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1. During Business in Russia
1.1 Corporate forms
As in most jurisdictions, there are several forms through which a foreign company can undertake business activities in the Russian Federation. The most frequently used forms are a separate Russian legal entity and a branch or representative office of a foreign company.
1.2 Russian legal entities
The most commonly used types of Russian legal entity are limited liability companies and joint stock companies (mostly closed joint stock companies).
1.2.1 Limited liability company
A limited liability company (LLC, or OOO in Russian) seems to be the most popular corporate form in Russia as its registration procedure is rather simple. The charter capital of an LLC comprises the nominal values of its participants’ equity shares. The minimum charter capital of an LLC is currently RUB 10,000 (about US$330). Payment for equity shares may be in the form of both cash and in-kind payment when it is paid with shares of
other companies, assets, equipment, etc. Since 1 January 2010, in case of charter capital increase, the payment of the charter capital of an LLC can be made by way of offsetting claims of the participants against the company provided that this has been agreed unanimously by the participants. Equity shares of LLCs differ from shares of joint stock companies in that equity shares are not treated as securities and should not be registered with FFMS. However, with the exception of certain state duty issues, in practice the differences are limited. The charter of an LLC can contain certain restrictions or special rights related to the transfer of participants’ rights, such as a prohibition against sales of equity shares to third parties and the right for participants to withdraw from the LLC without requiring the consent of other participants. If such withdrawal right is provided in the charter, the withdrawing participant should be paid the actual value of his equity share in the LLC. maximum number of participants in an LLC is 50. An LLC cannot have as its sole founder another entity owned only by one person (company or individual). The governing bodies of the LLC are the general meetings of participants and the board of directors (optional). An individual executive body (general director) runs the day-to-day business of the LLC; there can also be a collective executive body (managing board) running the day-to-day business of the LLC together with the general director.
1.2.2 Joint stock company
Joint stock companies (JSC, or AO in Russian) generally fall into two categories: closed (ZAO in Russian) and open (OAO in Russian). The fundamental difference between an open and a closed JSC is that in an open JSC, shares may be freely sold to third parties, while in a closed JSC share transfers are subject to the preemptive rights of other shareholders. The minimum capital requirement for incorporation is currently RUB 10,000 (equivalent to approximately US$330) for a closed JSC and RUB 100,000 (about US$3,315) for an open JSC. Shareholders can now pay their part of a charter capital increase by way of offset of mutual liabilities with the JSC, since the possibility to execute a straightforward debt-to-equity conversion has been introduced for JSCs. from 1 January 2010. The maximum number of shareholders cannot exceed 50 for a closed JSC but is unlimited for an open JSC. JSCs distribute ordinary (voting) shares among their shareholders and, in contrast to LLCs, have the right to distribute one or more types of preference (non-voting) shares. The nominal value of such preference shares distributed must not exceed 25% of the company’s charter capital. The charter of JSCs must determine the dividend rate and/or the value which is payable in the event of the company’s liquidation for preference shares of each type. Open JSCs must comply with a number of information disclosure requirements of the FFMS, and for this reason closed JSCs are generally preferred and may be used for setting up a joint venture with a Russian partner. Open JSCs are commonly used for establishing publicly traded companies.
1.3 Branch and representative offices
Foreign companies may also operate in Russia without creating a legal entity by establishing a branch or a representative office. The main advantages of operating through a branch or representative office, compared with a JSC or an LLC, are that a branch or representative office has fewer administrative, tax, and accounting obligations and is considered to be non-resident for currency control purposes.
1.3.1 Branch
The branch of a legal entity is a separate subdivision of a legal entity whose headquarters are in another location and may be in another country. A branch may perform all the functions of a legal entity, including representative functions. The branch should have a manager or head of branch who acts on the basis of a power of attorney issued by its parent company. Since the branch is not considered to be a separate legal entity, all duties and rights will apply to the legal entity which is behind that branch. A branch may be inappropriate for certain activities, such as those that require licenses that are issued only to Russian legal entities. In addition, a branch is not recommended if it is expected that significant import activity will take place, since it is easier to manage customs procedures as a Russian legal entity. The branch of a foreign company must be accredited and registered with the State Registration Chamber. The accreditation must be renewed every five years (whereas the registration of a JSC or LLC is usually for an indefinite period of time). In addition, a branch of a foreign company must be registered with the tax authorities, social funds, and other state bodies. The nature of the activities performed will determine whether the activities are subject to Russian taxation. Generally, tax filings must be made even if no taxable activities are performed or if no income is generated.
