the capital of the other party is more than 50%, and the property received (except money) is not disposed of within one year from the date of receipt;

. income in the form of property as well as non-property rights transferred to the tax-payer by its parent company for the pur-pose of an increase in the net assets of the taxpayer;

. income gained from revaluation of fixed assets and securities; and

. income in the form of property received as a contribution to a company’s charter capital, etc.

Deductibility of expensesExpenses are generally recognised on an ac-crual basis. They are deductible for profits tax purposes if they are related to the taxpayer’s income, and if they are economically justified and evidenced by the requisite documenta-tion. The tax authorities stringently apply these criteria.

The law specifies certain non-deductible expenses: . cost of assets transferred free-of-charge; . penalty payments made to the budget;

and . employee remuneration not provided for

in relevant labour contracts, etc.

Some types of expenses are subject to limitations on tax deductibility: . representative expenses: up to 4% of pay-

roll; . pension and life insurance for employees:

12% of payroll; . medical insurance for employees: 3% of

payroll; and . interest on loans and other borrowings

charged at a rate that is more than 20% above the average rate charged for com-parable loans made in the same quarter. In the absence of comparable data or at the taxpayer’s choice, the maximum rate fixed for the period from 1 January 2011 to 31 December 2012 is:

— for rouble loans, the refinancing rate of the Russian Central Bank at the date the loan is advanced (8% as at 28 Feb-ruary 2011), multiplied by 1.8; and

— for foreign currency loans, the refi-nancing rate of the Russian Central Bank at the date the loan is advanced, multiplied by 0.8.

Interest is subject to thin capitalisation rules.

Depreciation Taxpayers are required to maintain separate accounts for profits tax purposes. The meth-od applied should be clearly explained in the taxpayer’s accounting policy. Once chosen, the accounting method may not be modified during the financial year (1 January to 31 De-cember).

Two depreciation methods are available for profits tax purposes: . the straight-line method; and . the reducing balance method.

Depreciable property includes tangible and intangible assets with a useful life of at least one year and an initial value exceeding RUB

26

Tax system

20,000 (EUR 5001) for an asset acquired before 1 January 2011, and RUB 40,000 (EUR 1,000) for an asset acquired after the indicated date.

The useful life of depreciable fixed assets is determined, within certain limits, based on a classification adopted by the government. For intangible assets the useful life is the utilisation period defined by any agreement, in all other cases it is ten years. The tax base for a fixed as-set includes all costs incurred in order to place the asset in service for production. Accelerated depreciation is permitted in cases stipulated by the Tax Code, e.g. for leased property.

Some assets (such as works of art) are not subject to depreciation.

LossesLosses can be carried forward and be offset against future taxable profits for ten years. Carry back is not allowed. Losses from the sale of fixed assets are recognised evenly over the remaining useful life of the assets.

Transfer pricing mechanismsThe Russian tax authorities are entitled to chal-lenge the price of certain transactions, and to impose additional tax costs when the sales price deviates from the market level by more than 20%. This rule concerns the following transactions: . transactions between related parties; . barter transactions; . foreign trade transactions; and . transactions in which the price fluctuated

by more than 20%, within a short period of time.The government is working on an amend-

ment to the transfer pricing rules. One of the most important points in the draft law is the requirement to have documentation in place


to support the level of prices according to the OECD2 transfer pricing guidelines.

Tax rateThe general profits tax rate is 20% (as from 1 January 2009); of which 2% of the tax is payable to the federal budget and the remain-ing 18% is payable to the budget of the region where the company is incorporated.

In some cases reduced tax rates apply. As a matter of example, a 0% profits tax rate applies to companies (domestic and foreign) transferring participatory interests or not listed shares in Russian companies acquired after 1 January 2011 subject to a five-year detention condition.

Taxation of dividends

Dividends received by Russian companiesDividends received by a Russian company from another Russian company, or from a foreign company are taxed at a flat rate of 9%. Divi-dends received from “strategic investments” are exempt from Russian corporate profits tax. An investment is considered strategic when: . the recipient of dividends owns at least

50% of the payer of dividends’ capital, or owns depository receipts entitling it to re-ceive at least 50% of the amount of paid in dividends; and

. the share or depository receipts have been owned for at least 365 days on the day dividends are declared.Dividends from companies residing in low-

tax jurisdictions may not be exempted from Russian corporate profits tax. These jurisdic-tions are identified in an official list. The Min-istry of Finance is responsible for updating this list.

2 Organisation for Economic Co-operation and Development.


Dividends paid by Russian companiesThe standard 15% tax rate is applicable to divi-dends paid by Russian companies to foreign companies. The tax should be withheld by the Russian companies paying the dividends.

If there is an applicable double taxation treaty, then the standard tax rate may be re-duced to a minimum rate of 5%.

VAT

TaxpayersVAT applies to companies, individual entrepre-neurs and to any person importing items into Russia.

If the taxpayer’s aggregated income for three consecutive months, excluding VAT, is below RUB 2 million (EUR 50,000), the tax-payer may be exempt if he applies for the ex-emption.

Tax baseThe following operations are subject to VAT (even if they are supplied free of charge): . realisation of goods, works and services

within Russia; . transfer of goods, works and services with-

in Russia for the taxpayer’s own purposes, if the relevant expenses are not deducted for the purpose of corporate profits tax;

. construction and building projects for the taxpayer’s own use; and

. imports into Russia.The taxable base is generally defined as

the market value of goods, works and services supplied, inclusive of excise duty and exclusive of VAT. If the Russian tax authorities consider that the price deviates from the market value for identical goods, works or services by more than 20%, they may charge additional VAT.

If the goods, works and services are sup-plied free of charge, an imputed price (set at

the market value for identical goods, works or services, excluding VAT) is used.

Exempt suppliesCertain activities, including the following, are exempt from VAT: . assignment of loan agreements; . operations with securities and derivative

financial instruments; . certain banking transactions; . transactions with medical equipment and

medical services; . certain research and development services; . transfer of exclusive and non-exclusive

rights to software, know-how, databases, inventions, and a range of other rights under a licence agreement (except trade-marks);

. imports of technological equipment that does not have a Russian equivalent (as per a government approved list); and

. sale of scrap and waste ferrous metals.

Tax ratesThe standard rate is 18%. A reduced rate of 10% applies to books, periodicals, medical goods, certain foods and children’s clothes. A 0% rate is applicable to the following opera-tions: . export of goods outside Russia; . works and services related to the transpor-

tation of goods in transit; and . certain services and goods supplied to for-

eign diplomatic missions, etc.

Input VATThe VAT payable to the tax authorities is the difference between the VAT accountable for transactions subject to VAT (“output VAT”), and the VAT incurred on purchases subject to VAT (“input VAT”).

Input VAT is only recoverable in certain cases. Whether it is recoverable no longer

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depends on whether it has been paid to the supplier. VAT on imports can be recovered only after payment to the customs authorities.

Input VAT related to expenses or assets used for the manufacture or sale of products exempt from VAT may not be offset. In the same way, input VAT related to expenses or as-sets used for “non-production activities” may not be offset.

Any VAT incurred on purchases and ex-penses which relate to activities, both sub-ject to and not subject to VAT, must be ap-portioned. Only the part which is deemed to relate to activities subject to VAT may be offset as input VAT.

Any excess of input VAT over output VAT has to be refunded to the taxpayer. As a gen-eral rule, such a refund can only be made after the tax authorities have undertaken an audit. However, on 1 January 2010 new rules pro-viding for an accelerated VAT recovery proce-dure were introduced. Under this accelerated procedure, a taxpayer may recover VAT before the tax authorities complete the tax audit and make a definite decision on VAT recovery. Ac-cording to these rules, companies which have existed for at least three years and paid taxes exceeding RUB 10 billion (EUR 250 million) over the last three years are eligible for the ac-celerated procedure, without the obligation to provide a bank guarantee. Other companies can benefit from the accelerated procedure provided that they give a bank guarantee for the amount of VAT to be reimbursed.

VAT invoices serve as the basis for the off-set of input VAT. They have to be issued in Rus-sian and must contain the information speci-fied in the Tax Code.

Reverse chargeIf a foreign company which does not have a Russian tax registration supplies goods, works or services in Russia, VAT is collected through

a withholding mechanism. The tax-registered buyer is required to withhold VAT from the amount payable to the foreign seller and to remit it to the authorities. The tax-registered buyer may then offset the VAT which has been withheld and paid, as input VAT.

Commissioners and agents with a Russian tax registration are considered to be tax agents in relation to goods supplied on behalf of non-registered foreign companies.

Filing and paymentVAT is payable on the earlier of the following two dates: . the date of shipment or transfer of goods,

works or services; and . the date of payment (in full or in part) for

a future shipment or transfer of goods, works or services.Advance payments are included in the VAT

base at the time payment is received.Taxpayers must file their VAT declarations

on a quarterly basis. VAT returns must be filed within 20 days after the end of the tax period.

Commencing from Q3 2008, taxpayers have the option to pay VAT in three instal-ments, in the three months following the rel-evant quarter.

Excise TaxExcise tax must be paid by companies or indi-vidual entrepreneurs that are producers and/or importers of excisable products. Excisable products are, for example, oil products, alco-hol, tobacco and cars.

Excise tax is generally levied on the value of the product.

Corporate property tax Property tax is payable in accordance with re-gional regulations and with the Tax Code.


TaxpayersThe following structures are taxpayers for the purpose of corporate property tax: . Russian companies having fixed assets on

their balance sheets; . permanent establishments of foreign com-

panies having fixed assets on their balance sheets; and

. foreign companies owning immovable as-sets in Russia.The above organisations are required to

pay property tax to the regional budget of the place they are located in.

Religious organisations and various types of public organisations are exempt from prop-erty tax.

Tax baseProperty tax is assessed on both movable and immovable property. Taxable property includes fixed assets and “profitable investments in property” (as defined by Russian accounting standards). It also comprises leased property. Foreign companies that do not have a perma-nent establishment in Russia are only taxed on immovable property.

Intangible assets, inventories, work-in-pro-gress, financial assets (among other catego-ries) are not subject to property tax.

The tax base is the average annual residual value of taxable property for financial report-ing purposes (and not for tax purposes).

Tax rateThe rate is set at the regional level but may not exceed 2.2%. This maximum rate is currently imposed in most regions, including Moscow and Saint Petersburg.

PaymentsThe tax period is a calendar year. Advance tax payments must be calculated and paid on a quarterly basis. Taxpayers must file quarterly tax

returns within the 30-day period following the reporting period. Annual returns must be filed by 30 March following the reporting period.

Payroll-related taxes

TaxpayersSeveral kinds of payroll-related taxes must be paid by employers. This applies to Russian em-ployers as well as to foreign companies.

Insurance contributionsOn 1 January 2010 new Russian tax legislation came into force, replacing previous single tax assessed on the remuneration of each em-ployee and named the Unified Social Tax (the “UST”) with insurance contributions paid to four separate non-budgetary funds: the Pen-sion Fund, the Federal Social Insurance Fund, the Federal Mandatory Medical Insurance Fund and the Territorial Mandatory Medical Insurance Funds. According to this new leg-islation, the previous UST regressive scale has been cancelled, and the general tax rate has been increased from 26% to 34% for the part of the employee’s annual gross remuneration as is below RUB 463,000 (EUR 11,575).

Please note that 2011 is still being treated as a “transitional” period for the purpose of social contributions for several companies. As a result, some tax privileges under the Tax Code are preserved during this period (e.g. companies operating the simplified taxation system in certain field of activities pay insur-ance contributions at a general rate of 26%).

The rules of social contributions payment also allow payments and other compensations paid under employment and civil contracts to foreign nationals temporarily located in Rus-sia (i.e. those who have arrived in Russia on the basis of a visa and/or with a temporary residence permit) to be exempt from social contributions to the Russian non-budgetary

30

Tax system

funds (except contributions for accidents in the workplace and work-related illness).

Other payroll contributionsContributions to the Social Insurance Fund against industrial accidents and diseases are also payable. They vary from 0.2% to 8.5%, depending on the risk category of the em-ployee.

Taxes on natural resourcesTaxpayers who use land either on the basis of ownership rights or rights of permanent use have to pay land tax to the local budget. The tax base used for calculation is the relevant land’s cadastral value (which, in practice, is significantly lower than its market value). The tax rate is set at local levels and may not ex-ceed 1.5% of the cadastral value (0.3% with respect to certain types of land).

Water tax is imposed on taxpayers who use water to produce hydroelectricity. The tax rates vary, depending on the specific water object.

Mineral resources extraction tax is im-posed on sub-soil users. It applies to various types of minerals, including oil and gas. It is based on the value of the extracted resources, and the rate varies according to the type of mineral.

Transport taxThis is a tax payable on registered transporta-tion vehicles by the registered owners of those vehicles. The methods of declaration, payment and deposit are established by regional au-thorities.

The transport tax rates are generally fixed on the federal level, but the regional authori-ties are entitled to increase/decrease these rates by a maximum of ten times3.

3 Previously, the regions were entitled to increase/decrease the transport tax rates by five times maximum.

In addition, the regions have a right to establish differentiated transport tax rates de-pending on the age and/or emission class of the vehicles. Previously they could determine a differentiated rate on the basis of the vehicle’s useful life.

State dutiesAccording to the Tax Code, a state duty is a fee charged on companies and individuals for taking certain legal actions.

By way of example, the state duties for registration of a Russian company currently amount to RUB 4,000 (EUR 100) and for ac-creditation of foreign companies’ branches to RUB 120,000 (EUR 3,000).

The maximum state duties for considera-tion of cases by courts of general jurisdiction and by magistrates’ courts (“mirovye sudi”) are currently RUB 60,000 (EUR 1,500). The maxi-mum state duties for consideration of cases by arbitration courts now amount to RUB 200,000 (EUR 5,000).

Taxation of individualsIncome tax

TaxpayersTaxpayers are subject to Russian income tax as either tax residents or non-residents.

Tax residents are taxed on their worldwide income. Since 1 January 2007, an individual is considered to be a tax resident if he is physi-cally present in Russia for at least 183 calen-dar days during a 12-month rolling period. According to the clarifications of the Ministry of Finance, however, the tax residence status of an individual should be defined by count-ing the days spent in Russia within the relevant calendar year.


Non-residents have tax imposed on their Russian-sourced income, irrespective of the nature of that income.

Taxable incomeThis is gross income less deductions and ex-emptions.

Gross income is defined as any economic gain, in cash or in kind, received by a taxpayer and subject to his discretionary disposal.

Deductions and non-taxable incomeA Russian tax resident can benefit from four kinds of deductions: . Standard tax deductions:

The taxpayer receives a standard monthly deduction of RUB 400 (EUR 10) until his total annual earnings amount to RUB 40,000 (EUR 1,000).Other standard deductions are also avail-able for certain categories of taxpayers.

. Social tax deductions:Social deductions comprise educational expenditures (per taxpayer and each of his children) and medical expenditures (per family), up to a combined annual maxi-mum of RUB 50,000 (EUR 1,250).

. Property deductions:Property deductions relate to the purchase and sale of property (mainly residential real estate).

. Professional deductions:These are generally permitted for individu-al entrepreneurs and include, for example, expenditure for the creation of intellectual property rights.Certain statutory allowances, bank inter-

est (within limits), state pensions (and certain other pensions), and revalued shares (issued as a result of statutory revaluation, merger or re-organisation) are exempt from taxation.

Tax rates

Residents . a standard flat rate of 13% applies to most

types of income; . a rate of 9% applies to dividends received

from Russian or foreign companies; and . a rate of 35% applies to certain prizes, in-

surance receipts and interests from bank deposits in excess of specific limits.

Non-residentsA general rate of 30% applies to all types of Russian-sourced income except dividends (to which the rate of 15% applies). It may be pos-sible to apply the relevant provisions of a tax treaty in order to exempt certain types of in-come from non-resident taxation.

In addition, a 13% personal income tax rate has applied since 1 July 2010 to remuner-ation received from professional activities of non-residents regarded as “highly qualified” specialists (please see the Employment chapter on page 76).

Tax payments

Withholding of taxRussian companies, individual entrepreneurs and permanent establishments of foreign companies are considered to be tax agents. They must calculate, withhold and pay income tax on the payments they make to individuals.

As a result employees are not required to file tax returns for their salary, unless they claim property deductions or they have other income which is subject to the obligation to file a tax declaration.

An individual entrepreneur remains per-sonally responsible for meeting his income tax obligations.

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Tax system

Tax returnIndividuals must file returns and pay the ap-propriate income tax if: . the income was received from outside Rus-

sia (in the case of a Russian tax resident); . the income was paid by an individual; . the tax was not properly withheld; or . the income was received from the sale of

property, etc.The tax return must be filed by 30 April in

the year following the tax period.The amount of tax due must be paid by

15 July in the year following the relevant tax period. However, if the taxpayer leaves Russia, he must file a tax return at least one month before his departure and pay the amount of tax due within 15 days after the filing date.

Individual property tax

TaxpayersAccording to law No. 2003-1 “On the Individ-ual Property Tax” dated 9 December 1991, the owners of houses, apartments, rooms, cottag-es, garages, other buildings or constructions and owners of part-interests in such property rights are liable to pay individual property tax.

Tax ratesThe tax rate varies depending on the total inventory cost of the property. As individual property tax is a local tax, the local govern-ment authorities are entitled to set the tax rate within the following limits:

Property cost Tax rateBelow RUB 300,000 (EUR 7,500)

Below 0.1%

RUB 300,000 to RUB 500,000 (EUR 7,500 to 12,500)

0.1% – 0.3%

Above RUB 500,000 (EUR 12,500)

0.3% – 2%

Special tax regimesThe Tax Code provides for the following spe-cial tax regimes according to which a taxpayer is entitled to pay one special tax instead of a number of separate taxes: . simplified tax system; . tax on imputed income; . unified agricultural tax; and . production sharing.Special regimes may be applicable if the neces-sary requirements are met, as outlined below.

Simplified tax system

TaxpayersCompanies are eligible for the simplified tax system if they meet the following criteria: . their annual turnover does not exceed

RUB 45 million (EUR 1.125 million); . the combined net book value of their fixed

and intangible assets does not exceed RUB 100 million (EUR 2.5 million); and

. they employ less than 100 persons.The Tax Code includes a list of organisa-

tions that may not use the simplified tax re-gime. This includes: (i) foreign companies; (ii) Russian companies with local branches and/or representative offices; (iii) companies where more than 25% of the capital is owned by other companies; (iv) banks; (v) insurance com-panies; (vi) pension funds; (vii) and investment funds.

