Avoid Being a Cowboy Lone Trader

Foreigners who are based in Moscow and working for themselves are free to set up a business here. In fact, they are obliged to do so.

"In the U.S. you can do what you want so long as you pay the tax, but anyone who engages in business activity here as an individual without registering the business is liable to prosecution, even if he pays personal income tax on his gains," said Valery Toutykhin, partner at Moscow legal firm John Tiner & Russian Partners.

The rule has some justification in a country where the personal income tax rate is only just over half the corporate income tax rate (13 percent and 24 percent respectively), compared with rough equality of the two rates in most Western countries.

Small businessmen can pay even less than 24 percent, offering one good reason for foreign lone operators who work in Russia to be based here. New rules, introduced in 2002 and 2003, allow businesses with fewer than 50 employees and an annual turnover of less than $500,000 to use a lightened and simplified tax regime, paying either 6 percent of turnover or 15 percent of profit instead of the 24 percent of profit tax rate applicable to bigger companies. The regime also gives exemption from a number of other taxes and duties, including value-added tax.

The Internet and the Russian financial press are full of legal firms that will help anyone set up their own business in Russia for a fee, and some of them are geared to foreigners. The visa issue is not a big problem.

"A foreigner gets a business visa to Russia based on an invitation from a Russian organization, and then sets up a business and applies for a visa that gives him the right to work here. That will be a 12-month visa, which can be renewed without leaving the country," said Timur Beslangurov, the managing director of Vista Foreign Business Support.

According to Beslangurov, the most popular form of organization for foreigners setting up alone is an "OOO," which is not a cry of alarm, but the Russian version of "LLC," or limited liability company. This is a company with no shares, which makes it simpler to create and operate. The official start-up costs are a minimum charter capital of 10,000 rubles ($330), and a registration fee of 2000 rubles ($66).

Setting up an OOO requires a two-week paper chase between the tax office, registration chamber and various other state agencies; but legal firms will do it all for a fee that varies from $400 to $8000 depending whether you want the minimum or a tailor-made solution. Necessary documents are a passport with visa and permission to work in Russia, issued by your country's embassy in Russia. You also need a legal address (owned or rented owned office space), but the lawyers can fix that without any genuine renting taking place.

There is another legal status, the exotic-sounding PBOYuL, which seems even better suited to a sole proprietor. The acronym stands for "entrepreneur without creation of a legal person," and it has had a colorful history. Status as a Russian PBOYuL was once the best option for the ex-Yukos head Mikhail Khodorkovsky, and for international corporate expats in the top income bracket. It is still the best option for car mechanics and hairdressers working from home.

Setting up as a PBOYuL is cheaper than registering an OOO. No company means no charter capital, which saves $330, and the lawyer's fee for doing the paper work is about $250. But the status has attraction for people who deal in much larger sums.

Billed as Russia's richest man, Khodorkovsky is now being taken to task by Russian prosecutors for a 1998-99 scheme, in which he was paid millions of dollars as a PBOYuL by offshore shell companies for vague consulting services. The allegation is that he was really being paid for his work as head of Yukos and its affiliates.

Khodorkovsky's trick was to set up as a PBOYuL and opt for the "imputed tax" system, by which PBOYuLs paid no income tax, but instead paid a fixed sum of a few thousand rubles ($100-$200) per year to buy a "patent" that allowed them to practice a specific profession as a PBOYuL. Lawmakers had wanted to make life easier for the small-earning car mechanic and home-based hairdresser, whose casual cash earnings are untraceable anyway, but the plan got hijacked.

"The imputed tax system was meant for simple services, but we could draft a law that made it applicable for much more professional jobs and get the law passed in some region far from Moscow, where a top executive would then register as PBOYuL - a lot of international companies did it to legally optimize tax and salaries of their highest-paid people," said Valery Toutykhin, partner at Moscow law firm John Tiner & Partners.

Toutykhin said that high net worth individuals who had nothing to do with Russia also used the loophole, making themselves tax resident as PBOYuLs in the country. "The Russians don't care who registers as tax resident here," Toutykhin said.

The dodge was closed down last year, when a strict list of business activities that can be given PBOYuL status was inserted into the Tax Code. The system for calculating the fixed sum of imputed tax was also overhauled. PBOYuLs now have a choice of paying imputed tax, if their profession allows it, or using the same privileged tax rates, which are available to OOOs -- either 6 percent of turnover, or 15 percent of turnover minus costs.

Beslangurov said that foreigners doing bona fide business in Moscow as lone operators opt for OOO and not for PBOYuL status. That is partly because a PBOYuL is personally liable if his business runs up debts or fines, while the owner of an OOO is only liable to the extent of company capital. But there is also an image aspect.

"Being a company is perceived as more respectable than being a sole trader," said Beslangurov, "If you are an OOO, you could be employing up to 50 people for all the customers know."