Analytics on companies with foreign participants
1. Definition and legal regulation of non-resident status
Current legislation contains several variants of definitions of “non-resident”.
In accordance with Article 1 of the Federal Law dated 10.12.2003 No. 173-FZ “On Currency Regulation and Currency Control” non-residents are recognized as:
- individuals who do not have a permanent place of residence in the Russian Federation, including foreigners temporarily staying in the Russian Federation;
- legal entities established in accordance with the legislation of foreign states, their branches and representative offices in the Russian Federation;
- international organizations, their branches and representative offices in the Russian Federation;
- diplomatic and consular missions of foreign states in the Russian Federation.
The Tax Code of the Russian Federation in Article 207 links the definition of “non-resident” to the presence of an individual in the Russian Federation for less than 183 days within 12 consecutive months. The Tax Code of the Russian Federation also states that non-residents are taxed only on income received from sources in the Russian Federation.
The definition of “non-resident” is also used in the banking and financial legislation of the Russian Federation. For the purposes of interaction with banks, non-residents are defined similarly to the currency legislation. Non-residents have a special regime of work with currency accounts in the Russian Federation. For example, non-residents have an opportunity to open special “C” type accounts.
The legal status of non-residents in the Russian Federation is regulated by several key legislative acts, depending on the sphere of their activity (economic, tax, migration, etc.). The main laws regulating this status are the following:
1. Federal Law “On the Procedure for Foreign Investments in Business Companies of Strategic Importance” No. 57-FZ of 29.04.2008.
The law regulates investments of non-residents in companies operating in strategic industries (defense, natural resources, communications, etc.), establishes restrictions on the acquisition of controlling stakes in strategic companies. The law also requires prior approval of major transactions with the Government of the Russian Federation.
2. Federal Law “On the Legal Status of Foreign Citizens in the Russian Federation” No. 115-FZ of 25.07.2002.
This legal act establishes the procedure for the stay and registration of foreign citizens in the Russian Federation, describes the procedure for obtaining work permits and residence permits. The law also regulates labor, migration and administrative rights of non-residents.
3. Federal Law “On International Treaties of the Russian Federation” No. 101-FZ of 15.07.1995.
The law defines how international treaties regulate the legal status of non-residents. International agreements on avoidance of double taxation affect the tax obligations of non-residents and establish certain requirements regarding tax obligations.
4. Federal Law “On Foreign Investments in the Russian Federation” No. 160-FZ dated 09.07.1999.
This legal act defines the list of transactions, investment in which by non-residents of the Russian Federation must be coordinated with the Russian state authorities.
5. In addition to the above-mentioned special laws, the legal status of non-residents is regulated by the following general legal acts: Federal Law “On Currency Regulation and Currency Control” No. 173-FZ dated 10.12.2003, Federal Law “On State Registration of Legal Entities and Individual Entrepreneurs” No. 129-FZ dated 08.08.2001, Federal Law “On Privatization of State and Municipal Property” No. 178-FZ dated 21.12.2001, Federal Law “On Mass Media” No. 2124-1 dated 27.12.1991.
In general, the Civil Code of the Russian Federation guarantees non-residents the right to participate in civil turnover on an equal footing with residents, but with restrictions established by laws.
Basically, the current legislation distinguishes between residents and non-residents in order to regulate their rights and obligations in economic, tax and currency spheres. But a separate sphere is also occupied by the regulation of corporate rights and obligations of non-residents.
2. The right of a non-resident to be a participant in Russian organizations
Foreign citizens may participate in Russian legal entities on general grounds in accordance with the Civil Code of the Russian Federation, Federal Law No. 14-FZ dated 08.02.1998 “On Limited Liability Companies”, Federal Law No. 208-FZ dated 26.12.1995 “On Joint Stock Companies” and other laws regulating the forms of entrepreneurial activity.
Meanwhile, certain restrictions may be imposed on non-residents. Such restrictions are related, among other things, to non-residents' inability to be participants of organizations in certain industries, as well as depend on the form of entrepreneurial activity.
There are the least restrictions for non-residents in limited liability companies and the most restrictions in production cooperatives.
The ways of participation of a non-resident in a Russian legal entity are different. Thus, a foreign citizen may:
- establish a new organization by becoming its participant;
- join an existing organization by buying a share from another participant or by making a contribution to the authorized capital.
In order for a non-resident to become a participant of a Russian company he should have the following documents:
- foreign passport with a notarized translation into Russian;
- tax identification number (INN) in the Russian Federation;
- a work permit in the Russian Federation or a residence permit (if the non-resident plans to be not just a participant, but a general director of the company). Also, in case of obtaining the status of general director, a non-resident is subject to additional checks by migration and tax authorities.
Meanwhile, a foreign citizen may become a participant of a legal entity in Russia provided that all legal requirements are strictly observed.
3 Requirements for non-residents
If a non-resident plans to establish a new organization in the Russian Federation, the following stages must be performed in sequence:
Stage 1 - preparation of the company's founding documents.
