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Adventures of foreigners in Russia. How to avoid mistakes while doing business?

Many entrepreneurs, starting their own business, do not even know what difficulties they might face. Opening up your own business in Russia is doubly difficult for foreigners, since it involves a deep study of Russian economic, legal and other realities. Let us dwell in more detail on the mistakes that foreigners allow while doing business in the Russian Federation, and we will also discuss how to avoid them.

Risks of entrepreneurial activity. It is known that people tend to make mistakes. This statement also applies to entrepreneurs – businessmen, even though they are professional market participants, also do mistakes. The possibility of miscalculations and the presence of risks are stipulated in the very definition of entrepreneurial activity. Thus, the third paragraph of part 1 of the article 2 of the Civil Code of the Russian Federation indicates that entrepreneurial activity is understood as «an independent activity carried out at its own risk aimed at the systematic receipt of profits from the use of property, the sale of goods, the performance of work or the provision of services». An interesting addition to this definition was made by the Constitutional Court of the Russian Federation. Thus, in 2004, it pointed out that «the activities of shareholders are not entrepreneurial (it refers to another economic activity not prohibited by law), but it also entails certain economic risks, as the joint-stock company itself carries out entrepreneurial activities» (Decree of the Constitutional Court of the Russian Federation of February 24, 2004 №3-P «In the case of verification of constitutionality of certain provisions of Articles 74 and 77 of the Federal Law» On Joint Stock Companies «regulating the order of consolidation of the placed shares of the joint-stock company and repurchase of fractional shares in connection with the complaints of citizens, companies «Cadet Establishment» and the request of the Oktyabrsky district court of Penza «).

Many entrepreneurs, starting their own business, do not even know what difficulties they might face. Opening your own business in Russia is doubly difficult for foreigners, since it involves a deep study of Russian economic, legal and other realities. Let us dwell in more detail on the mistakes that foreigners allow while doing business in the Russian Federation, and also how to avoid them.

Unfortunately, it is necessary to state that the majority of mistakes made while doing business should be classified as «stupid»: entrepreneurs may then introduce a «gray» (and sometimes «black») salary to save money, they forget about the repatriation of hard currency proceeds at contractual relations with a foreign counterparty or bring the organization to the deadlock, because there are only two participants in the LLC with shares of 50% each.

The first mistake is Russian specificity. Despite the fact that the Russian Federation belongs to the countries of the Romano-German legal system, the legislation of our country has considerable specificity. Foreign entrepreneurs often do not understand the basic concepts, because other rules are established in Russia. So, for example, forms of legal entities, requirements for their activities and other rules differ. However, among the positive trends, it is necessary to note the large-scale reform of civil legislation, as a result of which foreign businessmen meet in business practice the tools that they have known for a long time. So, for example, Federal Law No. 42-FZ of March 8, 2015 «On Amending Part One of the Civil Code of the Russian Federation» introduced significant changes to the mandatory part of the Civil Code of the Russian Federation from June 1, 2015. This law added to the Russian legislation such instruments as warranties and representations; a contractual condition for compensation of losses incurred in the event of occurrence of circumstances specified in the contract (indemnity); the ability to ensure the execution of negative covenants (injunction); rule on the award of funds in favor of the plaintiff in case of non-enforcement of the judicial act by the defendant (astriente); option to conclude an agreement; agreement on the procedure for negotiating (MoU), subject to legal protection; waiver of the arising contractual right; a provision on the payment of a certain amount of money for a unilateral change or a unilateral refusal to fulfill an obligation (break-up fee).

However, there is also a minus: the listed tools are regulated in own way, nevertheless there is a certain Russian specificity.

The second mistake is taxation. The tax sphere is traditionally considered one of the most difficult, and tax advisers are not in vain one of the highest paid experts in the field of consulting. Studying tax requirements is a task that requires serious resources. Recently (especially since Russia took the course of «deoffshorization») foreign companies that somehow are present in the territory of the Russian Federation, have felt the obvious trends in the field of tax regulation. In legal terms, we call these tendencies an improvement in the quality of inspections by the Federal Tax Service, while reducing the likelihood of challenging judgments based on the results of inspections in court. In other words, the Federal Tax Service has become much more strict about violations in the tax sphere, and inspections increasingly end with the appointment of fines and legal proceedings. There are lots of examples. Here are just a few.