1.3.2 Representative office
A representative office is generally understood to be a subdivision of a foreign legal entity (FLE) that represents the company’s interests in Russia. Representative offices are not officially allowed to undertake commercial activity under the Civil Code. Their main purpose is generally to promote commercial relations between the foreign legal entity and Russian enterprises and to gather information about the Russian market. In practice, many representative offices in Russia do engage in commercial activity. Another point to take into consideration when deciding on the form of establishing a legal presence in Russia is that a representative office may not be the most appropriate form for foreign entities which plan to hire a significant number of expatriates since the new favorable status of Highly Qualified Specialists (HQS) is not available for foreigners working for representative offices of FLEs. HQS benefit from significantly more favorable work permit and work visa procedures and less restrictive tax residency rules. A representative office should be accredited with the State Registration Chamber or with the Chamber of Commerce and Industry (or, for example, with the Ministry of Education and Science in the case of educational activity) and registered with the State Registration Chamber, as well as with the tax authorities, social funds, and other state bodies. The maximum accreditation term is three years but can be renewed.
1.3.3 Registration of businesses in Russia
Russian companies, as well as branches and representative offices of foreign companies in Russia, must be registered with several state authorities. Companies must be registered with the state registration authority (currently the tax authorities) which takes care of both the state and tax registrations, with the state statistics service, and with three social benefit funds. Branches and representative offices must be registered and accredited and registered with a designated tax inspectorate for foreign companies, as well as with the state statistics service and three social benefit funds. The establishment of a commercial legal entity may also require obtaining the prior approval of the Federal Antimonopoly Service when certain thresholds are reached in terms of balance sheet value of the assets or revenue or if the charter capital of a commercial legal entity is paid by shares or property of another commercial legal entity. As a preliminary step, significant time is necessary to gather and draft the documents to be filed with the competent authorities (notarized and legalized/ apostilled corporate documents of the foreign company, constitutional documents of the newly created Russian company or business, etc.). As far as the registration itself is concerned, the average registration of a Russian legal entity, branch, or representative office takes approximately four weeks from the date of filing of the necessary documents with the authorities, but can take longer in certain circumstances. Additional steps are necessary for the entities to be fully operational, e.g., opening of bank accounts, manufacture of a corporate seal, and registration of the issuance of shares (for JSCs only) with the securities authorities. Companies need not wait until the end of the entire registration process before starting their activities. They can begin operations after their state and tax registrations, production of a company seal and opening of permanent bank account(s); branches and representative offices can begin operations after their accreditation with authorized bodies, registration with the tax authorities, production of a seal and opening of permanent bank account(s).
1.4 Taxes at a glance
Russian taxes are listed and regulated by the Russian Tax Code. The list of Russian taxes includes the following taxes and levies:
- Federal taxes and levies – VAT, excise duty, personal income tax, profits tax, mineral extraction tax, water tax, levies for the use of fauna and for the use of aquatic biological resources, state duty
- Regional taxes – assets tax, gambling tax, transport tax
- Local taxes – land tax, assets tax on individuals (introduced by a Federal law of 9 December 1991 and not included in the Tax Code).
2. Duing Business in UAE
2.1 Corporate forms
There are seven business structures stipulated by Federal Law No. 8 of 1984 concerning commercial companies and amended by the Commercial Companies Law, Federal Law No. 15 of 1990.
2.1.1 General Partnership
A general partnership is an arrangement between two or more partners whereby each of the partners is jointly liable to the extent of all their assets for the company’s liabilities. Only UAE nationals are allowed to be partners in a general partnership .
