BUSINESS AND THE LAW: Cleaning Up Office Legal Structure

So you have been operating in Russia for a few years and you have this uneasy feeling that your structure is vulnerable. Well, the tax police recently visited your office. Then they came again, and again and began asking questions about your business in Russia and your Russian partners. Unfortunately, you have been on vacation and your office manager has been dealing with the authorities and it seems that the tax police and the manager did not form a productive relationship. The tax police have asked for a list of your employees and details on salaries paid, as well as other benefits provided by the employer. The last time they brought some colleagues from the immigration office to ask questions about how your expatriates are hired and if they have work permits and now in passing they have noted that the method of payment of your Russian employees violates Russian currency law. Will you shortly be visited by VEK (the currency regulators)? Don't panic. This might be a chance to clean up your legal structure and develop a defensive legal strategy for the future -- and remember, you are not alone. It is more likely that the tax police are interested in a few well defined areas of tax liability than any general plan to immobilize your operations.

Take a look at one structure used by many foreign companies -- the unregistered branch or, as it is sometimes incorrectly referred to, the "commercial representative office." What a corruption of legal terminology! It is a term that is dangerous to use because no judge, regulatory agency or Russian legal scholar will know what you are talking about. Worse, use of such a term may raise unnecessary suspicions by tax authorities that you are operating illegally. The tax authorities often assume foreign investors are not fully in compliance with legislation dictating forms of doing business, and the worst message to send is that you do not understand your own structure. Knowledge is the best defense.

A representative office is not a branch. Many foreign investors, however, have both a representative office and "branch operations," i.e. an unregistered branch. If this sounds confusing, return to the basics because Russian law is actually very "user friendly" in many areas. How do you know how you can do business in Russia? Russian law stipulates how foreign companies may "invest" in Russia. "Invest" here is used in the broadest sense, including the generation of revenues through operations in Russia, purchases of securities and formation of Russian companies or "branches." The law on foreign investment specifically lists these and other methods of investment (or "doing business" in Russia). Representative offices, not surprisingly, are not listed as a form of permitted investment as Russian law assumes that a representative office will perform only representational activities.

The foreign investment law mentioned above requires branches to be registered. Registered branches also may be entitled to more investor protections since they clearly qualify as "enterprises with foreign investment." So why are there so many unregistered branches of foreign companies (many of you reading this article have one) -- because until recently Russian regulators were reluctant to register branches (now it is relatively easy to register a branch) so foreign companies wishing to operate other than through a Russian company simply did not register them. So long as the foreign company registered for tax purposes and paid required Russian taxes on revenues, the structures have not been challenged (to our knowledge) by regulators. The problem, however, has been that since these structures do not have a clearly defined legal basis, incidental problems may arise. These problems can range from how to keep separate the activities of a representative office and the branch activities to avoid problems with customs authorities to how to get a sufficient number of visas and work permits for expatriates since Russian authorities have no basis on which they can issue such documents to employees of an unregistered branch. The good news is that thanks to recent changes in law all of these problems can be solved through a simplification of your legal structure in Russia to conform to certain key legal formalities. As always, seek tax and legal advice before making changes in structure, including registration of a branch.

W.E. Butler and Maryann Gashi-Butler are partners in the Price Waterhouse CIS Law Offices.