Tax ratesThe rate for this tax regime is as follows: . 6% if all income, without deductions, is

considered to be the tax base; and . 15% if income less deductible expenses is

considered to be the tax base.The simplified tax system is used as a single

substitute for profits tax, property tax and VAT (subject to several exceptions). The use of this system does not exempt employers and indi-


vidual entrepreneurs from making obligatory pension insurance contributions, or withhold-ing income tax from their employees’ compen-sation.

Tax on imputed incomeRegional authorities have the right to impose this tax on some categories of taxpayers (e.g. individual entrepreneurs and small compa-nies).

The tax rate is 15% on “imputed” revenue each month and is adjusted by special coef-ficients which are based on the type of land used, the range of goods being produced, the level of income received each month and sea-sonal factors. When this tax is applied the tax-payer becomes exempt from most taxes and contributions (except, for example, obligatory pension insurance contributions).

Unified agricultural taxThis tax system is aimed at reducing the ob-ligatory tax burden on taxpayers involved in agricultural production.

TaxpayersTaxpayers producing, processing (including industrial processing) and selling agricultural products are entitled to use this tax system, provided that the share of income they receive from the sale of agricultural products is at least 70% of their overall sales income.

Tax rateThe tax rate is set at 6% of revenue less certain deductible expenses that are listed in the Tax Code and include, in particular, the following: . expenses relating to the acquisition, con-

struction and manufacturing of fixed as-sets (being allocated during the useful life term of the relevant assets);

. lease payments; . wages costs;

. expenses connected with certain types of insurance payments (both obligatory and voluntary);

. material costs.The unified agricultural tax substitutes

profit tax, VAT (except for import VAT) and property tax.

Production sharing

TaxpayersThis simplified tax system may be used by companies (investors) entering into production sharing agreements (“PSAs”) under which they are granted an exclusive right to carry out mineral exploration and mining operations on a particular subsoil area.

PSAs provide for sharing the profitable production between the Russian state and the investor. A part of “compensational pro-duction” which is granted to the investor to compensate its expenses connected with the project is also defined (in general, not exceed-ing 70% of the whole amount of production or 90% when the project is implemented on the Russian continental shelf).

The production sharing tax system may be used if the relevant PSA (i) is concluded as a result of an auction and (ii) provides that, if the project’s return on investment exceeds origi-nally agreed expectations, the Russian state’s share in the profitable production will increase.

General PSA regime If a general PSA regime is used, the main char-acteristics of the production sharing tax system are the following: . Certain expenses incurred by the investor

for the purposes of performing the PSA are subject to reimbursement by “com-pensational production”.

. VAT, taxes on natural resources, state du-ties, land tax and excises paid in connec-

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Tax system

tion with performing the PSA are subject to reimbursement by the state.

. Goods imported to and exported from Russia are exempted from the payment of customs duties.

. Property tax is not payable on fixed assets used solely for performing the PSA.

. Transportation tax is not payable on vehi-cles used solely for performing the PSA.

. The investor may be exempted from pay-ing any regional and local taxes by the rel-evant local or regional authority.

Special PSA regime Some additional tax privileges may apply if (i) the PSA is concluded under a procedure dif-ferent from the general procedure mentioned above and (ii) the share in the production tak-en by the Russian state is at least 32%.

IncentivesSpecial economic zonesTaxpayers can benefit from incentives granted to special economic zones (“SEZs”) which have been created in Russia by Federal Law No. 116-FZ “On Special Economic Zones in the Russian Federation” dated 22 July 2005 in order to promote economic growth in specific areas and regions of Russia.

The general aim of SEZs is to attract for-eign investment: as SEZs are exempt from custom duties, they are an effective means of promoting import/export business. The tax ad-vantages provided for the residents of these zones are as follows: . reduced corporate profits tax; . exemption from property tax and land tax;

and . exemption from customs duty and VAT (in

several cases), etc.

Types of SEZFour types of SEZ are established by the leg-islation: . technical research and implementation

zones (Saint Petersburg, Dubna, Tomsk, Zelenograd);

. industrial production zones (Lipetsk, Tatar-stan);

. recreation and tourism zones (Altai, Buryat Republic, Kaliningrad); and

. port zones.A company registered in Russia is entitled

to obtain the status of a SEZ resident after en-tering into a special agreement with the local Agency in charge of the relevant zone.

Skolkovo innovation centreIn 2010 a territorially isolated complex in the Moscow Region named the “Skolkovo innova-tion centre” was created for the purpose of research, development, and commercialisation of research and development activity. A special legislative regime regulating how it will oper-ate has been established.

The participants in the Skolkovo initiative will benefit in particular from the following tax, customs and accounting incentives: . 0% corporate profits tax rate applicable to

income generated as a result of research, development and commercialisation for the first ten years of a participant’s regis-tration in the Skolkovo project;

. exemption from property tax and land tax; . reduced payroll-related taxes; . VAT exemption; . reimbursement of customs duties and VAT

payable upon the importation of goods; . exemption from the obligation to keep

financial accounting, unless the partici-pant’s annual income exceeds RUB 1 bil-lion (EUR 25 million); and


. exemption from the payment of state du-ties for the issuance of work permits, in-vitations and visas for foreign employees.In order to operate in the Skolkovo innova-

tion centre and benefit from the above-stated incentives, investors will have to set up Rus-sian companies to conduct research there and they will have to follow a special procedure to obtain the relative status for these new com-panies.

Double taxation treatiesDouble taxation treaties exist between many countries on a bilateral basis in order to pre-vent double taxation, i.e. taxation which is levied twice on the same income, profit, capi-tal gain, inheritance or other item. The trea-ties generally guarantee non-discriminatory tax treatment and provide for co-operation between the tax authorities of the respective signatory countries.

Tax treaties signed by Russia are usually based on the OECD Model Treaty and the UN4 Model Convention.

The provisions of these treaties override Russian domestic law. However, in practice, the tax authorities often deny the benefit con-ferred by a treaty, even if all the relevant condi-tions are fulfilled.

The table below contains the tax rates ap-plicable under several double taxation treaties to which Russia is a signatory. The rates ap-ply to withholding taxes on Russian sourced income. The numbers in brackets refer to the notes below the table.

4 United Nations.

Country Dividends Interest RoyaltiesAustria 5/15 (1) 0 0Belgium 10 0/10 0Canada 10/15 (2) 10 0/10China 10 10 10Cyprus 5/10 (3) 0 0Denmark 10 0 0Finland 5/12 (4) 0 0France 5/10/15 (5) 0 0Germany 5/15 (6) 0 0Ireland 10 0 0Italy 5/10 (7) 10 0Japan 15/10 10 0/10 (8)

Korea (South) 5/10 (9) 0 5Luxembourg 10/15 (10) 0 0Netherlands 5/15 (11) 0 0Norway 10 0/10 (12) 0Poland 10 10 10Portugal 10/15 (13) 10 10Spain 5/10/15 (14) 0/5 (15) 5Sweden 5/15 (16) 0 0Switzerland 5/15 (17) 5/10 (18) 0Ukraine 5/15 (19) 10 10UK 10 0 0USA 5/10 (20) 0 0

Notes:(1) 5% for shareholdings of 10% or more, other-

wise 15%;(2) 10% for shareholdings of 10% or more,

other wise 15%;(3) 5% if the initial investment is greater than

USD 100,000, otherwise 10%;(4) 5% for shareholdings of 30% or more, other-

wise 12%;(5) 5% if the investment is not less than

EUR 76,225 and if the recipient pays tax; 10% if only one of these two circumstances applies; otherwise 15%;

(6) 5% for shareholdings of 10% or more, other-wise 15%;


(8) 0% for royalties in respect of literary, artistic or scientific works including films and tapes; 10% for royalties in respect of any patent, trade mark, design or model, plan, secret formula or

36

Tax system

process, or industrial, commercial or scientific equipment, or information concerning indus-trial, commercial or scientific experience;


(10) 10% for shareholdings of 30% or more, otherwise 15%;


(12) 0% for commercial loans in connection with a delay of payment for goods, equipment and services; otherwise 10%;

(13) 10% for shareholdings of 25% or more, otherwise 15%;

(14) 5% for shareholdings of at least EUR 100,000 and if the dividends are exempt from tax; 10% if either condition is met; otherwise 15%;

(15) 0% if the actual recipient of interest is the government of the other contracting state, or for long-term bank loans (exceeding 7 years); otherwise 5%;

(16) 5% for 100% shareholdings or 30% or more interest in a joint venture; otherwise 15%;


(18) 5% for bank loans, otherwise 10%;(19) 5% for shareholdings of at least USD 50,000;

otherwise 15%;(20) 5% for shareholdings of 10% or more, other-

wise 10%.


Customs regulations

General approachThe formation of the Customs Union of Russia, Belarus and Kazakhstan, and the adoption of the Unified Customs Code have transformed the Russian customs regulatory landscape.

The Unified Customs Code came into force in the middle of 2010, together with Federal Law No. 311 dated 27 November 2010 “On Customs Regulation in the Russian Fed-eration”, replacing the Customs Code of the Russian Federation.

Significant amendmentsThe most significant amendments introduced by the Unified Customs Code include the fol-lowing:

. the creation of a common customs ter-ritory in which customs duties and other economic restrictions no longer apply to reciprocal trade between Customs Union members, with the exception of special protective, anti-dumping and compensa-tory measures;

. a common external tariff and non-tariff regulatory measures for trade with non-member states;

. the levy of export customs duties on goods exported to third countries at the rates in-dicated by the law of the state where the goods were produced;

. the abolition of customs clearance pro-cedures between the member states and import customs duties for goods imported within the Customs Union territory;

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Customs regulations

. 0% VAT charged on goods exported with-in the Customs Union territory and/or an exemption from excise duties and indirect taxation of goods imported within the Customs Union territory in the importing state; and

. an extension from 12 months to three years of the period in which customs au-thorities may control the declared cus-toms value for customs clearance after the goods’ release, running from the date of their release (this term may be extended by internal legislation to up to five years).

NoveltiesThe Unified Customs Code provides for the following new measures: . A new legal concept, “authorised eco-

nomic operator”, was introduced to sim-plify the completion of customs formali-ties for participants in foreign trade (these operators are able to store goods at their own warehouses and release goods into free circulation before submitting a cus-toms declaration).

. A unified register of items of intellectual property registered in the territory of the Customs Union will be created by merg-ing the national registers of the Customs Union members.

Practical impactThe creation of the Customs Union has simpli-fied cargo traffic between Russia, Belarus and Kazakhstan. In turn, this promotes the deve-lop ment of economic relations and co-opera-tion between these countries.

Moreover, the Customs Union encourages its member states to compete with each other in providing the most preferential customs rules in terms of formalities. The fewer obsta-cles the country’s customs treatment creates, the more investors the country attracts.

The following customs regimes are out-lined below: (i) trade between the Customs Union and third countries and (ii) mutual trade between member states.

Trade between Customs Union and third countriesImportation

Declaring proceduresUnder the Unified Customs Code, declaration procedures must be completed in the country where the importing company is registered.

Therefore, when importing goods to Rus-sia (or to the customs territory of the Customs Union) a Russia-based company must fulfil cus-toms clearance formalities for imported goods at an appropriate customs office in Russia.

In addition, when imported goods cross the customs border of the Customs Union in Belarus or Kazakhstan, a border post of the relevant country must fulfil the procedure of internal customs transit of the imported goods to the destination point within Russia, i.e. to the customs point where the imported goods will be cleared.

Customs payments (VAT, customs duties and excises)When goods are imported into the territory of the Customs Union from third countries, cus-toms payments are made (i) on the territory of the member state whose customs authorities release the goods and (ii) in the currency of this member state.

The forms and the timeframes for customs payment are determined by the legislation of the respective member state. For instance, under Russian law, customs payments for im-ported goods into Russia must be made on or prior to the day the customs declaration is submitted to the Russian customs authorities.


VAT, customs duties and excise duties must be paid by separate payment orders: VAT and excise duties are to be paid to the Russian budget, while customs duties are transferred to a special accumulation account.

Import customs dutiesThe Customs Union member states are obliged to apply the common customs tariff and uni-fied nomenclature of goods, to goods from third countries imported into the Customs Union.

Tariff privilegesCertain goods imported into the Customs Union from third countries may be subject to tariff privileges, such as exemption from im-port customs duties or reduced customs duties rates. Goods falling under this regime include, in particular: . vehicles involved in international opera-

tions concerning goods, luggage and pas-sengers as well as related equipment; and

. goods imported by individuals for non-production and non-profit purposes pur-suant to the customs regulations.

Tariff preferencesGoods originating from developing countries as well as the least developed countries fall within the unified system of tariff preferences of the Customs Union.

Goods from developing countries are sub-ject to customs duties at rates which are 75% of the rates provided in the common customs tariff. Goods from the least developed coun-tries are fully exempted from import customs duties.

The Customs Union Commission is respon-sible for establishing a list of goods originat-ing from developing and the least developed countries.

Non-tariff restrictionsBefore importing goods into the Customs Union, a Russia-based company is obliged to verify existing limitations to import certain goods to Russia (e.g. quotas, special protec-tive, anti-dumping and compensatory meas-ures) and obtain all necessary authorisations and licences.

Exportation

Declaring proceduresWhen goods are exported from Russia to countries outside the Customs Union, the Russia-based company must fulfil customs clearance formalities for exported goods at an appropriate customs office within Russia.

A customs procedure of goods export is applied to exported goods. When the goods leave the customs territory of the Customs Un-ion, customs authorities located on the bound-ary of the Union make corresponding notes on the export customs declaration.

Export customs duties and paymentExport customs duties are to be paid to the country from which the goods originated.

The Customs Union Commission is re-sponsible for establishing a consolidated list of goods to be exported by member states to third countries subject to export customs duties under the legislation of the respective member state (which has produced the ex-ported goods). This list will be based on the information provided by each member state on these goods.

Non-tariff restrictionsThe member states will unify non-tariff regula-tion measures taken with regard to third coun-tries: special protective, compensatory and anti-dumping measures as well as sanitary and veterinary measures.

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Customs regulations

Some measures of non-tariff regulation may be introduced in the form of quantitative restrictions or as an exclusive right to export and/or import certain types of goods, which require a licence to be granted by the compe-tent authorities of the member state.

Decisions on introducing, applying and cancelling measures of non-tariff regulation are taken by the Customs Union Commission.

VATGoods exported to third countries from Russia are subject to 0% VAT rate and/or are exempt-ed from excise duties, provided that the export of goods is properly documented.

Mutual trade between the Customs Union membersFree circulation of goods

Declaring procedures and customs dutiesAs the territories of the member states of the Customs Union form a common customs terri-tory, there are no customs offices and customs declaration procedures between them (please note, however, that border control procedures between Russia and Kazakhstan will be abol-ished by July 2011).

Customs duties are not applicable to recip-rocal trade between the member states.

Non-tariff restrictionsNo restrictions of an economic nature are ap-plicable in mutual trade between the mem-ber states, except for special protective, anti-dumping and compensatory measures.

Indirect taxation within the Customs Union

Exporting goodsGoods exported within the Customs Union (from a member state to another member

state) are subject to a 0% VAT rate and/or ex-empted from excise duties provided that the export of the goods is properly documented.

Importing goodsGoods imported from the territory of one member state into the territory of another member state are subject to indirect taxation.

The indirect taxes paid on imported goods are subject to deductions in accordance with the legislation of the importing state.

Indirect tax rates, which are applicable to goods imported from the territory of one member state into the territory of another member state, must not exceed those applied to similar domestic goods.

Works and servicesWorks and services are subject to indirect taxes in the member state deemed to be the place where the services were rendered or the works were executed. This is the case where: . works/services are related to immovable

property or movable property located in the given member state; or

. services in the spheres of culture, art, edu-cation, physical training, tourism, recrea-tion and sports are rendered in the terri-tory of the given member state; or

. the taxpayer of the given member state acquires consulting, legal, accounting, auditor, designer, marketing, research and development and some other types of ser-vices.In other cases not mentioned above, works

and services are subject to indirect taxes in the member state of the taxpayer who rendered the services or executed the works. The tax base, the rates, the collection procedure and tax concessions are also determined on the basis of the legislation of the member state where the works are executed or the services are considered to be rendered.


Energy efficiency

General approachUntil recently energy efficiency matters were al-most unregulated by Russian legislation. How-ever, on 23 November 2009 Federal Law No. 261-FZ “On Energy Saving and Energy Efficien-cy Increase and Amending Certain Legislative Acts of the Russian Federation” (the “Law”) was passed. The Law created a legislative, eco-nomic and organisational stimulus for energy saving (“ES”) and increasing energy efficiency (“EE”). The majority of provisions of the Law came into force on 27 November 2009.

The framework nature of the Law requires the Russian Government and competent fed-eral ministries to adopt numerous bylaws. This is a complex process and it has not yet been completed.

However, due to the presence of strong political will, Russian EE legislation is being ac-tively developed. At the end of 2010 a state programme establishing the main principles and purposes of ES policies was adopted for the period up to 2020. By example, this pro-gramme provides for a general decrease in the energy intensity of the Russian GDP to 40% by 2020. The state programme also promises that total financing for the implementation of EE measures will be equal to RUB 9,532 billion (EUR 238.3 billion1) – the majority of this com-ing from non-budgetary sources.

Notwithstanding the above, investment in energy efficient technology in Russia is

1 At the notional exchange rate of RUB 40 = EUR 1, as through-out this guide.

42

Energy efficiency

currently limited when compared to develop-ments in the rest of the world.

Therefore, it should be noted that Russia offers unique opportunities for investors who want to effect projects in the EE sphere and, more particularly, for representatives of coun-tries which already possess experience of im-plementing EE and ES technology.

In this chapter we will summarise the Rus-sian EE requirements in relation to various sec-tors and the main features of the newly intro-duced “energy service agreements”, as well as outline the energy audit mechanisms and incentives.

EE requirementsTo facilitate the efficient use of energy resourc-es and to support and encourage ES the Law provides for several groups of EE requirements in various sectors. Below we examine how the Law applies to (i) the circulation of goods; (ii) buildings, structures and installations; and (iii) the public sector.