2.1.2 Simple Limited Partnership
A simple limited partnership is a company formed by one or more general partners liable for the company liabilities to the extent of all their assets, and their respective shares. The limited partners are liable only to the extent of their personal contributions. In a limited partnership, the law states that there shall be at least one general partner who is liable to the extent of his separate properties. Only UAE nationals are allowed to be general partners
2.1.3 Private Joint Stock Company
Shares in a PJSC must be offered for public subscription and the subscription notices must be published in two local daily Arabic newspapers. The founders are obliged to subscribe for a minimum of 20 per cent of the share capital but no more than 45 per cent of the share capital. Article 153 of the Commercial Companies Law prevents shares being issued which have differing rights. A PJSC is required to have between three and 15 directors, who are elected for three year terms. The chairman and a majority of the board of directors must be UAE nationals.
2.1.4 Limited Liability Company (LLC)
The limited liability company (LLC) is the most widely used commercial entity for companies with a non-UAE national element wishing to conduct commercial activities in Dubai. An LLC is a private company whose shares are not offered to the public. The Commercial Companies Law requires that 51% of the shares in an LLC be held by UAE nationals. However, the law permits profits and losses to be distributed disproportionately to the shareholding ratio; determined in its Memorandum of Association. When naming an LLC, it is required that the LLC’s name is derived from either its purpose or from the name of one or more of its shareholders.
- There are no nationality restrictions regarding the management of an LLC
- The minimum number of directors is one, and the maximum permitted by the Commercial Companies Law is five directors.
- Article 218 of the Companies Law regulates the composition of an LLC. An LLC requires a minimum of two shareholders, while the maximum permitted is 50 shareholders.
- Article 227 of the Companies Law (applies throughout the UAE) stipulates that the minimum share capital of the company is AED 150,000; Individual shares should have a minimum face value of AED 1,000. The shares need to be “equal shares”, that is, in an equal manner or degree in equal shares or proportion. Shares of an LLC may not be bearer shares (Articles 218 and 221) and the Companies Law does not allow different classes of share to be issued. All shares must be fully paid up and distributed among the shareholders (Article 222). Thus, the law does not recognize the concept of authorized but unissued shares, which is the case in many other jurisdictions.
- An LLC may not conduct the business of insurance, banking or the investment of money on behalf of third parties. Administrative tasks to be completed before the LLC’s incorporation takes effect include the approval of the LLC’s name and memorandum of association by the DED. Article 219 of the Companies Law sets out various requirements that must be followed when naming an LLC for example, set the LLC’s name from either its purpose or from the name of one or more or its shareholders. The DED provides a standard form of memorandum of association and will review an LLC’s memorandum to ensure compliance with local requirements. The DED must also be provided proof that the minimum share capital of the LLC has been deposited with a bank operating in Dubai before it will allow the LLC to be incorporated.
2.1.5 Professional Companies
- In setting up a professional firm, 100% foreign ownership is permitted, however certain sectors and activities are restricted to either UAE nationals or have an UAE national shareholding requirement such as the 51% required for a UAE national
- Professional firms are either sole proprietorships or civil companies. Such firms engage in professional or artistic activities but the number of persons employed by such firms is limited.
- Where there are two or more partners, the legal structure is a Civil Works Company whereby there must be a UAE national shareholding of at least 20%.
- A UAE national must be appointed as a local partner in sole proprietorships, and is not directly involved in the business. The local national partner is paid a lump sum and/or percentage of profits or turnover. The role of the local partner is to assist in obtaining licenses, visas and labor cards.
- Individuals involved in professional companies are required to have relevant University level qualifications in the relevant field of business
2.1.6 Partnership Limited with Shares (PLS)
- A Partnership Limited with Shares is a company formed by general partners who are jointly liable to the extent of all their shares for the company liabilities and participating partners are liable to the extent of their capital shares.
- For the general partners, the company is a general partnership, and the general partner is a dealer even if he did not enjoy such capacity before entering the company. All general partners must be UAE nationals.
- The capital of Partnerships Limited with Shares shall be divided into negotiable equal shares. The partners whose liability is unlimited must be UAE nationals. The minimum share capital requirement for limited partnership is AED 500, 000. *
- The company is named after the name of one or more of the general partners. Its name may be added to another innovative name or a name indicating its purpose, thus two ways of naming firms are possible.
