Subsidiary company (Limited Liability Company (OOO) as an example)
A limited liability company is one of the most popular organizational and legal forms (along with joint-stock companies, partnerships, etc.) for the establishment of commercial organizations in Russia. The main legal act that regulates the activities of limited liability companies in Russia is Federal Law No. 14-FZ “On Limited Liability Companies” dated 08.02.1998. The closest analogs of the OOO legal form in other jurisdictions are, for example, GmbH in Germany and KFT in Hungary.
Participants (founders) of an OOO:
- An OOO may be established by Russian or foreign legal entities or individuals;
- 100% in the authorized capital of an OOO cannot be owned by only one organization consisting of one person (the company should be owned by at least 2 ultimate owners, even if one of them has only 1% participation), although in practice violation of this principle is not a legal reason for liquidation of the company or other negative consequences;
Authorized capital of an OOO:
- It is divided into shares that are assigned to its participants, the rights to shares are not embodied in any security (the company has no stocks);
- The minimal amount of the authorized capital is 10,000 rubles;
- The authorized capital of an OOO must be paid no later than 4 months from the moment of state registration of the OOO;
- Liability of the participants (founders) of an OOO is limited to the amount of the authorized capital unless it is proved that the actions of such participants resulted in insolvency of the OOO.
Director and employees of an OOO:
- An OOO must have at least one director, which can be an individual or a legal entity;
- Foreign individuals are allowed to be directors, but as a rule they must obtain a work permit in Russia (or similar documents);
- Foreign companies are allowed to act as corporate directors of an OOO, but such activity requires accreditation of a branch of such foreign company;
- The number of employees of an OOO is not limited (foreign employees must obtain work permits and other similar documents).
Authorized activities of an OOO:
- A Limited Liability Company established by a foreign company / foreign individuals has the right to engage in virtually any kind of financial and economic activity in Russia;
- An OOO may import goods in its name from outside Russia, including for the purpose of their further sale in Russia, and participate in customs relations (directly or through a customs “broker”);
- Some types of OOO activities require a preliminary license or special permits (activities in finance, education, medicine, construction, etc.);
- Some business activities may be completely restricted for companies with foreign capital (e. g.: activities in defense, national security, activities as a payment system and similar).
Taxation (basic taxes)
- Profit tax is 20%
- VAT is 20%
- Taxation of employee income is 13% or 30% (residents or non-residents of the Russian Federation);
- Payment of mandatory insurance payments for employees is 32% of salary on average.
IMPORTANT: OOOs can apply special taxation schemes for small enterprises, in particular, the simplified taxation system:
- Tax rate when applying simplified taxation system (at the discretion of the taxpayer)
- 6% (from all income without deduction of expenses) or
- 15% (income reduced by the amount of expenses);
- There is no VAT or income tax when applying the simplified taxation system;
- Restrictions on the use of the simplified taxation system (primary):
- The share of other organizations in the authorized capital of the OOO must not exceed 25%, i. e. an OOO established by a foreign organization is not eligible to use simplified taxation system.
- However, foreign individuals having a share in the authorized capital of an OOO do not affect the eligibility for the simplified taxation system;
- Revenue (gross profit) and assets must not exceed 150 million rubles/year (excess leads to ineligibility for the simplified taxation system);
- Number of employees must not exceed 100 people.
IMPORTANT: Please note that additional taxation is also possible with respect to OOOs in regard of real estate, land, vehicles, use of water resources, trade turnover and import of goods into the Russian Federation.
- Two types of accounting (for the purposes of preparation of accounting (financial) statements and for tax reporting purposes) are kept simultaneously;
- Accounting reports are prepared annually (financial year starts on January 1 and ends on December 31) and may include monthly and quarterly interim reports;
- Income tax calculations and VAT returns are filed on a quarterly basis;
- Reports on mandatory employee insurance are filed on a monthly basis.
Depending on the activity of the OOO, it may also be necessary to execute other tax and accounting reports (for the statistical accounting authorities, reports on average number of employees, reports on property and other taxes).
The audit of the financial statements of OOOs is not mandatory, except for the cases directly established by Federal Law No. 307-FZ “On Auditing Activities” dated 30.12.2008 (applicable if the amount of revenue exceeds 400 million rubles or the amount of assets exceeds 60 million rubles).
Acquisition of income by the owner (leaving the project)
The main form of obtaining income from the activities of an OOO is the payment of dividends to the participants of such OOO. Dividends may be paid annually (annual dividends) or quarterly (interim dividends) in the amount not exceeding the net profit of the OOO.
Dividends paid from Russia in favor of foreign persons are taxable:
- at the rate of 15% for any cases (both for non-resident individuals and foreign companies), apart from exceptions;
- at the rate of 10% (standard relief), if allowed by the Double Taxation Agreement with a specific country;
- at the rate of 5% (special relief), if this is allowed by the Double Taxation Agreement with a specific country (as a rule, this requires additional investment in Russia, EUR 75,000–100,000 on average);
- or at other rates, if this is stipulated in a specific agreement with Russia.
Dividends may also be taxed in the country where they are received (unless a special agreement stipulates otherwise), which in some cases gives a sufficiently large tax burden on the movement of profits.
Cross-border payments from Russia and foreign exchange control
A Limited Liability Company established by a foreign company / foreign individuals is considered a so-called “currency resident” of the Russian Federation and:
- It has the right to open accounts in rubles and foreign currency, in Russia and abroad (however, for accounts outside Russia it is necessary to submit a special report to the Bank of Russia on a quarterly basis);
- It has the right to carry out currency transactions with non-residents (e. g., with the founder of the company) without restrictions, and such transactions will be subject to currency control by Russian banks;
- Contracts for the amount of more than 3 million rubles (import contracts and loan agreements) and worth more than 6 million rubles (export contracts) are checked especially carefully (so-called “contract registration”): all transaction documents, including acts and interim documents, must be submitted to the bank in due time, any violations of the schedule established by the contract must be motivated to the bank;
- It is not entitled to carry out foreign exchange transactions (transactions carried out in currency other than the Russian ruble) with Russian residents (subject to the established exceptions), but is entitled to carry out other economic transactions with residents (e. g., purchase and sale of goods) without restrictions.