EE requirements for circulation of goodsSeveral categories of goods produced in and imported to Russia must contain information on their EE classes in the attached technical documentation, as well as on their tags and labels. This requirement concerns: . household energy consuming devices2

since 1 January 2011; . computers and “organisational” hardware

(fax machines, copiers, etc.) from 1 Janu-ary 2012; and

. other goods (such as electric cookers, TVs) as defined by the relevant Government Decree from 1 December 2012.

2 These devices include refrigerators, domestic air-conditioners, electric household lamps (incandescent lamps less than 100W and luminous low-pressure lamps), etc.

Manufacturers/importers are respon-sible for defining EE classes for specific types of goods, and to include this information in the technical documentation attached to the goods on their tags and labels. Failure to com-ply with these requirements results in admin-istrative liability3.

EE requirements for the circulation of goods also cover the introduction of energy efficient bulbs. The Law prohibits the cir-culation of incandescent lamps exceeding 100W for the purposes of alternating current and lighting from 1 January 2011. Optional rules prohibiting incandescent lamps exceed-ing 75W from 1 January 2013 and exceeding 25W from 1 January 2014 are also imposed by the Law. However, these are due for revi-sion in the future following the first results of the EE programme in Russia. More stringent rules are imposed on the public sector: from 1 January 2011 no public procurements for the supply of any incandescent bulbs will be per-mitted with the exception of electric bulbs for premises used by large groups of people (e.g. theatre and cinema halls, lecture auditoriums and restaurants, etc.).

EE requirements for buildings, structures, installationsAccording to the Russian EE rules buildings, structures and installations (with only a few exceptions) must comply with obligatory re-quirements. These requirements will be fixed by the Ministry of Regional Development in concurrence with the Ministry of Energy (the “ME”) and Ministry of Economic Develop-ment (the “MED”) under a special Decree to be adopted by the Government. The EE re-

3 A “per breach” penalty for company officials at the rate of RUB 10,000 - 15,000 (EUR 250 - 375); for individual entrepre-neurs at the rate of RUB 20,000 - 35,000 (EUR 500 - 875) pos-sibly followed by confiscation of goods; for legal entities at the rate of RUB 100,000 - 150,000 (EUR 2,500 - 3,750) with pos-sible confiscation of goods.


quirements will be revised every five years and include: . maximum energy consumption limits in

buildings/constructions; and . requirements relating to the architectural,

functional, technological, construction, engineering and technical solutions influ-encing the EE of buildings/constructions.These EE requirements will indicate the

persons (developers/builders/owners) responsi-ble for their implementation. One of the most important requirements in the short term will be the indication of the EE classes of apart-ment buildings on their facades.

Energy metersEvery building must be provided with an en-ergy meter by certain deadlines.

Since 1 January 2011 all commercial and industrial buildings and constructions are sup-posed to be equipped with water, natural gas, thermal energy and electrical energy meters. However, in practice this requirement has not yet been fully complied with.

In apartments and residential buildings, the energy meters, both collective (for the whole building) and individual (for separate apart-ments), must be in place by 1 January 2012.

LiabilityFailure to comply with EE requirements in de-sign, construction, reconstruction and capital repairs, as well as failure to comply with en-ergy meter fitting requirements, will result in administrative liability4.

EE requirements for public sectorOne of the main priorities of the Law concerns the public sector.

4 A “per breach” penalty for company officials at the rate of RUB 20,000 - 30,000 (EUR 500 - 750); for individual entrepre-neurs at the rate of RUB 40,000 - 50,000 (EUR 1,000 -1,250); for legal entities at the rate of RUB 500,000 - 600,000 (EUR 12,500 - 15,000).

Energy consumption reduction targets and programmesPublicly financed institutions must reduce their consumption of water, natural gas, thermal energy, electrical energy, coal and black oil by 15% (based on 2009 figures) within five years from 1 January 2010. The yearly reduc-tion of energy consumption should be at least 3%.

Companies with state participation and companies carrying out regulated types of activities are obliged to adopt and implement programmes aimed at increasing EE.

Public procurementsAll orders by state or municipal clients must be made in accordance with ES and EE require-ments to be fixed by the MED with the agree-ment of the ME, the Ministry of Industry and Trade, and the Federal Anti-monopoly Service. These requirements will concern certain types of goods (e.g. new goods produced with high-ly energy effective technology), works (e.g. operating and capital repairs, construction and development) and services. They include: . limits on energy consumption; and . technological solutions influencing the EE

of goods/works/services ordered.The above listed federal authorities are

charged with monitoring annually the market of energy efficient goods, works and services and preparing yearly proposals for reviewing EE requirements for public procurement.

Energy service agreementsThe Law introduced a novel type of contract to Russian legislation: energy service agreements. They are entered into between a (private or public sector) customer and a contractor that provides works and services aimed at ES and greater EE in the use of energy resources

44

Energy efficiency

These agreements must include the fol-lowing obligatory conditions: (i) the volume of ES guaranteed by the contractor; (ii) the expiration date of the agreement (which may not be less than the term necessary to achieve the ES set by the agreement); and (iii) other obligatory conditions provided for by Russian legislation.

The discretionary terms of energy ser-vice agreements may include among others (i) a clause determining the price for the works and services, subject to results attained or upon the performance of the contract (e.g. the value of ESs); and (ii) a clause stipulating the obligation of the performing party to install and use energy meters.

Clauses containing the essential elements of an energy service agreement may be includ-ed in contracts of sale and purchase, supply or transport of energy resources (except natu-ral gas). Model terms of these contracts have been established by the MED.

Energy audit mechanismsThe Law provides for two main types of energy audit: voluntary and obligatory. As a gener-al rule, energy audits are deemed voluntary ex-cept in circumstances stipulated by the Law5.

Companies, self-regulated organisations and individual entrepreneurs must conduct energy audits on products and technological processes aimed at: . collecting objective data on the volume of

energy used; . defining EE indicators;

5 According to art. 16 of the Law an obligatory energy audit must be conducted in respect of: (i) certain regulated companies; (ii) companies producing or transporting energy resources (oil, gas, etc.) or investing in ES and EE, and financed by federal or re-gional budgets; (iii) companies with yearly energy consumption exceeding RUB 10 million (EUR 250,000). The above companies will have to undertake their first energy audit by 31 Decem-ber 2012 and subsequent energy audits at least once every five years.

. defining ES and increase in EE potential; and

. developing a list of possible programmes which target EE increase and evaluation.The results of energy audits must be re-

flected in energy passports for each product or process comprising information on the pres-ence of energy meters, the volume of energy used and the variations of volumes used, etc. All information contained in the energy pass-ports will be included in the State Energy Register kept by the ME.

IncentivesIn order to encourage private investors to par-ticipate in the EE programme the Law propos-es a range of economic/tax incentives.

For example, tariff regulated companies transporting energy are able to take advan-tage of two incentives during a maximum five year period: either to gross up their sale pro-ceeds by the amount of expenses incurred in reducing energy loss, or retain savings gener-ated as a result of investments in EE and ES.

The tax incentives include, in particular: . investment tax credits up to 30% for com-

panies investing in EE and ES technology; . accelerated depreciation of assets belong-

ing to the category of objects with high EE or sites classified in top EE classes; and

. partial compensation of interest on loans granted by Russian banks for the purpose of investing in ES and increased EE tech-nology.


Anti-monopoly issues

General approachAnti-monopoly issues are mainly governed by Federal Law No. 135-FZ “On the Protection of Competition” dated 26 July 2006 (the “Com-petition Law”), while liability for the violation of anti-monopoly regulations is established (in addition to the Competition Law) mainly by the Code on Administrative Offences and the Criminal Code.

The Federal Anti-monopoly Service (the “FAS”), a Russian executive authority, controls and enforces compliance with anti-monopoly legislation. It also oversees the adoption of regulatory acts in the field.

The FAS is currently finalising the so-called “Third Anti-monopoly Package” – an extensive set of amendments to the abovementioned

primary acts of anti-monopoly legislation. It is anticipated that the main changes will concern the regulation of cartel agreements and coor-dination of economic activity (including liability for the violation of related requirements). The Third Anti-monopoly Package is expected to be adopted in the first half of 2011.

Scope of application of the Competition LawThe Competition Law applies to: . agreements/actions concluded or commit-

ted in Russia that may influence competi-tion in Russia; and

. agreements/actions concluded or commit-ted outside Russia, between Russian and/

46


or foreign legal entities/individuals and which are related to:

— fixed assets (both tangible and intangi-ble) located in Russia;

— shares or participatory interests in Rus-sian legal entities; or

— rights relating to legal entities engaged in business activities in Russia.

The expression “legal entity engaged in business activities in Russia” includes all for-eign entities carrying out any business activity of any kind in Russia (e.g. supplying goods or services to the Russian market, having a repre-sentative office, etc.).

Based on the above, the scope of appli-cation of the Competition Law is very broad. In practice it will cover almost any agreement and may apply to any company directly or in-directly connected with the Russian market or Russia in general.

Anti-competitive practices and restriction of competitionThe Competition Law covers the following types of anti-competitive practices and activi-ties which may lead to a restriction of com-petition: . abuse of a dominant position; . cartel agreements and concerted actions; . vertical agreements and economic coordi-

nation; and . unfair competition.

The Competition Law also provides for the rules of transaction clearance.

Abuse of a dominant positionThe general rule is that a company is deemed dominant if it has a market share of over 50%. However, in practice, dominance may be es-tablished in certain circumstances with a mar-ket share of less than 35%.

Dominance of a market is, in itself, not a violation. However, abuse of the dominant position gives rise to liability. In addition to the prohibitions outlined below in the “Cartel agreements and concerted actions” section, dominant entities are prohibited from: . fixing or maintaining “monopolistically”

high or low prices; . establishing different prices for the same

commodity without technological or eco-nomical substantiation; and

. establishing discriminatory conditions.

Cartel agreements and concerted actionsGenerally, cartel agreements and concerted actions involve the following violations that are expressly prohibited by the Competition Law: . fixing or maintaining prices/tariffs, dis-

counts, bonus payments or surcharges; . increasing, reducing or maintaining prices

during auctions; . dividing markets by:

— territory, — volume of sales or purchases, — assortment of commodities sold, or — range of sellers or purchasers/ custo-

mers; . unsubstantiated refusal to enter into con-

tracts with certain sellers or buyers; . imposing unfavourable terms upon a con-

tracting party; . reducing or terminating a commodity’s

production; . impeding other business entities’ access to

or withdrawal from a commodity market; and

. establishing membership conditions in professional or other associations if these conditions lead or may lead to a restriction of competition.


Vertical agreements and economic coordinationIf the parties to an agreement do not compete with each other, such a “vertical agreement” (an agreement between business entities that do not compete with each other, one of which is the buyer of a commodity and the other one is a supplier of a given commodity) may not contain any provisions which lead to a restric-tion of competition in general and, specifically, may not: . establish resale prices for a commodity;

and . impose on the purchaser a restriction on

the sale of competing products.Moreover, the Competition Law also pro-

hibits any economic coordination exercised by one business entity over the activities of other business entities if the coordination results in any of the prohibitions outlined in the Cartel agreements and concerted actions section above.

Unfair competitionUnfair competition is not permitted under Rus-sian competition legislation. In particular, un-fair competition includes: . the distribution of false or incorrect in-

formation which may cause damage to a business entity or impair its reputation;

. misleading information in respect of the (i) nature, (ii) manner and place of produc-tion, (iii) consumer properties, (iv) quality and quantity, or (v) manufacturers, of a commodity;

. an incorrect comparison of the commodi-ties produced by a business entity with those produced or sold by other business entities;

. the sale, exchange or other placement into circulation of a commodity in breach of third-party intellectual property rights; and

. the unlawful receipt, use and disclosure of commercial secrets, official secrets or other information protected by law.Several of the above actions are also regu-

lated under Federal Law No. 38-FZ “On Adver-tising” dated 13 March 2006 (the “Advertis-ing Law”).

The FAS is entrusted with monitoring com-pliance with the Advertising Law and may hold business entities liable for violating it.

Transaction clearance

Transactions subject to clearanceThe following transactions may require appro-val from the FAS or a notification to the FAS: . the establishment of a Russian company if

(i) its charter capital is paid up by shares and/or tangible or intangible assets of an-other company and (ii) the new company, as a result, acquires:

— more than 25% of voting shares in a Russian joint-stock company;

— more than 1/3 of the participatory in-terest in the charter capital of a Rus-sian limited liability company; or

— more than 20% of the balance sheet value of fixed and intangible assets of the company which owns the assets (and whose assets are located in Russia);

. reorganisation (in the form of merger or accession);

. the acquisition of more than 25%, 50% or 75% of voting shares in a Russian joint-stock company;

. the acquisition of more than 1/3, 50% or 2/3 of the participatory interest in the charter capital of a Russian limited liability company;

. the acquisition of indirect control over a Russian company or a foreign company with any business activity in Russia;

48


. the acquisition of the right to own, use or possess tangible and/or intangible assets of a company, if the book value of the ac-quired assets located in Russia exceeds the following percentages of the total book value of the seller’s tangible and intangible assets:

— 20% for companies operating on commodity markets; or

— 10% for companies operating on financial markets.

ThresholdsThe transactions mentioned above require merger clearance (prior or post transaction) from the FAS if the respective thresholds es-tablished by the Competition Law and sum-marised in the tables below are met. These are mostly asset-based thresholds. However, when the asset-based thresholds are not met revenue-based thresholds apply.

When the thresholds for prior approval are met FAS clearance must be obtained before the closing of the transaction. When they are not met the Competition Law requires post-transaction notification to the FAS within 45 calendar days after closing.

The thresholds set out below only apply to companies operating on the commodity mar-kets. For those operating on financial markets, the requirements are different (please see the Banking sector chapter on page 51).

LiabilityGeneral remarksIndividuals and legal entities may be subject to administrative and criminal liability for non-compliance with anti-monopoly law.

Liability may include: . mandatory directions issued by the FAS to

cease a violation, etc. and/or transfer to the state budget of all revenue received as

a result of the violation of anti-monopoly legislation (under the Competition Law);

. fines calculated on the basis of revenue (up to 15% of the revenue gained over the period of the violation of anti-monop-oly legislation ) and/or disqualification of company officials (under the Code on Ad-ministrative Offences); and

. fines, disqualification of company officials and, for the more serious anti-monopoly violations, up to seven years’ imprison-ment of company officials (under the Criminal Code).

Specific remarks

Prohibited agreements and leniencyAs mentioned above, cartels and concerted ac-tions which violate anti-monopoly regulations are strictly prohibited and may lead to severe sanctions being imposed.

The Code on Administrative Offences provides a limited opportunity for companies which have participated in illegal cartels or ac-tions to avoid penalties – the “Leniency Pro-gramme”.

To obtain total immunity under the Leni-ency Programme a cartel participant must (i) be the first to inform the FAS of the cartel’s existence; (ii) submit sufficient information and/or documents to the FAS to allow an ad-ministrative violation to be identified; (iii) fully co-operate with the FAS throughout its inves-tigation; and (iv) cease any involvement in the cartel or other infringement immediately. It is only possible to benefit from the Leniency Pro-gramme if the FAS is not aware of the reported infringement.Collective applications for the Leniency Pro-gramme are not accepted.


PRIOR MERGER CLEARANCE THRESHOLDSAggregate worldwide value of assets of the acquirer’s group and the target’s group

> RUB 7 billion (EUR 175 million1)

and Aggregate world-wide value of as-sets of the target’s group of companies

> RUB 250 million (EUR 6.25 million)

ORAggregate worldwide revenue of the acquirer’s group and the target’s group of companies from the sale of goods, works and products during the last calendar year

> RUB 10 billion (EUR 250 million)

and Aggregate world-wide asset value of the target’s group of companies


ORThe acquirer, the target or any company in their groups is included in the FAS Register of Business Entities with a Market Share Exceeding 35% (mostly applicable to Russian companies)


POST-TRANSACTION MERGER NOTIFICATION THRESHOLDSAggregate worldwide value of assets of the acquirer’s group and the target’s group

> RUB 400 million (EUR 10 million)

and Aggregate world-wide value of as-sets of the target’s group of companies


ORAggregate worldwide revenue of the acquirer’s group and the target’s group of companies from the sale of goods, works and products during the last calendar year

> RUB 400 million (EUR 10 million)

and Aggregate world-wide asset value of the target’s group of companies


Transaction controlFailure to obtain FAS clearance where required may lead to anti-monopoly and administrative proceedings against the acquirer and the im-position of a fine of up to RUB 500,000 (EUR 12,500).

A transaction requiring prior FAS clearance may be deemed invalid by the courts if clear-ance is not obtained and the FAS proves that the transaction led to, or may lead to, a restric-tion of competition in the relevant market.

50

Banking sector

Banking sector

Banking industryThe Russian banking industry is characterised by the operation of a large number of credit organisations (955 as of 1 January 2011) and by a high level of concentration of capital. As of 1 January 2011, approximately 48% of the banking sector’s total assets1 were held by the top five Russian banks2. Throughout the recent financial downturn, state owned banks3 have played an ever increasing role in the stabilisa-

1 http://www.cbr.ru/analytics/bank_system/obs_1102.pdf2 As of 1 January 2011 the top five Russian banks in terms of

net assets are Sberbank (RUB 8,887,918, i.e. EUR 222,197); VTB (RUB 2,731,547, i.e. EUR 68,288; Gazprombank (RUB 1,811,806, i.e. EUR 45,295); Rosselkhozbank (RUB 1,069,506, i.e. EUR 26,737); and Bank of Moscow (RUB 923,252, i.e. EUR 23,081 – http://rating.rbc.ru (all conversions based on a notion-al rate of RUB 40 to EUR 1).

3 Such as, Sberbank, VTB, Gazprombank, etc.

tion and development of the Russian banking sector.

Legislative and regulatory framework The legislative framework regulating the Rus-sian banking sector is provided under Federal Law No. 395-1 “On Banks and Banking Activi-ties” dated 2 December 2002 (the “Banking Law”) and Federal Law No. 86-FZ “On the Central Bank of the Russian Federation” dated 10 July 2002 (the “CBR Law”). In addition to the general insolvency legislation, bank insol-vency is regulated by Federal Law No. 40-FZ “On Insolvency (Bankruptcy) of Credit Organi-sations” dated 25 February 1999. These laws and related regulations:


. define credit organisations; . set out the list of banking operations and

other transactions that may be performed by credit organisations;

. establish the framework for the registra-tion and licensing of credit organisations; and

. provide the regime for insolvency proceed-ings and the protection of credit organisa-tions.The Central Bank of Russia (the “Central

Bank”) is legally and financially independent from the Russian Government. The Central Bank consists of a Moscow Head Office, which includes its Board of Directors, National Bank-ing Council and central administrative depart-ments, a number of regional branches in the constitutive subjects of the Russian Federation (which are called “National Banks” in certain republics), and local branches.