- The rules related to the incorporation of limited liability partnerships apply to partnerships limited with shares, according to the following:
- All general partners and other founding parties sign the MOA and its regulations, and their resolutions are as effective and valid as the founders of the limited liability companies.
- Names of the general partners, their surnames, nationalities, and countries are stated in the company contract and its regulations.
- The minimum share capital requirement for limited partnership is AED 500,000.
- The documents issued by partnerships limited with shares are subject to the same rules as those issued by limited liability partnerships.
2.1.7 Foreign Companies
Article 314 of the Companies Law regulates the operation of branch and representative offices of foreign companies in the UAE. These could be owned by a foreign entity, provided that a UAE national is appointed as the local partner.
- The role of a local partner for a branch or representative office is to assist with bureaucratic aspects such as obtaining visas, licenses and dealing with local authorities. The local partner is generally paid a fixed fee and does not have a right to participate in any profits from the branch or representative office.
- A branch office carries out activities similar to those of the parent company. Certain activities are restricted to UAE nationals, for example, importing goods.
- A representative office promotes the foreign parent company’s activities through, for example, gathering information and soliciting orders and projects to be performed by the company’s head office. Representative offices are restricted as to the number of employees, typically, they can sponsor three to four employees and as a result, representative offices tend to act as administrative and marketing centers for the foreign parent company’s head office.
- Provided approval is received from the Ministry of Economy and the DED, and the appropriate trade license is obtained, a company establishes a branch or representative office in the UAE. The office is registered on the Registry of Foreign Companies at the Ministry of Economy before it starts conducting business.
Many companies conduct business in the UAE through a dealer network and have a branch or representative office in Dubai to oversee their marketing operations and provide the necessary support.
2.2 The Free Zones
Article 314 of the Companies Law regulates the operation of branch and representative offices of foreign companies in the UAE. These may be wholly owned by a foreign entity, provided that a UAE national is appointed as a local agent.
Setting up a business in a Free Zone
- Dubai has a number of free zones or industry clusters. Companies incorporated and operating within the free zones are not subject to many of the restrictions imposed by the Companies Law and other UAE laws and regulations. Entities operating within the free zone may be 100 per cent foreign owned and benefit from a guarantee that tax will not be applied for a specified period of time, notwithstanding any subsequent change to federal or local laws.
- Depending on the type of business to be set up, the appropriate free zone should be selected by the business. Refer to section 5.4 for list. For example, DAFZA is intended for businesses that import and export goods and the business activities permitted in TECOM include ‘design, development, use and maintenance of everything relevant to Information Technology, E-commerce and Media’.
Types of operating licenses issued by the free zones
- Trade license-This license is available to companies that wish to import, export, sell, distribute or store items identified on their license. Sales cannot be made directly to the UAE. Any company wishing to sell goods from the JAFZ into the UAE appoints a distributor or agent in the UAE who is selected by the business owner(s) in order to distribute on the mainland. Furthermore, this agent could also be a business partner if a business is ultimately set up on the mainland.
- Industrial license-Industrial licenses are for companies with manufacturing activities. Restrictions on selling products into UAE apply to industrial licensees and a distributor or agent must be appointed in the UAE in order to sell products into the UAE. The specifics of this relationship can be determined with the assistance of legal expertise.
- Service license-A service license permits the licensee to provide services within the free zone. Services provided by the free zone licensee must be the same as those stipulated in the parent company’s license in the UAE or abroad.
- National Industrial license: A national industrial license permits the holder to import raw materials, manufacture specified products and export the finished products. However, a minimum 51 per cent of the shareholding must be owned by Gulf Co-operation Council (GCC) nationals. A minimum 40 per cent of the value of the final product must be added in the free zone.
- A license holder can operate outside the free zone using its free zone license provided permission is granted by DED and the respective free zone. A distributor or agent must be appointed within the UAE if operating within another Emirate. Potential customers from the UAE may visit the premises of the license holder to view the goods.