Constituent documents in the Russian Federation are the charter, the decision on the establishment of the company (if there is one participant) or the agreement on the establishment of the company (if there are several participants).
Stage 2 - preparation and submission of an application for registration to the tax authority.
In order to register the company, the founder must prepare an application to the Federal Tax Service in the form P11001. This application shall be filled out in strict compliance with the current legislation of the Russian Federation. Many fields of the form are filled in taking into account that the individual or legal entity is a non-resident.
Stage 3 - contribution of the authorized capital.
Different minimum amounts of authorized capital are set for different types of legal entities. In particular, in respect of LLCs the specified amount is 10,000 rubles.
The Federal Tax Service must provide proof of payment of the authorized capital, which can be confirmed by bank documents or a certificate of payment of the share.
Stage 4 - registration with the tax authority.
After collecting all the documents, the package is submitted to the tax authority. In case of compliance with all requirements, the Federal Tax Service performs state registration or refuses to register.
In case of refusal, it is possible to eliminate the deficiencies related to the initial submission and go through the procedure again.
4. restrictions for non-residents
If a non-resident participates in a Russian company, a number of additional restrictions are imposed. In particular, non-residents of the Russian Federation may not carry out their activities in the following industries:
- spheres related to defense industry, ensuring state security, production and repair of armaments;
- activities related to the extraction and processing of minerals in areas of federal significance (e.g. gold, diamonds, oil, gas and other strategically important resources);
- work with radioactive materials;
- transportation infrastructure (e.g., sea and river ports, ship berths);
- activities related to political investment (non-residents cannot finance political parties, movements and other political associations in Russia);
- certain types of telecommunication services, participation in mass media (the share of non-residents and foreign companies in the authorized capital of Russian mass media cannot exceed 20%).
Foreign investors are limited in their ability to acquire controlling stakes (more than 50%) in companies related to the above-mentioned specific industries of special state importance.
5. Additional requirements for non-residents
Special requirements are imposed on non-residents in the sphere of currency and tax control. Among other things, the following additional requirements are imposed on non-residents as compared to residents:
1. Mutual settlements between a Russian company and a foreign participant are subject to currency control.
In order to ensure currency control, non-residents may open special currency accounts (e.g., a “C” type account) that restrict access to certain transactions.
All receipts to non-resident accounts must be declared, and some transactions require special permits from authorized bodies, including the bank.
2. There are certain requirements regarding the taxation of dividends paid to a foreign participant. The rate of taxation depends on the presence or absence of a double taxation treaty between countries.
Also, companies with foreign participants may face taxation peculiarities related to, among other things, an increased tax rate on dividends.
Non-resident individuals are taxed at a higher rate on income, which is 30% (for income from work or other remuneration in the Russian Federation) and 15% (for dividends from Russian companies).
Non-resident legal entities pay income tax if they receive income from activities in the Russian Federation.
Non-residents are deprived of the opportunity to use tax deductions available to residents.
3. non-residents cannot participate in public procurement and tenders related to state security or strategic projects.
Participation in other types of tenders and public procurement may require mandatory registration of a branch or representative office in the Russian Federation for a non-resident legal entity.
4. With respect to non-residents, ownership of certain types of land plots, including agricultural land, is restricted.
Non-residents are allowed to own the above categories of land under lease relations. Also, non-residents cannot acquire ownership of real estate located in border zones of Russia.
Non-residents are restricted from participating in the privatization of a number of objects, including those related to state security.
5. With respect to non-resident legal entities, an additional requirement is established, according to which foreign banks, insurance companies and financial institutions must coordinate the acquisition of significant stakes in Russian banks and insurance companies with the Central Bank of the Russian Federation.
6. Major transactions related to mergers and acquisitions of companies where non-residents participate must be coordinated with the Federal Antimonopoly Service (FAS). Special attention is paid to transactions where foreign companies may gain significant influence on the Russian market.
It is worth noting that due to the current political and economic situation in the country and the world, state authorities, including tax and migration authorities, are conducting more detailed inspections of legal entities involving foreign nationals.
6. Conclusions
Although non-residents can actively participate in the economic life of Russia, there are significant restrictions aimed at protecting strategic industries, national security and state interests of the Russian Federation. These restrictions vary depending on the type of activity and the legal status of the non-resident.
It should also be noted that in response to international sanctions or for national security reasons additional restrictions may be imposed on non-residents, for this reason the legislation in the sphere of determining the legal status of non-residents is constantly changing. In the context of international sanctions, the Russian Government constantly imposes additional restrictions on transactions with foreign citizens and companies from unfriendly countries.
The legislation requires prior approval of transactions that may have a significant impact on the economy and security of the country. For the above reasons, before starting a business or concluding a transaction with a foreign element, it is recommended to consult with specialized lawyers to take into account all possible risks and restrictions.
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David Glickstein, manager. I write articles, looking for interesting information and suggesting ways to use it in practice. I believe that through quality legal analytics, clients come to the law firm, not the other way around. Wouldn't you agree?
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