Under the CBR Law and the Banking Law, the Central Bank is responsible for regulating banking activities and is authorised to adopt binding regulations (or “instructions”) con-cerning banking and currency operations. The Central Bank actively uses its powers and has created a detailed and extensive body of regulation on key areas, including: capital requirements – Directive No. 1260-U, dated 24 March 2003; mandatory economic ratios and reserves – Instruction No. 110-I, dated 16 January 2004, and Regulation 342-P, dated 7 August 2009; and provision for losses – Regu-lation No. 254-P, dated 26 March 2004.

Licensing and operationsLicensingA credit organisation must be licensed by the Central Bank in order to conduct “banking activities”, as defined under the Banking Law. Under the Banking Law, credit organisations may be incorporated either as joint-stock or

limited liability companies, or companies with additional liability. The latter form is not often used as it provides for the joint liability of the company’s owners in respect of the company’s obligations.

The Central Bank may refuse to issue a banking licence in the event of: (i) non-com-pliance of application documents with Russian law requirements; (ii) unsatisfactory financial standing of the owners; (iii) non-compliance of the managers’ qualifications; and (iv) unsatis-factory business reputation. The Central Bank may revoke a banking licence, for example, in cases of capital inadequacy, breach of bank-ing law requirements, carrying out of banking operations not stipulated in a banking licence, and the insolvency of a bank.

AcquisitionsAcquisitions in the banking sector are subject to specific banking and anti-monopoly rules.

Banking rulesAccording to the Banking Law, the Central Bank must: . give its prior consent to any acquisition

of an interest of 20% or more in a bank or credit organisation; and

. be notified of an acquisition of more than a 1% interest in a bank or credit organisa-tion.

Anti-monopoly rulesPrior approval from the Federal Anti-Monop-oly Service (the “FAS”) is required if the pro-posed acquisition relates to: . more than 25%, more than 50% or more

than 75% of the voting shares, or more than 1/3, more than 50% or more than 2/3 of participatory interests, in a bank or credit organisation; and

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Banking sector

. the target is a bank or credit organisation whose assets exceed RUB 33 billion (EUR 825 million4). The acquisition of these thresholds in the

charter capital of a bank or credit organisa-tion whose assets exceed RUB 2.5 billion (EUR 625 million) will require FAS notification within 45 calendar days.

OperationsBanks may provide a wide range of banking services. Non-bank credit organisations con-duct only a limited number of banking op-erations, such as maintaining accounts and processing payments on behalf of various companies.

The Banking Law states that the follow-ing services are “banking operations” that require receipt of an appropriate licence5 from the Central Bank: . taking deposits from individuals and legal

entities (both demand and fixed-term de-posits);

. investing the deposited funds as a princi-pal, and opening and maintaining bank accounts for individuals and legal entities;

. performing settlements in accordance with the instructions of individuals and legal entities, including correspondent banks, from/to their bank accounts;

. cash, cheque, promissory note, payment document handling services and over-the-counter services provided to individuals and legal entities;

. selling and purchasing foreign currency (including banknotes and coins);

. taking deposits in precious metals and in-vesting them;

. issuing bank guarantees; and

4 At the notional exchange rate of RUB 40 = EUR 1, which is used throughout this guide.

5 A general banking licence, a licence to conduct operations in foreign currency, a licence to carry out operations with precious metals.

. processing payments in accordance with the instructions of individuals without opening bank accounts (excluding pay-ments by post).In addition to banking operations, credit

organisations are permitted to: (i) give sureties for obligations of third parties contemplating payment in cash; (ii) take assignments of rights to demand payment in monetary form; (iii) perform fiduciary management of monetary funds and other assets for individuals and le-gal entities; (iv) engage in operations with pre-cious metals (in accordance with Federal Law No. 41-FZ “On Precious Stones and Precious Metals” dated 26 March 1998 and related legislation); (v) lease special premises and safe deposit boxes to individuals and legal entities for document and valuables storage; (vi) effect leasing operations; (vii) engage in factoring operations; and (viii) provide consulting and in-formation services. A credit organisation may enter into any other transaction in compliance with the relevant Russian legislation.

Under the Banking Law, a credit organisa-tion cannot engage in manufacturing, com-modities trading (excluding precious metals6) or insurance activities. However, these restric-tions do not extend to any commodity deriva-tive transactions.

Deposit insuranceTo protect individual depositors, Federal Law No. 177-FZ “On Insurance of Deposits of Indi-viduals in the Banks of the Russian Federation” dated 23 December 2003 (the “Deposit In-surance Law”) came into effect at the end of December 2003. It stipulates that a bank may only attract deposits from, or open accounts for, individuals if the bank is a member of the deposit insurance system.

6 On the basis of the relevant copy of a licence to carry out opera-tions with precious metals.


The Deposit Insurance Law provides for the creation of the Agency for Insurance of Deposits (the “Agency”). The Agency has a supervisory role over the deposit insurance system. Its responsibilities include collecting insurance contributions, managing the funds in the mandatory insurance pools, establishing insurance premiums and monitoring insurance payments. Once a bank has been issued with a retail banking licence, it is entered into the Agency’s register, and it needs to apply to the Central Bank to become registered as a par-ticipant in the mandatory deposit insurance system.

Participation in the deposit insurance sys-tem is subject to a number of requirements: . the Central Bank must be satisfied that the

bank’s financial accounts and reports are true and accurate;

. the bank must be in full compliance with the Central Bank’s stringently monitored mandatory ratios (capital adequacy, liquid-ity, etc.);

. the bank must fully comply with the Cen-tral Bank ratios for the assessment of the quality of the bank’s capital and assets, profitability and liquidity, in addition to the Central Bank’s requirements for the trans-parency of its ownership structure, risk management system and internal control; and

. the Central Bank must not be conducting any enforcement actions in respect of the bank, nor must any grounds for these en-forcement actions have arisen during the Central Bank’s review of the bank’s appli-cation. Failure to satisfy these requirements, or

indeed, choosing not to participate in the de-posit insurance system, will result in the bank being unable to attract deposits from, or open accounts for, individuals.

Member banks pay a contribution into a deposit insurance fund. These contributions are calculated as a percentage of the average daily balance of individual deposits maintained with a particular bank, and are subject to an upper limit. All individual depositors with de-posits in member banks are entitled to 100% compensation for aggregate amounts up to RUB 700,000 (EUR 17,500).

The anti-money laundering lawFederal Law No. 115-FZ “On Combating Mon-ey Laundering and the Financing of Terrorism” (the “Anti-Money Laundering Law”) came into force on 1 February 2002 and has been revised a number of times to reflect the global developments in this area. It is the primary legislative act in the Russian Federation aimed at preventing money laundering activities and the financing of terrorism, and is supported by numerous recommendations, binding instruc-tions and regulations of the Central Bank and other authorities.

The Anti-Money Laundering Law applies to individuals and legal entities engaged in transactions with monies (and other assets) in Russia, as well as so-called regulated entities and the state authorities responsible for moni-toring money laundering activities in Russia. It provides for mandatory internal procedures and reporting requirements in the event of any suspicious or otherwise monitored transac-tions.

Financial institutions such as banks and non-banking credit organisations, professional participants of the securities market, insurance and leasing companies, postal and other non-credit organisations that deal with the transmis-sion of money (the “regulated entities”) are required, with limited exceptions, to perform due diligence by ascertaining the identity of a customer (and a beneficiary) and monitoring

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Banking sector

transactions for suspicious activity. For these purposes, most regulated entities are obliged to develop and implement sophisticated internal regulations and procedures, as well as to main-tain a sufficient level of education and training on these matters for involved employees.

The regulated entities must identify and report transactions of a suspicious nature to the Federal Financial Monitoring Service, a designated monitoring authority. These trans-actions, among others, include cash or non-cash transactions of at least RUB 600,000 (EUR 15,000), and immovable property transactions of at least RUB 3 million (EUR 75,000), or the equivalent of these amounts in foreign cur-rency. If one of the parties to a transaction is suspected of being related to terrorist activity, the transaction is subject to mandatory control regardless of the amounts involved.

The Russian anti-money laundering legis-lation upholds the relevant international prac-tice, and provides for advanced identification and control procedures in respect of foreign publicly exposed persons (so-called “PEPs”).

The Central Bank may undertake preven-tative and/or enforcement measures in respect of a regulated entity involved in transactions which infringe the anti-money laundering leg-islation. These measures may include: . informing the entity of the Central Bank’s

concern regarding its activities; . suggesting that the entity provide the

Central Bank with a programme for im-provement; and

. establishing additional monitoring meas-ures. Enforcement measures may also include

the imposition of a penalty and the withdrawal of the banking licence. The Russian Criminal Code provides for criminal liability for breach of the legislation on anti-money laundering, which includes penalties and imprisonment for the bank’s management.


We set out below a brief discussion of certain issues related to lending in Russia to companies, by banks and other companies, with particular focus on foreign currency and secured lending.

Lending documents and governing lawRussian principles of contractual law are gen-erally permissive, allowing parties freedom to negotiate terms of credit agreements to suit their commercial requirements. In addition, under Russian conflicts of laws principles, parties to a credit agreement may generally choose a relevant foreign law as the govern-ing law of the agreement. It is usual for credit

agreements to be governed by a commonly used international law, for example English or the law of the lending entity.

However, each case should be carefully analysed to determine if there are particular enforceability issues which might arise. Care should also be taken in selecting the forum in which disputes may be heard, to ensure en-forceability in Russia or abroad.

JurisdictionThere are few jurisdictions with which Russia has an agreement for reciprocal enforcement of court judgments, or in relation to which a principle of reciprocity may apply. However, Russia is a party to the 1958 New York Con-vention on the Recognition and Enforcement

Lending in Russia

56

Lending in Russia

of Foreign Arbitral Awards, and an arbitral award obtained in another signatory jurisdic-tion should be enforceable by a Russian court. For this reason, it is common to provide for the jurisdiction of international arbitration in credit agreements, although consideration of the jurisdiction of foreign courts may still be relevant, in particular if the Russian obligor has assets abroad.

Currency controlsAs noted in the Currency control chapter on page 61, a “transaction passport” with a Rus-sian authorised bank is required for a foreign currency loan into Russia.

For payments received by a Russian com-pany for the export of goods (the receivables in connection with which may have been se-cured), the exporter is required to repatriate 100% of the proceeds within the period speci-fied in the export contract. In this respect, ser-vicing debt offshore from proceeds becomes problematic under Russian law. Certain ex-emptions apply, however, for loans which are in excess of two years, made by lenders in OECD1 or FATF2 countries.

Security interestsThe choice of law for security documents usu-ally depends on to the location of the secured assets (e.g. intangible assets), or the govern-ing law of the assets (e.g. contractual rights). In Russia, the principal form of security is a pledge, which normally is entered into in con-nection with identified assets. In the case of competing pledges, the first in time by crea-tion generally has priority. Under Russian law a universal security instrument (such as an English law debenture) which might secure all

1 Organisation for Economic Co-operation and Development.2 Financial Action Task Force.

assets of a company is generally not available. There is a security instrument called a mort-gage of enterprise under Russian law which may secure real estate, movable property, inventory etc., but because of practical diffi-culties in putting the security in place is rarely used in practice.

There is also no centralised legal entity reg-ister against which security interests may be noted. However, a company is required by law to record pledges that it grants in a “pledge book” which may be inspected, and pledges over particular types of assets (e.g. real estate, participatory interests, registered intellectual property rights) are recorded on specific public registers.

A pledgor needs to have title to the se-cured assets and although the pledge can be “possessory” or “non-possessory”, the se-cured party need not take possession of the secured assets. A pledge needs to be in writing and needs to accurately identify the pledged assets, the value of the pledge and the secured obligations. The following points are worth noting, in relation to certain types of assets:

Shares or participatory interestsA pledge of shares held directly in a joint-stock company must be registered in the joint-stock company’s register (held by the company itself or an independent licensed company). If shares in a joint-stock company are held by a deposi-tory, then its involvement is required and the pledge is registered with the depository. In this case, the shares may not be transferred with-out the pledgee’s consent.

For participatory interests, pledges must be notarised and recorded on the public Uni-fied State Register of Legal Entities.

Immovable propertyUnder Russian law, interests in land (e.g. free-hold and leasehold interests) are considered


“immovable property” and must be regis-tered. Pledges (or “mortgages”) over the inter-ests must also be registered. A mortgage does not come into effect until it is registered by the relevant land registration authority.

Ships and aircraft are similarly immovable assets, and pledges over these also require reg-istration.

Contractual and intellectual property (“IP”) rightsPledges over rights will require notice to be given to the relevant counterparties, and in some cases the consent of counterparties ob-tained. If IP rights are registered, the pledge will require registration with the relevant IP register.

Bank accountsUnder Russian law, it is not generally con-sidered possible to take effective security by way of pledge over bank accounts. As an al-ternative, it is common to enter into account withdrawal (direct debit) agreements between creditor, debtor and debtor’s account bank. These agreements have a number of practical limitations, and it is preferable (if appropriate) to sweep funds to offshore accounts where se-curity may be available.

Security trusts and syndicationUnder secured syndicated credit agreements, it is common for security to be held by a rep-resentative (i.e. a security agent or trustee) for a syndicate. Because of the lack of recognition of trust concepts in Russia, and the acces-sory nature of Russian security, syndication of credit agreements is commonly structured to minimise disruption to Russian security upon changes to the syndicate.

The following arrangements are common-ly used:

. bilateral (fronting bank) structures (syndi-cated through sub-participation);

. parallel debt (creating a parallel obligation to benefit a security trustee); and

. joint and several creditor structures.However, each of the above structures

have their own deficiencies and should be carefully analysed.

EnforcementEnforcement was historically carried out by way of public auction through the Russian courts. Changes to the law in 2009 introduced a wider range of out-of-court enforcement op-tions which may be included in an agreement. These measures include the possibility of a commission sale of the assets or a creditor ap-propriating title to the secured assets (whereas previously only proceeds were available).

However, in the case of a dispute between a pledgor and a pledgee, it is likely that any provision for out-of-court enforcement would be referred to the court’s jurisdiction. Proceeds from enforcement through the court would be likely to be in Russian roubles.

Bank guarantee and suretyshipUnder Russian law a “bank guarantee” refers to a particular type of commercial instrument that a bank may issue as credit support for the lender’s obligations. A “suretyship” refers to a particular type of instrument that a company (or individual) may issue as credit support for the obligations of another. A bank guarantee is the only Russian law instrument which is not “accessory” in its nature and survives the underlying obligation. Russian law guarantees and suretyships are commonly used in connec-tion with financing in Russia. In addition, pro-

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Lending in Russia

viding there is a sufficient foreign element to a transaction, a similar foreign law instrument may be issued by a Russian obligor (utilising appropriate jurisdiction provisions).

Insolvency considerationsUpon the insolvency of a debtor or pledgor, a moratorium against enforcement of security will arise whilst it is determined if a rehabilita-tion process or liquidation process will apply. Repayments or arrangements in preference of other creditors are likely to be the subject of anti-preference provisions set out in the insol-vency laws. For more information related to bankruptcy and insolvency in Russia generally, please see the Corporate bankruptcy chapter on page 63.

Upon liquidation of an insolvent company Russian law applies mandatory priorities un-der which creditors of the same class would rank equally. In brief these are: (i) “current claims” (e.g. insolvency costs, obligations in-curred following commencement of insolven-cy); (ii) “first priority claims” (personal injury); (iii) “second priority claims” (employee related, royalties); and (iv) “third priority claims” (all other claims, including tax liabilities).

Secured creditors fall within the cat-egory of “third priority claims”; however their claims are satisfied in priority to other credi-tors’ claims (including the claims of first and second priority) from proceeds of the liquida-tion of secured assets, subject to the following thresholds of recovery under law.

In connection with secured claims (other than under a credit agreement), a secured creditor is entitled to 70% of realised pro-ceeds, with the remaining 20% for first and second priority claims, and 10% for insolvency expenses. In connection with secured claims under a credit agreement, these percentages change to 80%, 15% and 5% respectively.

If a secured creditor forgoes its rights to vote during insolvency procedures (e.g. financial re-habilitation and external administration) Rus-sian law allows a secured creditor, with the ap-proval of the courts and providing the assets are not sufficient for the possible restoration of business, to enforce its security and retain all proceeds (ahead of liquidation).

Other lending related issuesFinally, the following additional aspects should also be kept in consideration when lending in Russia.

Corporate capacity and authorityAs a general rule, the general director, or any person acting under properly delegated au-thority (by way of a power of attorney), has the capacity to bind the company. However, when the company incurs financial obligations, Rus-sian law also requires the documents to be signed by the company’s chief accountant.

If the transaction value equals or exceeds 25% of the balance sheet asset value of the company (and no lower threshold is provided for in the charter), the transaction will con-stitute a “major transaction”. If the value is between 25% and 50% of this balance sheet value, unanimous approval of the board of di-rectors would be required, and if over 50%, approval of a 75% majority of shareholders would be required for a joint-stock company. Similar rules would generally apply to a limited liability company unless they are varied in its charter.

If the transaction constitutes an “interest-ed party transaction” (e.g. it may involve af-filiates, or cross-management) particular care needs to be exercised in order to obtain appro-priate approvals from majorities of, as the case may be, disinterested directors or sharehold-ers/participants.


Regulatory considerations on enforcementWhen taking security over company shares (ei-ther directly in Russia or through an offshore holding company, under a foreign law), two key aspects must be considered: . With regards to enforcement of the securi-

ty, ownership of the Russian entity may be restricted as “strategic” under Federal Law No. 57-FZ “On the Procedure for Foreign Investments in Commercial Organisations of Strategic Importance for the National Security of the Russian Federation” dated 29 April 2008. For more details please see the Common forms of business structures for foreign investors chapter on page 21.

