Establishing a joint venture with a foreigner in Russia

A joint venture with a foreign participant is a legal entity that is formed by means of a merger of capital between a Russian entity and a representative of another country. 

The establishment of such a company has traditionally been seen as positive because it allows the attraction of foreign capital and foreign technology into Russia. Other positive characteristics include:

• Simplified export of capital.
• Implementation of a wide range of investment projects. 
• The ability to operate in more than one market for products or services. 
• The ability to take advantage of the various benefits provided by Russian law, including tax or customs benefits. 
• Ability to reduce financial risks. 
• High competitiveness.

Other special features of the creation of a joint venture are covered in this material. 

Choice of legal form 

In the case of setting up a joint venture, foreign partners must come to a consensus regarding the decision on the legal form of the company. Being an international structure, such a company, in any case, acquires a special legal status in the country of its official registration. In Russia, a joint legal entity and all its activities are regulated by separate legal provisions, including tax and civil law. 

In general, any investor wishing to operate in Russia must decide on one of the available methods of doing business. The choice can be made in favour of one of several options:

1. A business partnership. 

In this case, the parties pool their capital on the contribution belonging to the founder. A feature of this form of business activities is the fact that the created deposit as well as the assets purchased from it will belong exclusively to the partnership. At that, in accordance with Article 69 of the Civil Code of the Russian Federation, the founders are liable for the activities of the company with their own property. 

Both individual entrepreneurs and legal entities may establish a partnership. At that, it is important to take into account that each participant will work on its own behalf, unless otherwise stipulated by the agreement between the parties. 

All profits and losses will be distributed in proportion to the funds invested in the partnership.

2. A limited liability company (LLC)

According to Article 87 of the Civil Code of the Russian Federation, the share capital of the LLC is divided into shares of each participant. The difference from a partnership is that in the case of an LLC, its participants are not personally liable for the debts of the firm. 

A maximum of 50 founders, including non-residents, may become members of LLC. The latter must have a shareholding of at least 10 % in order to become a partner. 

A joint-stock company.

A joint-stock company represents a company, the share capital of which is divided between the founders by means of shares. Each member of a JSC is only liable for its obligations by the value of these securities. Russian law allows the establishment of a JSC to be open for both legal entities and individuals from foreign investors. The main thing is that their contribution into the share capital must be not less than 10%. 

3. Joint venture (JV). 

A joint venture is the “youngest” of all the ways to open a company with foreign participation. As a rule, this form of arrangement implies buying a share in a company already operating in Russia. In this way, the non-resident will increase the size of the authorised capital. As this is one of the easiest and most straightforward ways for foreign investors to start a company in Russia, we shall look at this form in more detail. 

Features and advantages of a JV 

In a joint venture, its founders have equal rights and the same access to business management issues. Thus, the legislation of the Russian Federation does not single out the advantage of the domestic or foreign investor, creating equal conditions for both to manage the enterprise. 

The second feature of a joint business can be seen as the broad opportunities for international cooperation offered by a JV. This can take the following forms:

• Joint establishment of a new legal entity. 
• Opening a branch or representative office under a foreign jurisdiction. 
• Signing of an agreement to open a new production facility involving foreign capital.  
• Signing an agreement on the exchange of technology. 
• Participation in international scientific research. 
• Joint development of goods and services.

Procedure for setting up a joint venture

In order to establish a JV in Russia, a foreign and domestic investor needs to follow several important steps, among which the following can be highlighted. 

Stage 1: Determine the purpose and nature of the joint venture. 

Investment cooperation, including international cooperation, has a definite purpose in any case. First and foremost, investors want to derive profit from the joint venture. However, other purposes of establishing such a company can also be singled out: 

• Expansion of the product range in the Russian market. 
• Quick and painless entry into the international trade market. 
• Import substitution of foreign goods. 
• Search for new partners. 
• Obtaining of new resources for production of goods. 
• Modernization of manufacturing facilities. 
• Reducing the risks associated with an increase in the number of partners. 

Stage 2. Choice of a form of joint activity. 

As we noted earlier, the founders may choose one of the three forms of business – JSC, LLC or partnership. 

Stage 3. Signing a joint venture agreement.  

The joint venture agreement is the main document regulating the operations of a company with foreign participation, even if the foreign investment amounts to 100%. The agreement allows the foreign investor to engage in any type of activity which does not contradict Russian laws and regulations. 

To sign a joint venture agreement, it is necessary to:

• Define the name of the joint venture. 
• Choose the type of activity – OKVED code.
• Provide a document from the Chamber of Commerce of the country of registration of the foreign legal entity. 
• Determination of the amount of the share capital and distribution of its share among the founders.
• Selection of a registered office of the company and its state registration. 
• Provide the passport of the head of the company. 
• Choice of a taxation system in accordance with the Tax Code of the Russian Federation.

The joint agreement defines the procedure and secures the form of common activities. The document also provides a list of the main directions of the organisation’s development and control of the work by the company’s participants.  

Stage 4. Creation of the statutory fund of the joint venture. 

The statutory fund of the JV is formed from the property of the founders. This can be monetary funds, securities and other property, including real estate. The amount and composition of the JV charter fund is stated in a special agreement between the founders. 

The formation of the share capital is held in a temporary bank account, for the opening of which the following set of documents is required: 

• Application in the form prescribed by the bank. 
• A special card with specimen signatures of the entities which will subsequently dispose of the account. 
• Copy of the general meeting of founders, stating the intention to form a joint venture. 
• Copy of the agreement establishing the joint venture. 

Step 5. Register the joint venture. 

The state registration of any joint venture takes place at the Inspectorate of the Federal Tax Service at the chosen legal address. To register a company with foreign capital, the following set of documents must be submitted to the Federal Tax Service: 

• Application in the prescribed form. 
• Charter of the joint venture to be set up. 
• Agreement on setting up a joint venture. 
• A receipt for the payment of a stamp duty in the amount of 4 thousand roubles. 

At the end of the registration procedure the founders receive:

• Certificate of state registration of the joint company. 
• Extract from the Unified State Register of Legal Entities.
• A copy of Articles of Association certified by the Federal Tax Service. 
• TIN NUMBER. 
• Document on registration in non-budgetary funds. 

Stage 6. Opening a permanent bank account. 

After state registration is completed and the certificate of tax registration is received, the founders may open a bank account in the chosen bank organisation on the basis of the submitted application. At the same time, the temporary account must be closed by the shareholders upon application.  

Accounting and taxation of joint ventures 

It is important to know that the accounting of a JV must be kept separately from the founders, in the form of a separate legal entity. All documents must be in Russian, with the possibility of a notarised translation into a foreign language, for submission to the authorities of the country of the foreign investor.  

As far as taxation is concerned, joint ventures operate on equal terms with Russian companies under the general taxation system. 

Setting up a joint venture with a foreign investor is not a labour-intensive process, but it does require certain legal knowledge. If you have problems with registering a company and preparing a joint venture agreement, you need to seek professional help. VALEN’s lawyers and accountants provide a full range of services to Russian and foreign clients on starting and operating a business.