For example, case No. A40-155695 / 2012 came to the Supreme Court of the Russian Federation and made it possible to understand that it is necessary to accurately indicate the functions of the Russian representative office of a foreign company and also to build a transparent scheme of profit distribution within the group. Thus, the foreign company «Astellas Pharma Europe BV», opening a Russian office, indicated among its functions the following: conducting medical research, registering the company’s medicines, researching the pharmaceutical market, carrying out advertising activities for the company’s products. Thus, the receipt of profits was not included in the list of functions of representation. Specialists of the Federal Tax Service have established that the Russian representative office must pay taxable income. The situation was complicated by the fact that, as the tax authorities found out, the representation actually acted in the interests of a third party - CJSC Astellas Pharma (distribution company distributing the products of Astellas Pharma Europe BV in the territory of the Russian Federation). There is a situation directly stipulated by the Tax Code of the Russian Federation and requiring to determine the tax base of the profit tax in the amount of 20 percent of the amount of expenses of the permanent mission associated with activities in the interests of a third party. Paragraph 3 of Article 307 of the Tax Code of the Russian Federation states this as the implementation by a foreign organization in the territory of the Russian Federation of «preparatory and (or) auxiliary activities in the interests of third parties, leading to the formation of a permanent mission, and no remuneration is foreseen for such activities». Apparently, the company’s consultants could not properly study and clarify the direct requirements of the Russian tax legislation.

Foreign companies when doing business in Russia, indeed, often do not take into account local rules and apply global approaches that have developed in Western business practice. Analyzing the most high-profile cases of recent years, you naturally come to the question: did they not conduct compliance, did not assess the risks, based on clearly prescribed provisions of the law?

So it was, for example, in the case of the company Freshfields – the Russian representation office of the international law firm also tried to challenge the FTS instruction. However, the case concerned the distribution of expenses between the head office and the foreign (in this case, Russian) representation office. The taxpayer, among other things, referred to the provisions of the Convention between the Government of the Russian Federation and the Government of the United Kingdom of Great Britain and Northern Ireland «On the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income and value added.» At the same time, courts of three instances agreed with the argument of the Federal Tax Service that the Convention is inapplicable in this case, since Freshfields is a partnership, and paras. E.1 of Article 3 of the Convention expressly states that «the term «person» includes an individual, a company and any other body of persons other than a partnership».

It should also be taken into account that the tax authorities began to conduct a detailed analysis of the activities of legal entities, assessing their dependence. Thus, the experts of the Federal Tax Service managed to prove in court that the subsidiary Russian business company of the international group of companies Oriflame (LLC Oriflame Cosmetics), created as an independent legal entity, is nevertheless a permanent representative of Oriflame Cosmetic BV. After «taking into account the circumstances revealed during the tax audit, the actual conduct of activities in the territory of the Russian Federation by employees of Oriflame Cosmetics SA companies. and Oriflame Cosmetic BV, the focus of this activity on receiving income from the distribution of cosmetic products «Oriflame» among consumers in the interests and benefit of foreign companies», the courts confirmed that the companies reasonably refused to take into account royalties paid abroad in structure of expenses (Definition of the Supreme Court of the Russian Federation from 01.01.2016 №305-КГ15-11546 in case №А40-138879/14).

The third mistake is underestimation of inspections. There are several dozens of reviewing authorities in the Russian Federation, and despite certain indulgences and «administrative holidays» during which routine inspections are not conducted; the authorities often conduct the inspections that reveal serious mistakes made by businessmen and lead to serious fines and even administrative suspension of the activities of a legal entity.

Certainly, inspections are often frankly non-systematic. So, after a direct line with the President of Russia, V.V. Putin large-scale inspections of employers across the country to ensure compliance with the rules on the timely payment of wages began. The complaint of the employees of the plant from the island of Shikotan directly to the first person of the state led to the fact that the State Labor Inspectorate fined hundreds of employers and secured workers’ wages of hundreds of millions of rubles of detained wages.

Thus, highlighting the main mistakes in doing business in Russia, we add that most of them can be avoided if you work in advance with the highly qualified legal and tax advisers, and just be more careful.