. Ownership may also need approval from the Federal Anti-monopoly Service under Federal Law No. 135-FZ “On Protection of Competition” dated 26 July 2006. For more details please see the Antimonopoly issues chapter on page 45.

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General approachMost currency controls in Russia were removed in January 2007, following amendments to Federal Law No. 173-FZ “On Currency Regu-lation and Currency Control” dated 10 De-cember 2003 (the “Currency Law”), which regulates currency transactions. Consequently, most currency transactions can be conducted without limitation.

However, the Currency Law, and related regulations, contain a number of restrictions which should be considered (i) when dealing with transactions between residents and non-residents (in particular when importing and exporting goods and capital); and (ii) when importing and exporting foreign currency in cash.

Foreign currency transactionsForeign currency transactions between residentsThe following persons are considered to be “residents”: . citizens of the Russian Federation, except

those who are (or are considered to be) liv-ing abroad on a permanent basis;

. foreign nationals and stateless individuals who live permanently in Russia on the ba-sis of a residence permit;

. legal entities duly registered under Russian law;

. diplomatic representatives, consular of-fices and other official representatives of the Russian Federation; and

Currency control


. the Government of the Russian Federa-tion, regions and municipal units of the Russian Federation.Generally, foreign currency operations be-

tween residents are prohibited, although there are some exceptions. For example residents may borrow from, and then repay, Russian banks in foreign currency. Contracts in Rus-sia may be concluded in foreign currencies. However, the actual payment must be made in roubles. This can lead to exchange rate dif-ferentials, which may arise between the date the transaction is entered into and the pay-ment date.

Furthermore, residents must repatriate all roubles and foreign currency received from international trade and commercial activities into their Russian licensed bank accounts. There is an exception for payments due to a non-resident lender. These payments may be directly transferred into the lender’s foreign bank account.

Foreign currency transactions between non-residentsThe following persons are considered to be “non-residents”: . individuals who are not defined as resi-

dents; . legal entities and all other organisations

that are registered under the legislation of a foreign country, and that are located outside the Russian Federation;

. representative offices and branches of le-gal entities or other organisations located in the Russian Federation and registered under the legislation of a foreign country; and

. diplomatic representatives, consular of-fices and other official representatives of foreign countries, as well as international and intergovernmental organisations that are located in the Russian Federation.

Payments in foreign currency are permit-ted without restriction between non-residents. The purchase and sale of securities between non-residents are also permitted, although they can be subject to Russian securities and anti-monopoly regulations.

Foreign currency transactions between residents and non-residentsGenerally, foreign currency transactions be-tween residents and non-residents are also permitted without any restrictions. However “transaction passports”, which record for-eign currency flows through Russian author-ised banks, are required to be established for all transactions involving the import or export of goods, loans, the provision of services and intellectual property between residents and non-residents. Under the transaction passport (and as part of its regular reporting), the bank reports the receipt and repayment of the cur-rency to the Central Bank of Russia.

On December 2010 the Central Bank pub-lished draft regulations aimed at easing trans-action passport requirements. It proposed in particular to drop the requirement of having such a passport for transactions up to USD 50,000.

Import and export of foreign currencyResidents and non-residents can import and export foreign currency in cash subject to the following rules: . Import rules

Up to USD 10,000 No restrictionOver USD 10,000 Subject to written

customs declaration

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Currency control

. Export rules

Up to USD 3,000 No restrictionUp to USD 10,000 Subject to written

customs declarationOver USD 10,000 Authorised up to equi-

valent import amount on the customs declaration form

SanctionsBreach of the currency control rules can result in administrative and criminal sanctions.

The Code on Administrative Offences pre-scribes administrative fines for illegal currency transactions that can range from three-quar-ters to the whole amount of the offending transaction. This Code also prescribes fines of between RUB 1,000 to RUB 1,500 (EUR 251 to EUR 37) for individuals, and of between RUB 50,000 to RUB 100,000 (EUR 1,250 to EUR 2,500) for legal entities, where they breach the procedures for opening accounts in banks located outside Russia. In connection with the breach of rules for opening “transac-tion passports” (applicable for legal entities), fines may range from between RUB 40,000 to RUB 50,000 (EUR 1,000 to EUR 1,250).

More serious criminal sanctions may apply under the Russian Criminal Code. In particular, it stipulates that persons not repatriating for-eign currency to accounts in Russia where it is required by law may face imprisonment for a term up to three years. This type of punish-ment is only applicable to company officials.

1 At the notional exchange rate of RUB 40 = EUR 1, used throughout this guide.


General approachThe discussion in this chapter focuses on the Russian insolvency regime applicable to com-panies. The most important laws governing in-solvency proceedings in this respect are (i) Part I of the Russian Civil Code; (ii) Federal Law No. 127-FZ “On Insolvency (Bankruptcy)” dated 26 October 2002, which is the principal piece of legislation on insolvency in Russia (the “Insol-vency Law”); and (iii) Regulation No. 257 of the Russian Government dated 29 May 2004.

Insolvency conceptUnder the Insolvency Law the following “tests” are used to determine whether a debtor is in-solvent, i.e. when:

(1) a court (i.e. arbitration court) has recog-nised the debtor’s inability to meet creditors’ claims and the amount due and outstanding exceeds RUB 100,000 (EUR 2,5001);

(2) a court has recognised the debtor’s in-ability to fulfil mandatory payment obligations within three months from the date they were due and the amount due and outstanding exceeds RUB 100,000; or

(3) a court has recognised the debtor’s inabil-ity to (i) meet creditors’ claims and (ii) fulfil mandatory payment obligations within three months from the date they were due and the aggregate amount due and outstanding exceeds RUB 100,000.

1 At the notional exchange rate of EUR 1 = RUB 40, as used throughout this guide.

Corporate bankruptcy

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Also, when a debtor’s aggregate liabilities are greater than the aggregate value of its as-sets, its general director must file for the com-pany’s insolvency.

Bankruptcy proceduresDepending on the insolvent company’s circum-stances, five types of bankruptcy proceedings may apply: . supervision; . financial rehabilitation; . external administration; . insolvent liquidation; and . a voluntary arrangement.

At the same time Russian laws limit the bankruptcy procedures available to financial organisations2 by excluding financial rehabili-tation and external administration.

Preliminary step: initiating bankruptcy proceedingsAs a general rule, bankruptcy proceedings may be commenced against all types of legal en-tity, except for certain forms of government-owned enterprises, political parties and reli-gious organisations.

The following are permitted to file an ap-plication with a court to have a debtor de-clared insolvent: . the debtor itself; . a bankruptcy creditor; or . a federal executive body authorised by the

Russian Government. The Insolvency Law requires a debtor to

initiate bankruptcy proceedings if one of the tests for insolvency (as outlined above) is met.

2 Credit institutions, insurance organisations, professional partici-pants of securities market, non-state pension funds, manage-ment companies of investment funds and mutual funds.

SupervisionSupervision is a provisional procedure which operates via a temporary manager. Supervi-sion aims to (i) preserve the debtor’s property; (ii) analyse its financial status; (iii) complete a creditors’ register; and (iv) hold the first credi-tors’ meeting.

Supervision commences when the court rules that a bankruptcy petition is well found-ed, introduces supervision and approves the appointment of a temporary manager (and the amount and source of his remuneration). The court may also impose provisional measures alongside the bankruptcy petition. The court’s rulings must be executed immediately. Howev-er, even though the rulings may be appealed, the appeal process will not halt the execution of the court’s ruling.

RestrictionsAs of the date of the court’s ruling, the debt-or’s business is restricted as follows: . Creditors’ claims are to be submitted only

through the creditors’ register. . The debtor is prohibited from setting-off

(by counter claim) allocations of profits and dividends. The debtor may not alien-ate or purchase shares, place securities (ex-cluding shares), reorganise their company structure or found subsidiaries.

. Any property transactions which exceed 5% of the debtor’s balance sheet value and credit-related transactions are only permissible with the prior written consent of the temporary manager.The debtor is entitled to increase its reg-

istered capital through a private placement of additional ordinary shares. However it is not permissible to perform an increase in a compa-ny’s registered capital in order to cover losses. The debtor’s shareholders or third parties are entitled to repay the full amount of the credi-tors’ claims according to the creditors’ register.


Temporary managerThe temporary manager is nominated from members of a self-regulating organisation of insolvency practitioners. The party filing the insolvency petition may suggest the self-reg-ulating organisation and may also nominate an individual from that organisation. Where the party filing the insolvency petition does not suggest an individual, the temporary man-ager is nominated by the self-regulating or-ganisation of insolvency practitioners. In both circumstances the appointment is subject to court approval.

The duties of the temporary manager in-volve (among other things) (i) preserving the debtor’s assets; (ii) analysing its financial state; (iii) revealing the identity of all creditors; (iv) call-ing the first creditors’ meeting; and (v) notifying creditors of the introduction of supervision.

The temporary manager is entitled to, among other actions, seek injunctions to pre-serve the debtor’s assets, obtain information from the debtor, obtain documents relating to the debtor’s activities, claim before a court that transactions made by the debtor are invalid, request a court to remove a director, and chal-lenge creditors’ claims.

Termination of supervisionSupervision is terminated on the date a court makes a ruling to that effect, and another stage of insolvency proceedings is entered into: (i) financial rehabilitation; (ii) external manage-ment; (iii) insolvent liquidation; or (iv) volun-tary arrangement (as applicable). The court will issue a ruling upon the decision of the first creditors’ meeting within seven months from the date of the bankruptcy petition. If the creditors are unable to make a decision within the seven month deadline, the court will make a ruling and introduce the next phase of insol-vency proceedings at its own discretion.

Financial rehabilitationThis procedure aims to restore the debtor’s solvency and to schedule the repayment of debts. Financial rehabilitation may last up to two years and commences immediately upon a court’s ruling.

Financial rehabilitation proposalA debtor or a third party can propose financial rehabilitation at the first creditors’ meeting. The proposal differs depending on the party applying, but it will include at least: a financial rehabilitation plan, a debt repayment sched-ule, information on the security offered for performance of the debtor’s obligations un-der the debt repayment schedule, and, in the case of a debtor’s proposal, minutes from the general meeting of shareholders/participants authorising the decision.

Administrative manager When the court institutes financial rehabilita-tion on the basis of the decision of the credi-tors’ meeting, an administrative manager will also be approved by the court. The role of the administrative manager predominantly involves monitoring. His key duties include: (i) maintaining a register of creditors’ claims; (ii) examining reports on the progress of the financial rehabilitation plan; (iii) monitoring the debtor’s discharge of current claims; and (iv) enforcing the performance of guarantees.

The powers of the administrative manager are generally similar to those of the temporary manager.

RestrictionsThe following restrictions (and consequences) will take effect from the date of the court’s rul-ing on financial rehabilitation: . Monetary and property claims are only to

be submitted under the bankruptcy proce-dures.

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. Previously introduced interim measures will be cancelled.

. Penalties will not accumulate further (and they will relate to the last point of the in-debtedness repayment schedule).

. Setting-off by counter claim(s), the aliena-tion or purchase of shares or property, and the allocation of profits and dividends, are all prohibited.The debtor must obtain the consent of a

creditors’ meeting in order to perform the fol-lowing: (i) interested party transactions; (ii) prop-erty transactions exceeding 5% of the debtor’s balance sheet value; (iii) issuing credit and guar-antees; and (iv) any decisions about its reorgani-sation and the foundation of subsidiaries.

An administrative manager’s consent is necessary for transactions which increase the debtor’s level of indebtedness by more than 5%, any sale and purchase of the debtor’s property, succession and borrowings.

External administrationThis insolvency procedure intends to restore the debtor’s solvency and may last up to 18 months (with a possible six month extension). The combined duration of financial rehabilita-tion and external administration may not ex-ceed two years. This stage of proceedings com-mences upon a court ruling, which is based upon the decision of a creditors’ meeting.

External managerThe court approves the appointment of an external manager when it makes a ruling on introducing external administration.

Among other actions, the external man-ager is entitled to: . manage the debtor’s property; . make a settlement on behalf of the debtor; . challenge the validity of debtor’s transac-

tions and any resulting associated dam-ages before a court;

. refuse to perform a debtor’s transaction, when this transaction was not performed earlier in full or in part, if it creates loss in comparison with other transactions;

. challenge creditors’ claims; and . comply with the external administration

plan and report on compliance before a creditors’ meeting.The external manager’s authority is termi-

nated as of the date of the court’s appoint-ment of an insolvency manager (when the debtor is declared bankrupt), or the appoint-ment of a new head of the debtor (when a settlement is made).

RestrictionsWhen external administration is introduced, the authority of the debtor’s general director is terminated and transferred to the external manager. However, the debtor’s management is afforded limited powers relating to transac-tions concerning capital and additional share issues and entry into specified major transac-tions (subject to creditors’ meeting consent).

A wide-ranging moratorium is imposed upon creditors’ claims (excluding current pay-ments).

Similar to the situation under financial rehabilitation, interim measures which were introduced earlier will be cancelled. Monetary and property claims (including mandatory pay-ments) may only be submitted in accordance with the bankruptcy procedure.

TerminationExternal administration will be terminated pre-maturely if the debtor discharges all creditors’ claims.

Following the external manager’s report, the creditors’ meeting will adopt one of the following decisions by making a petition be-fore the court:


. to terminate the external administration on the ground that the debtor’s has been restored to solvency and to proceed with paying creditors’ claims;

. to terminate the external administration on the basis that all registered claims have been satisfied;

. to declare the debtor insolvent; . to make a settlement; or . to extend the external administration.

The court will evaluate the external man-ager’s report. If the court considers it to be justified, it will approve it and make a ruling on the introduction of the next stage of pro-ceedings.

Insolvent liquidationThis procedure is designed to make a settle-ment of creditors’ claims through the sale of a debtor’s assets. This procedure can be institut-ed for up to six months (with a possible further six month extension).

Consequences of winding-upThe immediate effects of the liquidation in-clude the following: . Monetary obligations and mandatory pay-

ments incurred by the debtor are deemed to be due.

. Interest will no longer accumulate, and financial (or other) sanctions arising from a failure to fulfil monetary liabilities and mandatory payments (other than current payments) will be terminated.

. Information on the debtor’s financial state is no longer deemed to be confidential.

. Previous property attachments shall be removed and no further attachments are allowed.

. The powers of the debtor’s general di-rector and board of directors the will be terminated and vested in the insolvency manager.

Insolvency managerThe court appoints an insolvency manager when a ruling for insolvent liquidation is is-sued. The insolvency manager acts until the winding-up process or court procedures are completed.

The principal role of the insolvency man-ager is to search, return, evaluate, pool and arrange for a sale of the debtor’s assets, and to make settlements with creditors. The in-solvency manager also dismisses the debtor’s employees. The insolvency manager assumes the powers of the debtor’s general director, board of directors and meeting of sharehold-ers/participants. The insolvency manager must publish notice of the debtor’s insolvency within ten days of his appointment.

Insolvent liquidation: order of prioritiesThe Insolvency Law provides a specific priority order in which claims will be met. The priority order is certain “current claims” followed by first, second and third priority claims.

Current claims must be met before first priority claims. Current claims include: (i) claims made before the bankruptcy petition was accepted; (ii) any expenses related to the bankruptcy procedures (including the remu-neration of employees and contractors); and (iii) operational expenses. First priority claims include personal injury claims. Second prior-ity claims include: (i) severance benefits; (ii) the wages of the debtor’s employees; and (iii) copyright royalties. Third priority claims in-clude all other claims (both secured and un-secured).

Possible transition to external administrationWhere financial rehabilitation and/or external administration proceedings have not previ-ously been instituted, the creditors’ meeting may petition the court for a transition to the

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external administration procedure. To do so, grounds must exist to believe that the debtor’s solvency can be restored, and these must be backed by financial data. The transition will only be permitted if the debtor has sufficient property to pursue independent economic ac-tivity.

Liquidation (close-out) nettingFederal Law No. 8-FZ dated 7 February 2011 implements liquidation (close-out) netting pro-visions to the Insolvency Law that becomes ef-fective in August 2011.

Prior to this Russian law did not recognise set-off (or netting) after the commencement of bankruptcy supervision. According to the provisions of the new law, obligations under fi-nancial agreements that are concluded on the basis of master agreements, stock exchange trading rules or clearing rules are terminated in accordance with the terms of these agree-ments or stock exchange trading rules or clear-ing rules. This leads to the determination of a close-out amount which is calculated in ac-cordance with the terms of the relevant mas-ter agreement, stock exchange trading rules or clearing rules and whose calculation can be made using close-out netting.

If a master agreement is entered into, the Insolvency Law stipulates additional require-ments. These criteria apply to domestic and cross-border transactions and agreements.

The above rules are applicable to financial agreements concluded prior to temporary ad-ministration or prior to implementation of one of the bankruptcy procedures or, in respect of credit institutions, prior to the date of revoca-tion of its banking licence.

Voluntary arrangementThis insolvency proceeding may be applied at any stage of an insolvency, in order to ter-minate proceedings and to give effect to an

agreement between the debtor and creditors. The debtor, creditors, third parties and author-ised bodies are all entitled to enter into a vol-untary arrangement.

At the creditors’ meeting, the decision to enter into a voluntary arrangement with the creditors or an authorised body must be ap-proved. The voluntary arrangement may only be instituted with the approval of the court.

A voluntary arrangement can only be ter-minated by a court, and only in respect of all creditors and/or authorised bodies. An appli-cation for termination may be put forward by creditors and/or authorised bodies which hold at least a quarter of the value of creditors’ claims on the date the voluntary arrangement was entered into.

The parties are entitled to file for the ter-mination of the voluntary arrangement when the debtor defaults, or significantly violates, the terms of the voluntary arrangement.


Employment

General approachThe Labour Code of 30 December 2001 (the “Labour Code”) outlines the main provisions applicable to employment arrangements in Russia. The main law regulating immigration issues in the country is Federal Law No. 115-FZ “On the Legal Status of Foreign Citizens on the Territory of the Russian Federation” dated 25 July 2002.

Over the past year there has been a grow-ing general trend for the legislator to provide more thorough protection for employees (e.g. the proposed veto on outsourcing and out-staffing at the end of 2010) and for the courts to interpret ambiguities in favour of the em-ployee. In the field of migration legislation, the legal framework has been adapted to in-

clude international immigration standards, with the aim of easing the migration process in Russia.

Below is a general description of the provi-sions as they apply to all employees, as well as how they apply to foreign employees specifi-cally.

Formalising the employment relationshipIndependent contractor vs. employeeAn employer can hire a person to perform spe-cific work under a civil-law services contract or an employment contract. The employer’s choice directly affects the legal status of both parties.

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Provisions in an employment contract are regulated by the Labour Code, whilst those in a civil-law services contract are subject to the Russian Civil Code.

When an employer hires an employee un-der an employment contract, the law imposes numerous duties on the employer, including the duty to provide the employee with social guarantees.

If engaged under a civil-law services con-tract, an individual performs work for a cus-tomer (i.e. his “employer”) at his own risk. This is one of the most significant differences between the two types of contracts.

Even if the parties have agreed to act un-der a civil-law services contract, in the event of a dispute the court may find that the civil-law services contract constitutes actual employ-ment because of the nature of the parties’ relationships. In this situation, the court may determine that employment law is applicable to the civil-law services contract.

Employment contractThe Labour Code stipulates that employment contracts must be concluded in writing and contain certain terms and conditions, cove-ring in particular the place of work, position, duties, a commencement date, the duration of employment (if applicable), remuneration and a work schedule. Employment contracts may contain additional terms and conditions, such as probationary periods and confidential-ity clauses.

The parties’ rights and obligations under the employment contract must comply with the minimum legal requirements. An individual employment contract must not result in an em-ployee’s terms and conditions of employment being worse than the terms and conditions of employment stipulated under the overriding requirements of employment law; otherwise,

the legislation will supersede the provisions of the respective employee’s contract.

DurationEmployment contracts may be concluded for an indefinite term or for a fixed term; however, the duration of a fixed-term contract may not exceed five years.

The law provides for a limited number of situations when fixed-term contracts may be used. These include in particular the following: . an employee replacing a temporarily ab-

sent employee; . temporary, project-related, or seasonal

employees; . directors, deputy directors, or chief ac-

countants; . employees of companies created for a spe-

cific term and purpose; and . an employee hired as part of a training

programme (“stazhirovka”).If a fixed-term contract is in breach of the

Labour Code, a court may declare the contract to be concluded for an indefinite term.

SalaryAn employee’s gross monthly remunera-tion must be a minimum of RUB 4,330 (EUR 108.251), as established by law and sub-ject to a regional coefficient determined by agreement between the regional authorities and employers. For example, since 1 February 2011, the minimum monthly salary in Moscow has been RUB 10,400 (EUR 260). A salary is to be paid at least in two instalments per month in roubles.

If salary payments are delayed by more than 15 days, an employee has the right to suspend work upon written notification to his employer.

1 At the notional exchange rate of RUB 40 = EUR 1, which is used throughout this guide.


Criminal sanctions may be imposed on the employing company’s officials if salaries are not paid in full for over two months. Sanc-tions may include a fine of up to RUB 500,000 (EUR 12,500); a ban from holding a man-agement position for up to three years; and/or imprisonment for a period of up to three years. Partial non-payment of salaries for over three months carries similar but lighter crimi-nal sanctions.

Probationary periodAn employment contract may provide for a probationary period, which must not exceed three months. For directors, deputy directors, chief accountants, deputy chief accountants, directors of representative offices, branches or other divisions, a longer probationary period may be established. This longer period may not exceed six months.

If an employee does not meet his employ-er’s requirements, the employer may terminate the contract with three-day prior written noti-fication, providing a substantiated reason for terminating the contract. The employee may also terminate the contract with three-day prior notice, without reason.

A probationary period is not permitted for pregnant women, minors, graduates and cer-tain other categories of employees.

Working hours and vacationA normal working week is 40 hours. Overtime is permitted upon the employer’s written re-quest. It may not exceed four hours for two consecutive days, and it is limited to 120 hours in total per year.

Irregular working hours may be estab-lished for certain categories of employees, as set in the employer internal regulations and relevant employment contracts. Irregu-lar working hours entail the employee being periodically engaged in additional work with-

out his written consent and upon the written request of the employer. The additional work is not remunerated; however, the employee is entitled to at least three additional days’ holi-day during the year.

The minimum annual paid vacation for all employees is 28 calendar days.

Confidentiality obligation imposed on the employeeRussian law does not impose a confidential-ity obligation on employees. If an employer wishes its employees to be subject to this type of obligation, it must (i) incorporate a confi-dentiality undertaking in the employment agreement of each employee concerned and (ii) adopt a set of internal regulations specify-ing the procedures for processing and obtain-ing access to confidential information. In the absence of these internal regulations, it will be almost impossible to prove an employee liable in the event of disclosure.

LiabilityLiability of the employeeAn employee who breaches his obligations un-der his employment contract may be subject to disciplinary sanctions or material liability.

The Labour Code strictly regulates discipli-nary sanctions, and consequently sanctions may not be varied by an employment contract.

An employee’s material liability is gener-ally restricted to compensation for direct dam-age caused to the employer’s property by his fault or negligence. This liability is limited to the employee’s monthly salary. However, an em-ployer may conclude an agreement on full ma-terial liability with certain categories of employ-ees. Full material liability extends to all damage incurred by the employer because of the fault of the employee. The Labour Code provides the following grounds for imposing full mate-rial liability, namely when an employee:

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. fails to protect valuable items entrusted to him as confirmed by signed documents;

. intentionally damages property; . causes damage when in a state of alco-

holic, drug or other intoxication; . causes damage as a result of criminal ac-

tions for which he has been sentenced by a criminal court;

. causes damage via an administrative of-fence as determined by the relevant state body;

. divulges confidential information; and/or . causes damage outside of his work duties.

If the employer wishes to be compensated for damage, it must follow a specific proce-dure. It must request from the employee a written explanation of the cause of the dam-age. Following this, the employer must enu-merate the amount and causes of the dam-age inflicted within one month of the alleged damage having occurred. If the employer does not exercise its right within this time period, damage may be recovered only upon volun-tary consent of the employee or by legal pro-ceedings.

Liability of the employerThe range and scope of an employer’s liability is relatively wide, as legislation is designed to provide an employee, as the weaker party in the employment relationship, with compre-hensive protection.

The employer is liable for violating contrac-tual obligations which are statutory require-ments, i.e. liability for breaching contractual obligations is established by law, not by the parties. Liability is two-sided: if the employer commits a single violation, it must (i) compen-sate the employee for all damage and loss and (ii) bear administrative or criminal liability.(i) The employer must compensate all dam-age incurred by the employee in full. In certain

cases, losses and moral damage are also com-pensated to the employee.(ii) Depending on the seriousness of the breach, the employer will be administratively or criminally liable. The Code on Administrative Offences provides for a penalty of RUB 30,000 to 50,000 (EUR 750 to 1,250) or administra-tive suspension of the company’s activities for up to 90 days. However, in practice, the latter sanction is rarely imposed. Punishment under Russian criminal law is usually imposed when the violation is either gross or entailed, or could have entailed, serious injury or death.

Labour bookRussian employment law requires employers to keep, sign and stamp a labour book (“trudovaya knizhka”) for any employee who works for more than five days with the same em-ployer. The labour book includes, among other things, records of the employee’s employment positions and grounds for termination of the employment contracts with previous employers.

Specifics of hiring foreign nationalsIf the employee is a foreign national, the em-ployment contract and other required docu-ments may only be signed once the steps described in the “Specifics of employing foreign nationals” section below have been com-pleted.

In essence, labour laws apply to foreign nationals to the full extent as provided by the Labour Code. Therefore, the employer is obliged to enter into an employment contract with any foreign national and follow all rules and procedures resulting from their employ-ment relationship.


Managing employment relationshipsInternal regulationsAny organisation whose employees work in Russia must adopt a set of internal regulations. These regulations complement the conditions set out in each employee’s employment con-tract, and the requirements they contain are obligatory for each employee.

Internal regulations deal with the rights and obligations of the employer and employ-ees, working and rest time, salary, bonuses and benefits, behaviour, employees’ liability, etc.

HR paperwork and inspections of the Labour InspectorateAn employer is obliged to maintain a signifi-cant amount of records and supporting docu-mentation relating to employees’ holidays, sick leave, promotions, overtime, business trips, etc.

These records may be checked by the La-bour Inspectorate at any time. If, in the course of an inspection, the Labour Inspectorate finds that the requirements of employment law have been violated, it may impose fines on the employer.

Sick leaveWhen an employee is on sick leave, his em-ployer is required to pay his salary for the first three days of absence, provided the employee has submitted a medical certificate in the re-quired form.

From the fourth day of absence, the em-ployee is entitled to a temporary disability al-lowance. This allowance is calculated on the basis of the average monthly salary over a period of two years and is capped at a cer-tain amount. The employer is required to pay

this allowance and then sets off the relevant amount against payroll contributions.

The same rules apply to foreign nationals when they meet certain requirements con-cerning their migration status.

Maternity leaveAn employee who gives birth is entitled to 70 days’ leave prior to and 70 days’ leave after the child’s birth. This right arises upon presen-tation of a medical certificate, which may be issued starting from the 30th week of preg-nancy. This provides for a period of disability equal to 140 days that is used by the employee summarily, i.e. irrespective of the actual num-ber of days used before the child’s birth.

Maternity leave may last up to three years and can be used by the mother or the child’s relatives at any time during this period.

The employer is responsible for paying the various maternity related allowances pro-vided for by law and then sets off the relevant amount against payroll contributions.

In general, pregnant women and women with children under the age of three years are entitled to an extensive number of ben-efits and privileges under employment law. In particular, they may not be dismissed on the grounds of a staff reduction. Moreover, preg-nant women may not be required to work a night shift, overtime, during days of rest or holidays and may not be sent on business trips. Women with children under the age of three years may be engaged in the above types of work only upon their written consent and provided that no medical certificate prohibits a particular employee from performing these types of work.

Disciplinary sanctionsNon-compliance with work discipline (i.e. non-fulfilment or inadequate fulfilment by an employee of his duties) may result in the fol-

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lowing disciplinary sanctions being applied: a warning, official reprimand or dismissal on corresponding grounds established by law.

Disciplinary sanctions may be imposed no later than one month after the time the em-ployer had, or should have had, knowledge of the breach and, in any event, no later than six months after the breach was committed.

The Labour Code regulates the procedure for imposing disciplinary sanctions. Failure to comply with it renders the sanction invalid.

Terminating an employment contractAn employment contract may be terminated: . at any time by mutual agreement of the

parties; . by an employee unilaterally providing two

weeks’ written notice, or upon the initia-tive of the employer (as discussed below);

. because of circumstances beyond the rea-sonable control of the parties;

. when the term of the employment con-tract expires;

. if an employee refuses to continue work-ing because of a change in the ownership of the company (employer) or its reorgani-sation (this only applies in relation to cer-tain high executive positions); or

. if an employee refuses to continue work-ing because he is relocated together with the employer.The employer may terminate the employ-

ment contract based on a limited number of grounds specifically listed in the Labour Code as follows: . When there is staff redundancy or the

employer is liquidated. The employer must notify each employee in writing at least two months in advance. If there is a staff redundancy, the employer must offer

employees all available vacancies which correspond to their qualifications.

. When an employee is unsuitable for an employment position. Unsuitability must be confirmed by an internal committee review. However, using these grounds for termination should be approached with caution, because employees have a good chance of successfully challenging this type of dismissal in court.

. When an employee systematically fails to fulfil his employment duties with-out reason or commits a single gross violation of his duties.

. When an employee is found to have pre-sented false documents during the hir-ing process. The Labour Code requires severance pay

to be remitted in certain circumstances.

Specifics of employing foreign nationalsRussian migration law on the stay, registration and employment of foreign nationals in Rus-sia has been amended over the last few years. These amendments are part of a broad reform officially intended to simplify (e.g. the intro-duction of a simplified work regime for highly qualified specialists in July 2010) and regular-ise the status of foreign nationals working in Russia.

However, as a result, Russian migration law today is complex and, at times, ambigu-ous. The reforms have also rendered the sanc-tions applicable to the breach of the regula-tions more stringent.

Visas for foreign employeesForeign nationals must apply for a visa. Citi-zens from the following countries of the Com-monwealth of Independent States are exempt


from Russian visa requirements: Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Tajikistan, Uzbekistan and Ukraine.

Types of visasThere are five categories of visas: ordinary, official, transit, diplomatic and temporary residence. There are seven subcategories of an ordinary visa: business, tourist, work, student, private, asylum and humanitarian. The most important types of visa for companies are con-sidered below.

Business visasBusiness visas are intended for foreign nation-als who wish to conduct short-term and tem-porary business activities in Russia. Examples of these activities include business trips, ne-gotiations, market studies and preparations to establish a company in Russia. Foreign nation-als with multi-entry business visas can stay in Russia for only up to 90 days within a period of 180 days.

Foreign nationals who obtain Russian busi-ness visas are not allowed to undertake any type of work activities in Russia. This requires a work visa.

Work visasWork visas apply to foreign nationals who in-tend to conduct professional activities in Russia.

A foreign national must first obtain a single-entry visa that is valid for up to three months. The visa may be exchanged for a one-year multi-entry work visa once the individual is in Russia, which is not applicable to highly qualified specialists (please see separate sec-tion below). The family members of a work-visa holder may obtain visas of the same cat-egory marked “accompanying person”. This visa does not entitle a family member to work in Russia, and it expires on the same date as the principal holder’s visa.

Work visas are issued only after the em-ployer has received general authorisation to recruit foreign nationals and a quota of foreign persons who may be recruited. Each foreign employee must also be granted a work permit (please see below).

The employer must be registered with the Federal Migration Service (the “FMS”) to be permitted to issue invitations to foreign em-ployees. The registration is valid for one year and can be renewed.

The process of obtaining a work visa usu-ally takes from eight to twelve weeks.

Procedures relevant to an employerAn employer who recruits foreign employees in Russia has to comply with the following pro-cedures:

QuotasAll legal entities wishing to employ foreign nationals must apply by 1 May each year for a quota of foreign employees who they may employ (except for those employers who hire high qualified specialists).

The quota allocated to each legal entity de-pends on the general quota set each year for all foreign employees. This quota differs between regions, different categories of employees, as well as different professions, countries of origin and other economic and social criteria.

General authorisation for the recruitment of foreign nationalsAny employer intending to recruit one or sev-eral foreign nationals must obtain prior gen-eral authorisation to recruit foreign employees from the FMS. For this purpose, the employer must justify the use of foreign employees.

Individual work permitsOnce general authorisation for the employ-ment of foreign employees has been obtained,

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the employer must apply for a work permit for each employee.

A work permit is required for any foreign national who wishes to perform any “work activity” in Russia, including unpaid and tem-porary work.

Notifications There is a notification procedure which must be followed by foreign nationals and their employers. It also applies to highly qualified specialists.

It comprises the following principles: . The FMS must be notified of arrivals and

any travel within Russia. . A highly qualified specialist and the mem-

bers of his family are allowed a period of 90 days from the date of entry into Russia during which they are not required to reg-ister with the migration authorities. Once the foreign specialist has been in Russia for 90 days, he is required to be registered at his place of residence.

. For all other foreign nationals, the time-frame in which the registration procedure with the FMS must be completed was in-creased from three to seven working days on 25 March 2011.

. Foreign nationals staying in Russia or trav-elling to another Russian region for less than seven working days, who are not staying in a hotel or in “a hotel like resi-dence”, are exempt from the notification procedure.

. Heads of State, heads of diplomatic mis-sions, members of parliamentary or gov-ernmental delegations, heads of interna-tional organisations (and family members of these persons) are exempt from the no-tification procedure. Ship, train or aircraft crew members are exempt from the proce-dure under certain conditions.

Business trips within RussiaA foreign employee is only permitted to go on business trips outside the Russian region(s) in which his work permit is valid if his posi-tion is included in a list contained in officially published orders of the Ministry of Health and Social Development.

In addition, the duration of foreign em-ployees’ business trips is regulated as follows: . a total of ten days over the period of valid-

ity of a general regime work permit; and . 30 consecutive days over the period of

validity of a highly qualified specialist work permit.Different rules apply to foreign nationals

who hold temporary or permanent residence permits.

Highly qualified specialistsOn 1 July 2010, a new category of foreign employee was introduced, entitled “highly qualified specialist”. This applies to a foreign employee with professional skills, knowledge and the proper qualifications in a specific area.

Annual remuneration paid to a highly qualified specialist must be at least RUB 2 mil-lion gross (EUR 4,167) per month.

The spirit of the new law provides that the employment of highly qualified specialists is supported by the Russian Government, insofar as the amount of taxes paid to the budget on the basis of their remuneration is very ben-eficial.

As a consequence, a simplified procedure has been introduced to obtain a work permit and a work visa when recruiting a highly quali-fied specialist. Accordingly, a work permit may be obtained within 14 working days and the employer is exempted from fulfilling a signifi-cant number of formalities (getting a quota, general authorisation to recruit foreign em-ployees).


Apart from this, the law sets out other ad-vantages and exemptions with respect to em-ploying highly qualified specialists, e.g. a work permit is valid for up to three years, whereas an ordinary work permit is only valid for one year, a work permit is valid for multiple Russian regions, less restrictive business trip rules (as mentioned above), etc.

Sanctions for violating migration requirementsAn employer risks a fine of up to RUB 800,000 (EUR 20,000) or the suspension of its activities for up to 90 days for failing to comply fully or in part with the relevant procedures. The em-ployer’s officials may be liable to fines of up to RUB 50,000 (EUR 1,250). A foreign employee can also be fined up to RUB 5,000 (EUR 125), and may be deported.

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Real estate and construction

The adoption of the Land Code in October 2001 ended the legacy of state ownership of land and established the right of private land ownership in Russia.

Key legislation regulating the property and construction market in Russia includes: . Land Code dated 25 October 2001 (the

“Land Code”); . Civil Code of the Russian Federation: Part I

dated 30 November 1994; Part II dated 26 January 1996; Part III dated 26 November 2001; Part IV dated 18 December 2006 (the “Civil Code”);

. Town Planning Code dated 29 December 2004 (the “Town Planning Code”);

. Federal Law No. 102-FZ “On Mortgage (Pledge of Immovable Property)” dated 16 July 1998 (the “Law on Mortgage”);

. Federal Law No. 101-FZ “On the Trad-ability of Agricultural Land” dated 24 July 2002 (the “Law on the Tradability of Agricultural Land”); and

. Federal Law No. 122-FZ “On the State Registration of Rights to Immovable Prop-erty and Transactions” dated 21 July 1997 (the “Law on State Registration”).

Contractual aspectsRights to landThe Land Code provides for two basic types of rights to land plots: . ownership rights to a land plot (freehold);

and . the right to lease a land plot (leasehold).


Russian land legislation which pre-dated the Land Code also provided for other types of land rights, such as, among others, the right of permanent perpetual use to land, or the right of inheritable use. The right of permanent perpetual use to land could only be granted to state, municipal or other public enterprises or to municipal authorities. Legal entities with rights of permanent perpetual use will be pe-nalised if they fail to convert to lease or free-hold rights before 1 January 2012.

Public and private ownership of landReal estate (including land plots) in the Russian Federation may be owned publicly or privately. Any legal entity or individual may own private real estate in the Russian Federation, subject to certain restrictions for foreign investors (see below). Public real estate may be owned by the state (both federal and regional levels) or by municipalities, and can be sold by an agen-cy of the federal government or a regional or a municipal agency.

Substantial areas of land in Russia (par-ticularly in Moscow) have always been state-owned. State ownership means that land may be owned either by the Russian Federation or its regions. Until 2001 (when the Land Code was adopted), the delineation of state-owned and municipal land plots was regulated by several acts, both at the federal and regional levels. The process of delineation was com-plicated and, at times, confusing. It has been clarified by the Land Code and further clarifi-cation is ongoing. Pending completion of this, and to ensure that it is still marketable, public land may be disposed of by municipal authori-ties who are authorised to act as landlords in lease agreements, allocate land plots for con-struction and act as the seller during the priva-tisation of public land.

Sale of land

Acquisition of interests in land by foreign investorsGenerally, foreign nationals and legal entities now enjoy the same rights to land as Russian individuals and legal entities. Consequently, they may lease or purchase land for use or for construction.

However, the following restrictions apply: . Foreign investors may not own land in

border territories, or other specially des-ignated territories (under the Land Code).

. Foreign investors may only acquire lease-hold (not freehold) interests in agricultural land (under the Law on the Tradability of Agricultural Land). The same rule applies to Russian legal entities, if foreign partici-pation in the charter capital exceeds 50%. The maximum duration of these leases is 49 years.

Acquisition of land plotsThe sale and purchase of land plots for con-struction is permitted, provided that the pub-licly or privately owned land plot has first been allocated a cadastral registration number and has been registered as freehold. Both proce-dures require the submission of certain docu-ments to a single state body, i.e. the Federal Service for State Registration, Cadastre and Cartography or its regional/local departments (the “Registrar”). Failure to comply with this requirement can lead to any land transaction connected with that land plot being declared null and void.

The transfer of ownership rights to land plots must be registered in the Unified State Register of Rights to Immovable Property and Transactions (the “Register”), whereas the sale and purchase contract itself does not have to be registered. Registration involves filing the sale and purchase contract and other related

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documents with the Registrar, as evidence of the transfer of ownership rights.

A basic principle of the Land Code is the unity of rights to land plots and buildings. The Land Code prohibits the assignment of land without the buildings and structures standing on it. Rights to a building may only be assigned together with the rights to the land under-neath it. In exceptional cases, parts of build-ings may be assigned separately from the land on which they are situated if it is impossible to separate the respective part of the land plot, or if there is a restriction on the sale and purchase of the land.

Owners of buildings located on a land plot other than their own generally enjoy a pre-emptive right to purchase the land plot, or a preferential right to lease it. If a land plot is un-der state or municipal ownership, the owners of buildings situated on it generally have exclusive rights to privatise the land plot, provided that they follow a set procedure, and do so within the period stipulated by law. By 1 January 2012, the owners of certain categories of buildings lo-cated on state or municipal land plots may pri-vatise their land plots at privileged prices.

LeasesThe following may all lease property in Russia (subject to certain restrictions): (i) Russian and foreign nationals; (ii) Russian and foreign legal entities; and (iii) state and municipal authori-ties.

TermRussian legislation places no general limit on the term of a lease. However, certain limits exist on leases for specific types of property. For example, the maximum permitted term for a lease of agricultural land or forest land is 49 years. The maximum permitted term for a lease of coastal land is 20 years. A tenant has a preferential right to conclude a lease of

the same land plot for a new term (and, on the sale of land, a pre-emptive right to purchase the same land plot). Any lease agreement con-cluded for a term longer than one year is sub-ject to obligatory state registration.

The Civil Code provides that, where a lease agreement does not stipulate the term, the lease is deemed to have been concluded for an indefinite period. The lease may be ter-minated by either party serving notification at least three months in advance.

AssignmentsAs a general rule, the Land Code allows leasehold rights to a land plot to be sublet, assigned, mortgaged or contributed to the charter capital of a company. Unless otherwise provided for in the lease agreement, these transactions may be entered into without the consent of (but subject to the notification of) the landlord. An exception to this, given in the Land Code, is where a lease agreement is for a state or municipal land plot for a term of less than five years. In this case, a tenant must ob-tain the landlord’s consent.

TerminationThe Civil Code gives both a landlord and a ten-ant the right to terminate an agreement uni-laterally, either in the limited number of situ-ations stipulated by the Civil Code (via court procedure) or in the lease agreement itself. In the latter case, both in-court and out-of-court procedures may be provided for.

The Land Code stipulates additional cir-cumstances according to which a landlord may terminate a lease. These include, among others, using land in a way that is inconsistent with its category and permitted use, and ap-propriation by the state.

In relation to state or municipal land, the Land Code also gives a landlord a specific ground for terminating a lease which has been


concluded for a term of more than five years, early. If a tenant commits a material breach of the terms and conditions of such a lease agree-ment, the landlord may apply for a court order enabling it to terminate the lease unilaterally.

Rights to buildings

Ownership certificates and other informationAccording to current legislation, rights to a building are subject to state registration. Rights to a building do not come into effect until they are registered with the state (i.e. a building starts to exist legally only from the moment of its state registration). Moreover, state registration is the only confirmation of the rights. Only a court decision can overrule state registration and a respective certificate of ownership, meaning a certificate of ownership is prima facie evidence: i.e. it is believed to be true and overrules any other evidence, until a court decision proves otherwise.

Any member of the public may receive gen-eral information about a building in the form of an extract from the Register for a small fee. However, certain information relating to a chain of transactions on the transfer of rights, as well as information about the number of properties owned by a certain person, may be requested only by the owner of the relevant objects.

Sale of buildings, structures and premisesThe sale and purchase of buildings, structures and premises is subject to the same rules as those on land plots (Please see the Sale of land section on page 79).

Commercial leases of buildings and premisesTo ensure regulated relations with tenants, landlords in Russia usually enter into the fol-lowing agreements:

. preliminary (or use) agreement (the “Pre-liminary Agreement”);

. short-term lease agreement (the “STL”); and

. long-term lease agreement (the “LTL”).All of the above documents are subject to

Russian law and governed mainly by the Civil Code.

Preliminary leaseA Preliminary Agreement is executed to regu-late relations between the landlord and the tenant before a building is fully built and title is registered in the Register.

Prior to the state registration of a build-ing’s title, no transaction regarding the build-ing itself, or premises located in it, may be for-mally entered into (i.e. the building/premises cannot be leased). Therefore, the subject mat-ter of the landlord’s relations with the tenant under the Preliminary Agreement comprises various obligations (such as preparation of the building/premises for their further use in ac-cordance with the landlord’s requirements, en-tering into a binding lease in the future, etc.).

The concept of a preliminary “agreement to agree” exists in Russian law (as it does in many other continental countries). However, it has not been widely tested in the Russian courts. In order for it to be valid, a Preliminary Agreement must clearly determine its subject matter, properly describe the real estate object, and establish all the material terms and condi-tions of the main lease agreement to be en-tered into (the “Main Agreement”). Parties to a Preliminary Agreement should determine a timeframe within which the parties must en-ter into a Main Agreement. If the parties fail to enter into the Main Agreement within this time the Preliminary Agreement will terminate. However, if the failure was caused by one of the parties, the courts may force the default-ing party to enter into the Main Agreement.

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Long-term lease (LTL)An LTL is a lease agreement which lasts for at least a year. An LTL is only valid upon state registration in the Register. It usually duplicates the terms and conditions of an STL (except for the duration and a few other provisions).

Short-term lease (STL)In order to legally occupy the building while the LTL is being registered, an STL is usually entered into. Both agreements are simultane-ously signed after state registration of the title to the building in the Register. An STL is a lease agreement executed for a period of less than one year, As the term of an STL is less than one year, it does not require state registration. It therefore requires only the signatures of the parties to be binding.

PrivatisationSince 30 October 2001, it has no longer been possible to privatise buildings, structures or in-dustrial objects without simultaneously priva-tising the underlying land.

As mentioned above, a building owner has exclusive rights to obtain freehold or leasehold rights to a publicly-owned land plot on which the owner’s building stands. The building own-er is free to choose whether to acquire lease-hold or freehold rights to the land plot.

During privatisation, the building owner must pay a buy-out price for the land to mu-nicipal authorities. The buy-out price depends on the cadastral valuation of the land plot, and is between five and thirty times the amount of annual land tax payments, largely depending on the location of the land plot.

At the end of 2009, the time period for the buy-out of municipal and state land plots at a preferential price was extended. The owners of buildings located on these land plots may buy out the plots by 1 January 2012. If utility

lines are located on the land plots, they may be bought out by 1 January 2015.

In early 2010, the enactment of legal norms banning allocation of the state and municipal land plots for construction purposes was postponed until 1 January 2012.

Registration of property rights and pre-existing ownership rightsThe Registrar is currently responsible for the state registration of property rights. Registered property rights are entered in the Register. Information from the Register is publicly avai-lable.

Rights of ownership to land and buildings; transactions involving property rights including mortgages and the assignment of these rights; and long-term leasehold and sub-leasehold rights (both for a period of at least one year) are subject to state registration, in accordance with the Civil Code and the Law on State Reg-istration. Rights requiring state registration are only enforceable against third parties once registered. However, rights to property which arose before the Law on State Registration came into force (January 1998) are valid even if they are not registered.

MortgagesA security interest over land or other real es-tate objects is generally created through a mortgage agreement between parties. Both freehold and leasehold rights to land and buildings may be mortgaged; there are no re-strictions against this in either the Land Code or the Civil Code. Rights to buildings and parts of buildings, including residential buildings and apartments, may also be mortgaged.

The terms and conditions of a mortgage are governed by the Law on Mortgage. It re-quires mortgages over the completed build-ings and the underlying land be granted simul-taneously.


If a significant breach of a secured obli-gation occurs, the mortgagor may enforce the mortgage. There are two methods of en-forcement: (i) through the courts, resulting in the secured property being sold at a public auction; or (ii) under an out-of-court enforce-ment agreement between the mortgagee and the mortgagor.

Mortgage agreements only come into ef-fect upon registration in the Register. If a mort-gage agreement is not registered in this way, it is null and void.

Residential as well as commercial prop-erty is generally mortgaged by virtue of law in favour of a creditor, where the property is acquired or constructed using funds borrowed from the creditor.

Real estate acquisition and anti-monopoly controlAs a general rule, the acquisition of land or other immovable assets is not subject to anti-monopoly control.

However, anti-monopoly control will ap-ply if the net value of the property that is the subject matter of a real estate transaction (or a series of related transactions) exceeds 20% of the net value of the assets of the seller. De-pending on whether certain asset value or rev-enue thresholds are exceeded, either the prior consent of, or a post-transaction notification to, the Federal Anti-monopoly Service will be required (please see the Antimonopoly issues chapter on page 49).

Furthermore, under Federal Law No. 381-FZ “On State Regulation of Trade Activities in the Russian Federation” dated 28 Decem-ber 2009, food retailers with a market share in a given locality exceeding 25% are prohib-ited from acquiring or leasing additional out-lets there.

Planning and construction issuesLand plots are assigned to a land category and a permitted use in order to optimise utilisation of different plots of land.

Land categories In accordance with the current Land Code, land in Russia is divided into seven land cate-gories (each with a designated prescribed use): . agricultural land; . land of settlement; . industrial land (for the purposes of indus-

try, energy production, transport, com-munication, television, radio translation, cosmic activities, defence and other special purposes);

. land containing specially protected areas and objects (e.g. nature parks);

. forest land; . land near water; and . reserved land.

Specific provisions may apply, depend-ing on the land category. For example, when agricultural land is being privatised, Russian regions enjoy pre-emptive rights of purchase, as do municipal authorities, in the situations provided for by the relevant regional legisla-tion. As mentioned above, foreign investors (including companies and individuals) may not own agricultural land, but may only obtain lease rights. Agricultural land that is not used in accordance with its designated prescribed use may be taken from its owner by a court decision.

Essentially, the most suitable categories for development and commercial construction are industrial land and land of settlement. It is pos-sible to build warehouses, commercial build-ings and production facilities on land plots within these categories.

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Permitted use of land Along with a designated prescribed use and zoning, land plots in the Russian Federation are assigned a “type of permitted use”. The type of permitted use characterises a land plot in accordance with territorial zoning and es-tablishes the specific use of a certain land plot. Each land category has different conditions for the use of land, and the Land Code requires that each plot is used only in accordance with the applicable category and established type of permitted use.

Change of land category and permitted useIt is possible to change the category of a particular land plot. For example, the regional authorities may change a plot’s land category from “agricultural” to “industrial” (e.g. for the allocation of a warehouse complex) sub-ject to a number of obligatory procedures. A land plot may be assigned the category of land of settlement only when annexed to the terri-tory of this settlement (included in the borders of settlement). Again, this is done at regional level if no town planning documentation has been adopted. As soon as the general plan of a settlement is adopted, the relevant change procedure requires the general plan of the set-tlement to be amended. This is done at mu-nicipal level.

Changing the category of forest land or land near water is more complicated (as it involves federal authorities) and strictly regu-lated. Legislation provides an exhaustive list of circumstances in which there may be a change of category in these cases.

The owner of a land plot may change the type of permitted use at its own discre-tion according to the adopted town planning documentation (general plan of the settlement and the rules of land use and development). Where town planning documentation is not

adopted, a strict procedure must be followed in order to change the type of permitted use, including public hearings.

Town planning frameworkThe current federal Town Planning Code adopted in 2004 (and revised a number of times since then) stipulates that each urban settlement must adopt city planning docu-ments, including: (i) regional and municipal territory planning documents that establish the boundaries of various development zones in large territories; (ii) city general plans that set out the boundaries of various functional development zones within individual urban settlements; and (iii) rules for land use and de-velopment that establish territorial zoning and describe in detail what may be done in each territorial zone of each urban settlement. The town planning documents establish territorial and functional zoning of the settlement ter-ritories and indicate existing town planning limitations, such as “red lines” and protection zones. Construction planned for any new de-velopment must comply with the prescribed town planning limitations and zoning. For ex-ample, the construction of a large shopping mall in a recreational zone would not be per-mitted.

Each settlement must adopt a general plan and rules on land use and development before 31 December 2012, in adherence with the re-cent changes in the Town Planning Code. Af-ter that date, no new development will be al-lowed in these settlements. However, the time limit has already been prolonged several times; therefore, there are grounds to suggest that it may be prolonged again.


Acquisition of public land for constructionThe Land Code stipulates a specific procedure for making public land available to individuals and legal entities for construction purposes.

Both Russian and foreign nationals or legal entities interested in obtaining land for con-struction may apply to the relevant authority for the allocation of a land plot. Any refusal to allocate land may be appealed against in court (subject to certain restrictions).

Land for construction may be obtained from the state or from the municipal authori-ties under either of the following two proce-dures: . First, a relevant state authority carries out

preparatory work (i.e. it determines the boundaries of the land plot and registers the land plot if necessary). Subsequently, it sells the land plot or the right to lease the land through an auction. This is likely to be the more common scenario.

. Alternatively, an interested party applies to the appropriate state authority for a land plot, together with authorisation for a construction site. The state authority de-cides whether or not to issue preliminary authorisation for a construction site (its de-cision is valid for three years). If preliminary authorisation is given, the applicant must carry out all preparatory work on the land. Once the preparatory work is completed, state authorities issue permanent authori-sation for a construction site.

Construction permitsConstruction is allowed only on the basis of a construction permit. A construction permit is a formal document confirming that the design documentation meets compulsory normative requirements. In line with the principle of unity of rights to buildings and land plots, the Town Planning Code provides that a construction

permit may only be obtained by someone with rights (freehold or leasehold) to the land plot. If someone constructs a building on a land plot over which it has no rights, the building may be declared to be an “unauthorised construc-tion” by the courts, and demolished.

A construction permit indicates the time period of construction works, the area of the constructed building and the name of the de-veloper. A valid construction permit is one of the documents required to commission the constructed building.

In practice, several construction permits may be issued regarding one development project: (i) construction permit for the prepara-tory works (for organisation of the construc-tion site); and (ii) main construction permit for the building construction. If the building is built in phases then, provided that construc-tion phases are stated in the design documen-tation, a construction permit will be issued for each construction phase, indicating the phase number.

Licences As of 1 January 2010, membership in self-reg-ulated organisations has fully replaced licens-ing for the following construction and design activities: . designing buildings and structures; . constructing buildings and structures; and . engineering and surveying for the purpose

of erecting buildings and structures.

Latest trendsReform of the Civil CodeAt the end of 2010, the Supreme Arbitra-tion Court of Russia published extensive draft amendments to the Civil Code on its website. Some of these amendments relate to con-struction development rights, mortgages and possession. In addition, new proprietary rights

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regarding real estate objects are due to be introduced and the list of limited proprietary rights will be clarified.

The right of developmentThe most important innovation of the pro-posed reform concerns the right of develop-ment (“pravo zastroyki”). Under current Rus-sian law, an individual or a privately-owned company that builds on a land plot must have rights to the plot (i.e. either own or lease it).

If enacted, the right of development will enable an individual or a privately-owned com-pany (developer) with a right of permanent possession and use of a land plot to build or construct on this land plot, although it belongs to somebody else. These rights will be provided under: (i) an agreement establishing the right of permanent possession and use; and (ii) an agreement establishing the right of develop-ment. The owner of the land plot will be en-titled to receive payments under these agree-ments. Several rights of permanent possession and use, and accordingly the right of develop-ment, may be created in relation to a single land plot. A developer will be required to pay the land plot’s owner separately for the right of permanent possession and use, and for the right of development provided to it under the respective agreements. The term of these agreements must be not less than 50 years. The payment amount may be changed only once every ten years. The developers are enti-tled to mortgage the right of development and the right of permanent possession and use.

Mortgages Currently, the Civil Code contains only general principles concerning mortgages. However, according to the draft amendments, a new chapter will be added to the Civil Code, enti-tled “Mortgages”. The draft chapter provides for the priority of a mortgage, depending on

the order of state registration of relevant mort-gages.

The draft chapter also introduces a new type of mortgage: “independent mortgage”, under which a mortgagee is entitled to choose which obligation of the mortgagor will be se-cured against the independent mortgage. The mortgagee must notify the mortgagor of this. An independent mortgage comes into effect once it is registered in the Register. Its duration may not exceed 30 years.

Technical regulation on the safety of buildingsTechnical regulations in relation to goods and services have been reformed to bring Russia’s laws in line with the requirements of the World Trade Organisation. In particular, Federal Law No. 384-FZ “On Technical Regulations on the Safety of Buildings and Structures” came into force in the middle of 2010, establishing spe-cific safety requirements in relation to a variety of risks faced when operating buildings and structures (for example, fire).

In addition, two sets of legal technical reg-ulations in Russia have been introduced, one based on Russian standards and the other on foreign standards, depending on the respec-tive applicant’s choice. To apply the foreign standards, the applicant must ensure that they have been registered in the federal unified data system in the field of technical regulation.


General approachOver recent years Russia has demonstrated it is willing to reinforce its efforts to combat the infringement of intellectual property rights.

Negotiations regarding Russia’s accession to the Word Trade Organisation have encour-aged Russia to adopt legislation matching international standards for the protection of intellectual property rights, including provid-ing for criminal prosecution for breaches of intellectual property rights.

International standardsRussia is party to a number of the most impor-tant international treaties and conventions on intellectual property issues, including:

. the Convention establishing the World In-tellectual Property Organisation;

. the Universal Copyright Convention; . the Berne Convention for the Protection of

Literary and Artistic Works; . the Paris Convention for the Protection of

Industrial Property; . the Madrid Agreement on the Internation-

al Registration of Marks and the Madrid Protocol thereto;

. the Singapore Treaty on the Law of Trade-marks;

. the Nice Agreement on the International Classification of Goods and Services for the Purposes of the Registration of Trade-marks;

. the Patent Co-operation Treaty;

Intellectual property

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. the Locarno Agreement Establishing an International Classification for Industrial Designs; and

. the Geneva Convention for the Protection of Producers of Phonograms against Unau-thorised Duplication of their Phonograms.

General legal framework

Civil CodeThe need to ensure consistency in the regula-tion of different intellectual property issues has led to the adoption of Part IV of the Russian Civil Code. This codifies the existing regula-tions concerning intellectual property rights and has also introduced some new provisions and principles.

Part IV of the Civil Code came into force on 1 January 2008 and replaces previous leg-islation regulating intellectual property rights, including the copyright law, the trademark law, the patent law and the software law.

Part IV of the Civil Code includes an ex-haustive list of the rights to the results of intel-lectual activity and protected means of individ-ualisation. It also stipulates some general re-quirements concerning their use and disposal.

Also, as President Medvedev has recently initiated a revision of the Civil Code, we an-ticipate 2011 to be a year of further develop-ments and continued progress in intellectual property regulation.

OtherIn addition to Part IV of the Civil Code, certain intellectual property issues are regulated by or-ders of the Federal Service of Intellectual Prop-erty, Patents and Trademarks (“Rospatent”).

Rospatent is subordinated to the Ministry of Education and Science and is responsible for the registration of intellectual property rights to trademarks, patents and, in some instances, to software.

Rights over the results of intellectual activity and means of individualisationGeneral provisions of the Civil CodePart IV of the Civil Code gives an exhaustive list of the rights over the results of intellectual ac-tivity and protected means of individualisation. It also stipulates some general requirements concerning their use and disposal. These are explained below.

General use and disposal requirements

Licence agreementA licence agreement grants the right to make use of means of individualisation or a work which is under copyright, patent or other in-tellectual property protection within the limits set out in the agreement.

Under the Civil Code the licence must set out the following information: . its duration; . the territories for which the licence is

granted; and . the ways the licensed object may be ex-

ploited. The licence may be granted on an exclu-

sive or non-exclusive basis.The agreement must fix the amount of re-

muneration (royalty payments), or the pricing methods, in order to prevent any disputes or litigation as to the price of the licence, which is always presumed to be “onerous”, unless pro-vided otherwise. Remuneration may take the form of a lump-sum fixed in advance and deliv-ered as a single payment, or as periodical roy-alties, or as a percentage of income. Govern-ment decrees have fixed the minimum amount of remuneration for certain types of work.

The Civil Code permits the use of shrink-wrap licences for software and databases which may be granted to each user (i.e. where


the conditions of the licence are provided for on the wrapping of the CD (or other vehicle of delivery) and the first use of the software or database by the consumer means they agree to adhere to the conditions of the licence).

Contracts for the assignment of exclusive rightsUnlike a licence agreement, this type of con-tract provides for a total assignment of the exclusive property rights to that intellectual property. According to the Civil Code, such a contract involves transfer of the full and exclu-sive rights to that work or means of individu-alisation for the whole period for which the rights were protected.

State registration of contractsIf the work or means of individualisation are subject to state registration, then the licence, any assignment contracts and any pledge con-tracts (as expressly provided for by the Civil Code) usually also require registration. Failing that, they risk being declared null and void.

Rights over the results of intellectual activity

Copyright and Neighbouring Rights

CopyrightCopyright covers scientific, literary and artistic work that is the product of creative work re-gardless of the value, type or mode of expres-sion of the work. Copyright protects both dis-closed and undisclosed works. Copyright pro-tection arises when a work is created. There are no registration requirements.

Chapter 70 of the Civil Code gives an author certain rights over his creations. The law sets out exclusive property rights over the work, as well as moral rights for the author of the work.

These exclusive rights include (among oth-er things): . the right of reproduction; . the right of distribution; . the right of demonstration to the public; . the right to import or export originals; and . the right to provide access to the work by

any means of telecommunication (inclu-ding the Internet).Moral rights include (among other things):

. the right of authorship; . the right to the name; . the right to preserve the integrity of the

work; and . the right of publication.

The exclusive rights to the works are pro-tected for the lifetime of the author plus 70 years.

Infringement of copyright carries civil, criminal and/or administrative liability.

Neighbouring rightsNeighbouring rights cover the creation and use of performances, phonograms, broadcast-ing programmes, cable distribution organisa-tions, and databases.

The holder of neighbouring rights is the performer of phonograms, the creator of da-tabases and the broadcaster media (which has been created by the broadcaster).

Under the Civil Code performers enjoy ex-clusive property rights and moral rights, whilst radio and television broadcasters enjoy only exclusive property rights.

The holding and the exercise of neigh-bouring rights is not subject to any mandatory registration formalities.

The rights enjoyed by holders of neigh-bouring rights may be granted by virtue of a licence agreement, or a contract for the exclu-sive assignment of rights.

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PatentsPatent protection covers: . inventions, which are a technical solu-

tion in any field related to a product or a process;

. utility models, which are the result of an intellectual activity in the scientific and technical domain; and

. industrial designs, which are the result of intellectual activity in the domain of ar-tistic design.Chapter 72 of the Civil Code regulates the

protection of inventions, utility models and in-dustrial designs.

Patent protection is subject to conditions, which depend on the type of object being pro-tected.

An invention can only be protected if it is: . new; . inventive; and . industrially applicable.

A utility model can only be protected if it is: . new; and . capable of industrial application.

An industrial design can be protected only if it is: . new; and . original.

Unlike copyright, which attaches to the author’s work from the day of its creation, a patent is only protected after state registra-tion. The right to obtain a patent belongs to the inventor, his/her employer (in case of an employee’s invention) or their assignees. The application for patent protection is delivered to Rospatent for consideration. It will grant the patent if the relevant criteria are met.

The maximum duration for patent protec-tion is as follows: . 20 years from the date of filing of the ap-

plication for an invention; . 10 years from the date of filing of the ap-

plication for a utility model; and

. 15 years from the date of filing of the ap-plication for an industrial design.The patent licence and any assignment

agreements need to be registered with Rospat-ent. It is also possible to obtain a compulsory licence, following the decision of a court. Rospatent also regulates open patent licences; an open licence may be chosen by the owner of the patent.

Trade secrets and know-howInformation which has actual (or potential) commercial value can be defined as a trade secret or know-how as long as the necessary criteria are met. In particular, the information must be unknown to third parties because there is no free access to it. Further, the owner of the trade secret must take active measures to protect the secret and ensure that there is no free access to it.

The law on trade secrets (as amended to comply with Part IV of the Civil Code) defines the information that constitutes a trade secret and lists the measures that the holder of the right must take in order to ensure protection of his know-how. The law also provides for civil, administrative and criminal liability for a breach of trade secret rights.

Employees’ workThe Civil Code regulates employees’ work. This includes literary work and patented ob-jects that are created by employees as part of their employment duties.

As a general rule, exclusive rights to the results of an employee’s intellectual activities belong to the employer.

However, if the employer fails to use, li-cence or assign its employees’ work within a prescribed period, or the employer fails to no-tify the employee that it has decided to keep the work secret, the exclusive rights to the work (or invention) will be transferred to its


author, i.e. the employee. This does not apply to know-how.

If the employer had started to use the work, assigned the rights to it, or decided to keep it secret, the employee is entitled to a level of re-muneration as agreed between the parties. If the parties fail to agree on the sum, then a com-petent court may set the level of remuneration.

Means of individualisationChapter 76 of the Civil Code provides for the protection of means of individualisation which are used to distinguish and identify both in-dividual entrepreneurs and legal entities, and the goods and services they offer.

Company namesThe company name is indicated in the corpo-rate documents of the company, which are filed with the Unified State Register of Legal Entities. It is protected in Russia from the mo-ment of the company’s state registration. Be-sides the name of the company, the state regis-ter also contains information on its legal form.

The exclusive right of a company over its company name may not be transferred or li-censed to third parties. This exclusive right allows the holder to freely use the name, in particular, (i) on signs; (ii) on letterheads; (iii) on official documents; (iv) in advertising; (v) on products; and (vi) on packaging.

Additionally the name of a company can be protected as a trademark or a commercial name (a trade name). This protection operates independently of a company’s exclusive right over its company name.

Trade names/commercial namesLegal entities and individual entrepreneurs may use trade names separately from their company name. Unlike the company name this trade name is not necessarily mentioned in the company’s charter and other constituent

documents, or in the Unified State Register of Legal Entities. The trade name may be used as a distinctive emblem to distinguish a legal en-tity or an individual entrepreneur. A legal entity or an individual entrepreneur can have only one trade name. A legal entity or an individual entrepreneur may not use a trade name which creates confusion with a third party’s company name or trademark or misleads the consumer. The right to use a trade name to individualise a Russian company is valid throughout Russia.

This exclusive right ceases to exist if the holder does not use the trade name for one year. The right to use a trade name is protect-ed independently, regardless of the company name or trademarks. It may be transferred by a commercial concession agreement, or by a contract for the lease of an enterprise.

Trademarks/service marksA trademark is a distinctive sign that is used to distinguish the goods or services of an individual entrepreneur or a legal entity. A trademark can be a verbal description, a figurative or three-di-mensional sign, or a combination of all of these elements. The Civil Code provides a list of words and signs that may not be used as trademarks.

To be protected in Russia, the trademark needs to be registered with Rospatent in the State Register of Trademarks. Alternatively it may be protected in Russia under the Madrid System of the International Registration of Marks.

The maximum duration of trademark pro-tection is ten years, from the date of filing of the application with Rospatent. There is an op-tion to prolong this protection period, subject to the necessary application and payment be-ing made.

As a general rule, the exclusive rights to a trademark are transferable to a third party, unless such an assignment could be mislead-ing for consumers. The exclusive right to use a trademark may also be the subject of a licence

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agreement. This may permit a third party to use that trademark within the framework of the licence, and in accordance with the quality requirements set out by the licensor.

Trademark protection may be terminated early if the trademark is not used during any three consecutive years after the date of regis-tration. Any interested person may file an ap-plication for early termination with the Cham-ber of Patent Disputes under Rospatent.

Since 2008, the Civil Code expressly re-quires that an applicant in the annulment of a non-used trademark prove it has a legal in-terest in this annulment. This requirement is aimed at preventing abuse of the right to chal-lenge the validity of trademarks.

Appellation of origin of goodsThe appellation of origin of goods is the name of the place where the goods come from. It may designate a country name, a city or any geographical area referring to the place of origin of the product. An appellation of ori-gin registered with Rospatent is protected throughout Russia. Any producer acting within the geographical area designated by the appel-lation of origin may enjoy the right to use that name provided it has first obtained a certificate from Rospatent and, if the appellation of origin has not yet been registered, to register it.

Violations of intellectual property rightsCounterfeiting is a difficult phenomenon to quantify in general, and in relation to the ex-

tent of the situation in Russia in particular. It affects all areas of the Russian economy, in-cluding: luxury perfumes, cosmetics, clothing, foodstuffs, vehicle spare parts, CDs, DVDs, pharmaceuticals, etc. Counterfeit products are mainly distributed through open-air markets.

Recognising the magnitude of the prob-lem and its potential impact on consumers’ health and well-being (especially with regard to pharmaceuticals), Russia has demonstrated a willingness to fight counterfeiting and to en-sure the compliance of its laws with interna-tional standards.

Russian legislation provides for civil, ad-ministrative and criminal liability for the in-fringement of intellectual property rights. The sanctions depend on the amount involved and if the individuals or legal entities involved are repeat offenders.

For example, the Code on Administra-tive Offences provides for a fine ranging from RUB 1,500 to RUB 2,000 (EUR 37.51 to EUR 50) for an individual and RUB 30,000 to RUB 40,000 (EUR 750 to EUR 1,000) for a legal entity that imports, sells, or rents items in violation of copy-right, rights over inventions and patent rights.

The Criminal Code provides for a fine of up to RUB 200,000 (EUR 5,000) or the offender’s income for 18 months, or imprisonment for up to two years, when the unlawful use, disclo-sure or appropriation of an invention or patent has caused significant prejudice to the author. Similar sanctions apply to infringement of cop-yright and to the sale of counterfeit works.


This publication has been prepared for the informative purpose only, and does not constitute legal or professional advice. The information relates to circumstances prevailing at the date of its original publication and may not reflect subsequent developments. For specific advice please contact us:

CMS, Russia119019 Moscow, Russia, 11 Gogolevsky Boulevard. Tel. +7 495 786 4000. Fax +7 495 786 4001

CMS has the most extensive presence in Europe. Our people are immersed in the local culture and understand the legal landscape. It means our clients benefit from high quality expertise wherever they need it in Europe, delivered in the local context.

Dear reader,

We at CMS have been welcoming investors to Russia for nearly twenty years and we appreciate the importance of high-quality, accurate information to the suc-cess of business here.

To help you, we have put together this introductory guide to the Russian legal system and the principal laws and regulations that are of interest to investors in this exciting, developing market. It is of course no substitute for the expert advice tailored to your project that our specialists will be pleased to provide to you on request.

Russia is changing every day and, although this guide describes the laws as at 1 April 2011, please contact us to check that it remains up-to-date. We would also recommend that you subscribe to our free CMS news service through which you will receive our newsletters, articles and invitations to our seminars and events. You can do this by contacting any lawyer at CMS, or the CMS Marketing Department.

We wish you every success.

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Jean-François MarquaireManaging Partner

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Warsaw

Kyiv

Moscow


Shanghai

Beijing

Munich

Dresden

Berlin

Hamburg

DuesseldorfCologne

Frankfurt

Stuttgart

Rio de Janeiro

Bristol

Amsterdam

Brussels

UtrechtLondon

Edinburgh

Aberdeen

Luxembourg

Antwerp

Paris

Leipzig

Lyon

Strasbourg

Madrid

SevilleMarbella

Casablanca

Algiers

Rome

Milan

Zurich

Ljubljana


Zagreb

SarajevoBelgrade

Sofia

Bucharest

Prague

Warsaw

Kyiv

Moscow


Shanghai

Beijing

Munich

Dresden

Berlin

Hamburg

DuesseldorfCologne

Frankfurt

Stuttgart

Rio de Janeiro

Tirana

Most extensive presence, deep local expertise

CMS offi ces

Rio de Janeiro Buenos Aires Montevideo

Beijing

Shanghai

Contact us:CMS, Russia11, Gogolevsky blvd.119019, Moscow, RussiaTel.: +7 495 786 4000Fax: +7 495 786 4001

CMS in Russia is a representative office of CMS International B.V., a limited liability company registered in the Netherlands. For more information, please visit www.cmslegal.ru.

CMS aims to be recognised as the best European provider of legal and tax services. CMS operates in 29 jurisdictions, with 54 offices in Western and Central Europe and beyond. CMS today comprises nine CMS firms, employing over 2,800 lawyers. CMS is headquartered in Frankfurt, Germany.

CMS member firms are:CMS Adonnino Ascoli & Cavasola Scamoni (Italy); CMS Albiñana & Suárez de Lezo, S.L.P. (Spain);CMS Bureau Francis Lefebvre (France); CMS Cameron McKenna LLP (UK); CMS DeBacker (Belgium);CMS Derks Star Busmann (Netherlands); CMS von Erlach Henrici Ltd. (Switzerland);CMS Hasche Sigle (Germany) and CMS Reich-Rohrwig Hainz Rechtsanwälte GmbH (Austria).

CMS offices and associated offices: Amsterdam, Berlin, Brussels, London, Madrid, Paris,Rome, Vienna, Zurich, Aberdeen, Algiers, Antwerp, Arnhem, Beijing, Belgrade, Bratislava,Bristol, Bucharest, Budapest, Buenos Aires, Casablanca, Cologne, Dresden, Duesseldorf, Edinburgh,Frankfurt / Main, Hamburg, Kyiv, Leipzig, Ljubljana, Luxembourg, Lyon, Marbella, Milan, Montevideo, Moscow, Munich, Prague, São Paulo, Sarajevo, Seville, Shanghai, Sofia, Strasbourg, Stuttgart, Tirana, Utrecht, Warsaw and Zagreb.

www.cmslegal.ruwww.cmslegal.com

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